Tax justice and tax compliance

After Bill McGurn’s WSJ article last month about American citizens becoming “economic lepers” (and the associated video — thanks Joe Expat), a number of prominent bloggers and journalists have been popping up to say that U.S. tax laws aren’t a problem except that they’re not restrictive enough. In particular, a post by the Tax Justice Network, riffing off of Bruce Bartlett’s New York Times piece, claims that there is no evidence for the fact that Americans are becoming “economic lepers” — because rich people are not moving out of the U.S., and because lots of people are moving into the U.S. Both of those latter facts may be true, but they are non sequiturs. The real question that McGurn was addressing is summed up in these paragraphs:

All these disincentives flow from a single source: Uncle Sam’s insistence on taxing people and companies for what they earn outside U.S. borders.

Jackie Bugnion, a director with the Geneva-based American Citizens Abroad, says the U.S. approach makes no sense at either the individual or corporate level.

At the individual level, says Ms. Bugnion, the IRS imposes a “highly complex, costly double filing.” Even so, it produces little revenue because most Americans end up owing no taxes at all because of exemptions and what they pay where they live. Indeed, this is one area where free-marketeers think that America should be more like Europe, which does not tax its citizens overseas.

The Tax Justice Network entirely ignored McGurn’s point about closures of expatriates’ bank accounts and about complex tax paperwork — which in effect amounts to a regressive capitation tax of thousands of dollars per U.S. Person abroad. TJN has spoken out several times in support of FATCA — which is causing its own set of unique problems for ordinary U.S. Persons abroad — but has never really taken a position on the issue of the U.S. citizenship-based taxation system. However, Richard Murphy, a British tax expert and one of the founders of the Tax Justice Network, has spoken out in favour of it and called on his own country to implement a similar system, which he thinks can somehow be tailored to affect only “the rich” and not “all working voluntarily overseas”. Apparently he also thinks that the U.S. system achieves that goal; of course, that characterisation “might” be disputed by those of us who are actually living overseas and paying U.S. tax and filing insane U.S. paperwork on retirement accounts which the democratically-elected legislatures of the places where we actually live have voted to receive simplified tax treatment.

Anyway, I left the following (rather lengthy) comment on TJN’s piece:

Mitchell, Bartlet, yourself, and everyone else who thinks this is about “rich people fleeing” — you all are missing McGurn’s point: the U.S. laws are going far beyond their stated goal of preventing tax evasion by rich Americans, and are affecting ordinary middle class expatriates who are not getting rich in America and then “fleeing taxes”, but who are already living abroad for reasons of career, study, or love.

The problem which McGurn points to is that the U.S., almost unique in the world, imposes the same reporting requirements on citizens permanently living abroad as it does on those living at home. This is not a tax problem (and it is not solved by tax breaks like the $95K Foreign Earned Income Exclusion); it is a paperwork problem. An American in London who opens a British bank account is clearly doing something of a different nature than an American in New York who opens a Swiss numbered account — but both of them are treated as having an “offshore financial account” and have to file FBAR and Form 8938. An American in Belo Horizonte who pays into a Brazilian pension plan is clearly not the same as an American in Miami who settles a Belize trust and transfers all his assets into it — but both are treated as having a “foreign grantor trust” and have to file Form 3520. An American in Sydney who opens a fish-and-chips shop and incorporates it is clearly doing something different than an American in Silicon Valley who opens a Bermuda letterbox company and transfers U.S.-developed intellectual property to it — but both are treated as having a “controlled foreign corporation” and have to file Form 5471.

The tax advice required to have these forms filled out properly is enormously expensive relative to the incomes of average expatriates. (The alleged targets of these laws, onshore abusers of offshore, barely even blink at the costs). And let me be clear that I am not talking about advice on how to avoid U.S. tax bills, because we expatriates are already paying taxes to the countries where we actually live which more than offsets the U.S. tax. I am talking about advice on how to report our ordinary, tax-compliant financial lives to a faraway government which sees everything we do as being “offshore” and threatens fines of tens and hundreds of thousands of dollars for inadvertent non-compliance — fines which are life-altering for us middle-class expats, but again which real onshore tax avoiders and evaders in your own backyard with real offshore accounts will laugh at. Where is the “tax justice” in this, pray tell?

