Though I would not want to trade my income taxes with those paid by Europeans, there is at least one area where the US has the worst tax regime in the world. The specific area is the double standard the US applied on eligibility of income when other countries are involved. For citizens of other countries, the US applies the standard that taxation is based on where one earns their income, so citizens of, say, France that are working in the US must pay US taxes. However, for citizens of the US, the government reverses its standard. In this case, the US applies the standard that taxation is based on citizenship, so US citizens must pay taxes on their income, even if it is all earned living in a foreign country. Since most countries of the world apply the first standard (which is also the standard individual states in the US apply), US expats find their income double taxed between the US and the country they are living in.
Queues of frustrated foreigners crowd many an American
consulate around the world hoping to get into the United States. Less
noticed are the heavily taxed American expatriates wanting to get out "”
by renouncing their citizenship. In Hong Kong just now, they cannot.
"Please note that this office cannot accept renunciation applications
at this time," the consulate's website states. Apart from sounding like
East Germany before the fall of the Berlin Wall, the closure is
unfortunately timed. Because of pending legislation on President Bush's
desk that is expected to become law by June 16th, any American who
wants to surrender his passport has only a few days to do so before
facing an enormous penalty.
"¦Congress has turned on expats, especially those who, since new tax
laws in 2006, have become increasingly eager to give up their
citizenship to escape the taxman. Under the proposed legislation,
expatriates surrendering their citizenship with a net worth of $2m or
more, or a high income, will have to act as if they have sold all their
worldwide assets at a fair market price.
"¦That expats want to leave at all is evidence of America's odd tax
system. Along with citizens of North Korea and a few other countries,
Americans are taxed based on their citizenship, rather than where they
live. So they usually pay twice "” to their host country and the
Internal Revenue Service. As this makes citizenship less palatable,
Congress has erected large barriers to stop them jumping ship. "¦[I]t
may have the opposite effect. Under the new structure, it would make
financial sense for any young American working overseas with a
promising career to renounce his citizenship as early as possible,
before his assets accumulate.
This is simply awful, and is another example of fascism in the name of egalitarianism (the fear is that a few rich people will move to tax havens to avoid US taxes). Add up your net worth - equity in your house, retirement savings, etc - and imagine having to pay 35% of that as a big
bribe tax to the US government to let you leave the country.