The US Erects Its Own Version of the Berlin Wall

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.

But now, it is just getting worse:

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. 

  • Flatland

    Wouldn't it be possible to just default on taxes if you were able to move all investments overseas? This might limit investments somewhat, but as long as you don't go back to the US you'd be fine? This is probably harder than what I'm thinking, but possible.

    For people with smaller incomes, there are some huge tax benefits that I was able to take advantage of for two years by living overseas.

  • Franco

    I have always wondered what it was like to be in Rome as the roman empire fell or Britain lost its stature in the world. Unfortunately, I fear it might be playing out here in the States. It is not dramatic but rather a long chain of events over a period of decades. This policy encourages people who are wealthy to move out => huge benefit programs necessitate high taxes which hurt competitiveness => people at home fear for their jobs and become xenophobic => bright foreigners don't come here to work anymore => Other countries pick them up => More bright Americans leave to chase these opportunities => Go back to beginning and repeat. I cannot say what the equilibrium point is but I think I can see the direction this ship is heading.

  • mjh

    (which is also the standard individual states in the US apply)

    I live in Charlotte, NC, which is right on the border with S. Carolina. Many of my friends live in SC, but work in NC. They have to pay income taxes to both states.

  • L Nettles

    The Berlin Tollbooth

  • cpk

    "...US expats find their income double taxed between the US and the country they are living in."

    I am sympathetic to the idea that someone should be taxed in the country/tax jurisdiction that they work and/or reside. While the US government's taxation of US citizens world-wide income rubs me as rapacious, it is less egregious than being "double taxed" as the article and you suggest. The US has income tax treaties with most countries which lessen the severity of having the individual's income tax subject to tax in 2 countries. The following is a simplified example of how such treaties generally work. A US citizen earned $100,000 living and working in Country A with an individual tax rate of 20% and is also subject to a US effective tax rate of 30%. His tax is not 50% or $50,0000. Rather, his tax is $30,000. The treaty provides a credit for the $20,000 of Country A tax which the individual was paid. The US collects "only" $10,0000 from you because your effective tax rate should be the US rate of 30% (hence the $10,000 owed Uncle Sam rather than $30,000)

  • Josh

    Thanks for the clarification, cpk.

    It makes me wonder, though - doesn't the USA usually get nothing out of agreements like that? Most European countries have higher tax rates than the United States, so there would be nothing left over after the host nation takes its cut.

  • Richard Sharpe


    It makes me wonder, though - doesn't the USA usually get nothing out of agreements like that? Most European countries have higher tax rates than the United States, so there would be nothing left over after the host nation takes its cut.

    Hmmm, yes, but in the case cited, of HK, taxation rates in HK are lower than they are in the US, and China's taxation rates perhaps even lower ...

  • Solar Lad

    Franco:

    Under normal circumstances that process might proceed, but we are entering an "abnormal" period in world history, i.e., the never-before-seen combination of near-global promised social benefits and shrinking future generations.

    Since the promised benefits are higher, and the dearth of future workers is larger, in most of Europe, Australia and parts of Asia like Japan and South Korea, the U.S. will therefore on a RELATIVE basis retain their attractiveness to potential emigrants.

    Even some places not normally seen as "advanced" nations are held together with baling wire and social benefits, e.g. Iran and Saudi Arabia, and so they'll get whacked even harder than will the 1st world, due to the combination of lower revenues and less ability to adapt and react.

  • http://jwherring.com/TOWM/ Joshua Herring

    CPK -

    My experience living in Korea and Japan was that we had to pay full taxes in both countries and were exempt from taxes up to $75k in the US. Since I was earning less than that, I only ended up paying the local taxes. But anything above $75k would have been taxed at the normal rate.

  • Astroboy

    Hmmm, one wonders what the treatment of greencard holders in the US will be ...

  • Dan

    Similar to Joshua, I worked in Japan for a couple years, and because my income was less than somewhere between $75k-80k, I just had to pay Japanese taxes. Since I didn't have to pay into their pension or health care system either, it was a pretty sweet deal.

    Canadians working at the same company had a much worse deal. Unlike the U.S., there is no lower bound on how much they have to be making before they got taxed in Canada, too. Most Canadians I worked with ended up closing all their bank accounts and selling off their property so that they could claim they were intending to become permanent Japanese residents, which exempted them from having to pay the Canadian taxes. In reality, most of them intended to move back a few years later.

  • Rocky Mountain

    Anybody that would renounce their US citizenship because of taxes is being incredibly short-sighted.

  • http://www.wallstreetsentiment.com Atlas

    RM, the long view is that if you just suck it up and stay, there is no cost to abusing the highly productive.

    Ever read Atlas Shrugged?