I had to shorten this part a bit because my usual loquaciousness was running me over their 4096 character limit, but the definition of “tax compliance” is important. I typically paraphrase Richard Murphy’s definition — in short: do you intend to cheat? In more words: are you being honest with the tax authorities about the place, form, and time of the underlying economic transactions through which you earn your income?

Almost undoubtedly there is some obscure U.S. tax law or regulation which I have failed to fulfill, but I call myself tax compliant because I have never been anything but entirely honest about how, where, and when I earn my bread: I am sitting outside the United States, getting a modest income from my work, putting some of it in the bank down the street and some of it my my local retirement plan. Congress in contrast are the ones who are dishonest and non-compliant: they pass laws pretending that expat fathers are single and childless, that Toronto residents live in Washington DC, that Johor Bahru startups whose owners perform work in Singapore are paying dividends in the U.S., and that people holding Certificates of Loss of Nationality and non-U.S. passports in their hands remain U.S. citizens until they file Form 8854. Anyway, the final bit of my comment:

And now because of the U.S. FATCA law passed in 2010, banks in foreign countries are closing the accounts of U.S. persons legitimately residing in those countries and using those accounts to pay rent, buy groceries, and deposit paychecks. This is what McGurn is referring to when he says that Americans abroad are being turned into “economic lepers”. This is why ordinary American expatriates are grumbling about the U.S. tax code. And this is why some who are blatantly not rich and who live in countries where they pay more tax than the U.S. will ever charge (such as Peter Dunn and Genette Eysselinck, who were interviewed for a Reuters article by Atossa Abrahamian last month) are renouncing their U.S. citizenship. We are sick of being the eggs who get broken so you can have your omelette, and we are sick of being smeared as rich tax evaders while the REAL tax evaders are sitting pretty in your own backyard.

So let’s see if TJN publishes and responds to my rantings. About three months ago, Tim said:

I know Richard Murphy quite well and was actually hoping he would find this blog and come over and heat things up so to speak.

Maybe now he’ll get his wish, or something close to it 🙂

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14 thoughts on “Tax justice and tax compliance

  1. Good for you Eric, and very well written. I know about those 4000 character limits, and I often brush up against them too. I think it is probably better when I am limited to 1000 characters, as it really makes me cut out, how did you say it, my loquaciousness!

    It is way past my bedtime here, but I will see if I can add a comment to that blog tomorrow sometime. Measured and temperate like Victoria! Actually, maybe all I have to do is put the link to her latest post.. That would be easy!

  2. Eric… One other thing… Did you read this? http://bit.ly/Kntq3n

    So, here is the side that think these FATCA style unilateral actions by the U.S. are a great idea, and loves the newest provisions of the Cut the Loopholes Act. http://bit.ly/xt2Iui

    I can imagine there are tons of unintended consequences on in that one too, but I have done enough reading for the night.

  3. @ Eric: I love this post. I believe it needs to be featured. Thanks again. I stand in awe of your multiple talents.

    But now I am going to nitpick: “… threatens fines of tens and hundreds of thousands of dollars.” Suppose a person is close to retirement age in Canada, and has had pretty good income and has done everything that the financial planners suggest–he and his wife have saved up, and they now have over one million dollars in savings in RRSPs, TFSAs, and unregistered investment accounts, not including their principle dwelling. Then 300% of that is in the millions of dollars. (=50% per annum fines per six years statute of limitations).

    So it is no exaggeration that IRS has threatened middle class people in Canada, who by all counts will require the retirement funds to maintain their lifestyle at 50-75% of income while working, with FBAR fines in the millions of dollars, and this the IRS argues is the reason that they need to enter the OVDI and pay only 27 % of their financial wealth –but in this case it also includes their principal dwelling, which then can double their fines. In my case, my house is a very modest starter home in the Toronto area. But many middle class Canadians esp. living in Toronto, Vancouver or Calgary, live in homes worth in excess of $1 million. So let’s say they only have to pay a fine of $270K for their principle residence alone!

    This is beyond extortionate, and as you say, ordinary folks like me, who are living overseas and have earned everything we have outside America — we will not put up with this treatment. It is a simple matter of committing a relinquishing act with the intention of losing USA citizenship, and telling the IRS to stick their fines and their threats where the sun don’t shine.

