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Capital, like
information, wants to be free. The idea that it should be limited to one
country has always struck rich people as silly, which is why Swiss bank
accounts, offshore trusts and Caribbean beachfront condos have been perennial
big-sellers.
But lately,
the legitimate reasons for investing overseas have been joined by a couple of
new ones: disgust with a ridiculously intrusive US tax system and worry that
the country is becoming something different and less predictable.
As the Wall
Street Journal's William McGurn reports below, a
small but growing number of Americans aren't just moving money offshore, but
are renouncing citizenship altogether:
What's
U.S. Citizenship Worth?
America is no
longer as attractive to highly successful people as we like to think.
People say
the dollar isn't what it used to be. Apparently neither is a United States
passport. Last year, nearly 1,800 American expatriates renounced their
citizenship, according to Treasury Department figures.
What gives?
The cheap
answer is to blame Barack Obama. After all, during his tenure, the number of
Americans renouncing citizenship has taken a sharp upward turn, from an
average of 482 per year under George W. Bush to 742 in 2009, to 1,534 in 2010
and to 1,788 in 2011. At the least, his calls for hiking taxes on the wealthy
can't be doing anything to discourage this trend.
The other
cheap answer is to blame the ever unpopular IRS--instead of the tax code
itself. In the international section of its most recent annual report to
Congress, the agency's National Taxpayer Advocate notes that whether it's Americans working abroad or foreigners residing here,
"taxpayers who are trying their best to comply simply cannot." The
result is that some are "paying more tax than is legally required, while
others may be subject to steep civil and criminal penalties."
Here's the
real issue: When it comes to attracting highly successful people, America is
just not as competitive as we like to think we are. What we need is a
complete rethink.
That rethink
begins with a hard look at what these 1,800 citizenship renunciations are
telling us. True, 1,800 is a drop in the bucket compared with either the
number of Americans working abroad or the number of foreigners who are
seeking U.S. citizenship. Still, when it comes to the global inefficiencies
of our tax code, these 1,800 ex-Americans are canaries in the coal mine.
Our tax
code--and especially the onerous reporting requirements that come with it--is
turning U.S. citizens into economic lepers. Many foreign banks refuse us as
customers; some investment ventures no longer want us as partners; and some
business opportunities that would have benefited Americans now benefit
others.
For
successful foreigners, our global tax regime tells them this: Avoid
entanglements with America. Andrew Mitchel is a Connecticut-based
international tax attorney who blogs on these issues. He says that for
someone who has foreign assets abroad, the cost-benefit analysis doesn't
always come out in America's favor.
"My
advice to, say, a small-business man abroad would be to think twice about
acquiring U.S. citizenship," says Mr. Mitchel. "Many of these
people do not realize what that means for their businesses until they start
dealing with the IRS."
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.
At the
corporate level, taxing overseas earnings means higher capital costs for the
U.S. Instead of taxing businesses only for what they earn in America, Ms. Bugnion says, Congress makes things even more complicated
by trying to offset the negatives with occasional measures such as deferred
taxation on profits earned and reinvested overseas.
In short, America
is not facing up to the big question: If you are a dynamic individual with a
good business, do you want to be an American--and open up all your world-wide
activities to the IRS--or might you be happy living and raising your family
in a part of the world that welcomes rather than discourages success? The
aforementioned IRS report suggests other countries are busy answering that
question, citing a World Bank study showing that, unlike ours, "40
economies made it easier to pay taxes last year."
Now the whole
notion that someone would give up U.S. citizenship to get out from the IRS
will be taken by some folks as evidence that he or she isn't worthy of
American citizenship. Maybe not. Alas, a focus on the punitive only blinds us
to the larger costs this approach is inflicting on the rest of society.
Indeed, the
whole reason Treasury reports the numbers of Americans renouncing citizenship
instead of the State Department is because Congress--Republicans as well as
Democrats--set it up that way. The aim is to "name and shame."
That's the Berlin Wall approach: The idea that the thrust of U.S. tax law
should be to prevent any American from benefiting from a better deal
somewhere else.
That a record
1,800 Americans gave up their citizenship last year suggests something else:
Instead of building walls to keep talent and investment from getting out,
Congress might start treating these as capital we ought to work to attract.
Some thoughts
This article
focuses on our increasingly abusive tax system, and no doubt that's a big
part of the immediate problem. The fact that foreign banks won't even accept
Americans as customers should tell us that we've crossed some very important
lines.
But the other
motivation for getting out -- fear that if we and our money stick around
we'll be trapped by capital controls and then impoverished by inflation and
confiscation -- will be the driver going forward. The list of "creeping
fascist" laws that have been proposed and/or passed lately reads like
something out of a bad dystopian novel. Combine this evolving police state
with never-ending wars and ever-rising debt and you have the recipe for a
financial collapse/state of emergency in which no one's capital is safe.
So the escape
strategy is evolving to fit the new reality. Where in the past it seemed
reasonable to stick around but move a bit of money offshore, now the goal is
"internationalization," in which not just one's assets but one's
identity is geographically diversified. That means a second passport to go
with foreign real estate and bank accounts, to make a complete break possible
should it be necessary.
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