    Everyone: Be of good cheer. The waiting times to get an appointment to relinquish in Canada are only around one month (at least when I did it).

  4. Middle class Americans abroad ARE lepers. Rich people can buy citizenships, have private bankers — things that people like me can’t have. I get stuck in the middle of this mess.

    True, people are moving to the US. But you can’t exactly say that it is the “cream of the crop” and definitely not majority rich people moving to the US. Just about any country will let someone in if they can create jobs. That’s the only thing yet that the US has to do away with.. another bullet in the foot.

    There’s going to be an unemployment claims number that will come out today. It’s forecasted higher, so we’ll see…

  5. This guy makes me laugh. He’s probably the same one who believes in “trickle down economics” but when the very people who are part of the “trickle down” renounce he attacks them as traitors. Hey mate…you can’t have it both ways.

    What he’s really saying is it’s OK to pursue whatever dream you wants as long as you’re under the thumb of the US government.

  6. Very well written @Eric, and good examples. Always difficult to address this and clear up the misconceptions in the compressed way demanded by the character limits on these sites. Thank you for your contributions.

    Good comments @All, when I read how others describe/discuss these issues, it helps me to organize the facts and offers a template to help in writing about them.

  7. Long story. I am not sure how much I can say because it was a private converstation but I talked to someone in tax law academia recently who knows Murphy and some of the key people who developed FATCA and sharply disagrees with them on this. Admittably its because the person in question is a citizen of a country we all know a lot about that begins in Ca(its not Cambodia) with a US Green Card and a US Citizen spouse and is about to move back to “Ca” with their spouse after living in the US for many years(“Into the FATCA furnace as how it was put”). The person in question is working on a paper in the future against FATCA and citizenship taxation. I post a link to it when its published.

  8. IMPORTANT – SENIOR WASHINGTON DC LOBBYIST AGAINST FATCA

    “James George Jatras is a Principal of Squire Sanders Public Advocacy, a Washington-based government relations firm. He previously served as a policy analyst at U.S. Senate and as an American diplomat. He can be reached at james.jatras@squiresanders.com.”

    His article:

    FATCA’s “Vulnerabilities Evident,” Washington Expert Claims, Calls for Repeal

    WASHINGTON, May 10, 2012 /PRNewswire via COMTEX/ — The following is being released by Global Strategic Communications Group:

    The FATCA law should be scrapped, writes James George Jatras, a Washington-based legislative specialist and expert in international affairs, in a May 8 UPI commentary. Citing “untold costs” versus “trivial revenue recovery,” Jatras shatters the myth that FATCA (“Foreign Account Tax Compliance Act”) is a “done deal” and calls for “first rendering FATCA unenforceable, and then for its final repeal.”

    http://www.marketwatch.com/story/fatcas-vulnerabilities-evident-washington-expert-claims-calls-for-repeal-2012-05-10

    Twitter @repealfatca

    UPI: “Why ‘FATCA’ should be repealed”

    For further analysis: “Global Financial Information Regime Looms”

    Contact: Global Strategic Communications Group, Darren Spinck, 202-669-4418, darren@gscgrouppr.com

    SOURCE Global Strategic Communications Group

  9. @Wondering

    I saw that this morning, and thanks for the twitter account.
    Sent him this…

    @repealfatca You are absolutely right. ACA has this mission too, but to no avail. #Fwhat? or #FATCA needs repealing http://bit.ly/nlOAPV

    Also, I noticed that a new hashtag is trending called #askdems

    So, might start dropping a few into that stream.

    #askdems Why there is an IRS jihad on #Expat offshore accts, #OVDI and why we have #Fwhat? forms or #FATCA and #FBAR http://on.mktw.net/JB3q56

  10. Well, TJN’s put up three more blog posts since I wrote this, but apparently they haven’t had time to check their comment moderation queue yet …

  11. Mr. Shulman is smart…and perhaps more than that. He knows that with the Earned Income Exclusion and the Tax Credits, regardless of how many forms we must fill and how many CPAs we must pay we end up paying no taxes. So he now wants to get us with the FBARs that came in the night, nobody knew about and now he will charge and put us in jail for not complying. A trap. I guess he will collect money with his extortion fines and will further his career. At our expenses. And Obama…is silent.

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