U.S. citizenship-based taxation harms U.S. economy

The result of citizenship-based taxation

We are living in interesting times. During all the years of my tax consciousness I have lived with the assumption of U.S. citizenship-based taxation. When the IRS began its “reign of terror” on U.S. citizens living  outside the United  States and many people learned about their tax filing obligations, the discussion about citizenship-based taxation began. The U.S. is the only Western democracy and of one two countries (Eritrea being the other) which taxes on the basis of citizenship. The rest of the world taxes on the basis of residence  or what is commonly referred to as “territorial taxation”. In a global world where:

– professional mobility is the norm;

– citizenship  be nothing more than an “accident of birth”

– there is a consciousness of human rights and the right to remain or renounce citizenship is protected

– standards of common sense and decency are desirable objectives

Citizenship-based taxation is not a good idea! It costs the U.S. economy lots of money!

Leaving aside arguments that are based on a constitutional right to expatriate and the argument surrounding “dominant citizenship” (these are very important arguments) let’s analyze this from the perspective of the character in Jerry McGuire. In other words:

“Show me the money!”

For those who don’t like sports, but do like Bill Clinton then let’s work with the principle:

“It’s the economy stupid!”

It is  not in the economic interests of the United States to impose “citizenship-based taxation”. I presume that you are reading this because you are a U.S. citizen living outside the United States. Even if you don’t owe any U.S. tax (the earned income exclusion, foreign tax credits and your general poverty have worked their magic), after 2011, you understand that you still have both U.S. tax and reporting obligations that are complicated and expensive. It will be increasingly difficult to find a “professional” to assist you. On the most basic level  the time, cost and anxiety associated with this are a “tax on U.S. citizenship” itself. This is a tax that no other kind of citizen has. (I am not even considering the social and business restrictions that are the result of FATCA. These include minor things like: no job and no life – but, I digress.)  U.S. taxation and reporting requirements make U.S. citizens too expensive and undesirable for foreign employers. So, a U.S. citizen can physically come to another country, but he or she comes with a level of toxicity that makes him undesirable. These things are really just a problem for the U.S. citizen living outside the United States. And who cares about them anyway. They (from the perspective of the U.S.) are just FATCAt(s) drinking expensive wine on the beach and certainly evading taxes. So, they are just getting what they deserve!

Actually Citizenship-based Taxation Harms The U.S. Economy and Harms It A Lot

 Let me introduce you to the best friend of those who oppose citizenship-based taxation. Some of you may already know him – he is out on the front lines commenting on the blogs. His basic thesis is that citizenship-based taxation is destroying the U.S. economy.  For example: The IRS brings in five billion dollars in taxes from U.S. citizens living outside the United States. But, to bring in that five billion in taxes, actually costs the good ole USA one-hundred sixteen billion dollars (yes for those who think that is a mistake $116,000,000,000) dollars a year. Furthermore, citizenship-based taxation is the direct cause of the U.S. trade deficit. Intrigued? Read what I call “The Conklin Report” which is really his testimony before the Ways and Means Committee.

Who is Roger Conklin? In his own words Mr. Conklin is a retired telecommunications consultant.  He is an 80 year old retired person who has actually lived the destructive effects of U.S. citizenship-based taxation. And he is willing to share his views with the government.

Here is an example of a superb comment he recently posted on the article “Obama promotes insourcing jobs”

“President Obama has a very short memory. Back at the beginning of his administration he announced an Export Initiative to create jobs by doubling US exports in 5 years. And his appinted commission presented a plan to add commercial attache staff at our Embassies abroad, encourage US companies to participate in foreign trade fairs and to invite foreign purchasrs to the US. Missing from this plan was increasing the number of Americans who go abroad to sell American products. The plan has gone very badly. Products don’t sell themselves. This takes feet on the ground which all of our trade competitor have but the US does not. Yes, there has been a modest increase in exports, but impports have grown far more rapidly than exports, so far more American jobs have been destroyed as our trade deficit has increased than jobs created by increased exports. Our 12-month goods trade deficit through October is $720 billion. This represents some 7 million destroyed American jobs manufacturing for export. Our trade deficit continues to grow by $1.9 billion per day. These destoyed jobs represent $130 billion in Federal tax revenue that fails to be generated.

The US attaches a ball-and-chain to every citizen who goes overseas. He pays taxes on his worldwide income to the foreign host country and then is double taxed on this same income by the IRS. No other country taxes is overseas citizens, so they go aborad and create jobs at home whereas this punishing double taxation of our own ctizens if they do that punishes them if they relocate abroad. Germany,for example, exports 7.9 times more per-capita than the US to China and has a $12.5 billion China trade surplus whereas we have a $270 billion China trade deficit.

In order to compete with citizens of other countries for overseas postings and and end up with the same after-tax income, US citizens must be compensated between 3 to 5 times more than non US citizens in order to cover the additional tax cost that citizens of no other nation have to bear.

Instead of repealing this destructive double taxation, President Obama in 2010 signed the FATCA legislation which makes it impossible for a US citizen to open a bank account in a foreign country. It imposes such massive reporting requiremnts on the accounts held by US citizens by foreign banks that they are dumping all their US citizen account holders. This law requires foreign banks to violate the privacy laws of their countries in providing data to the IRS, a foreign tax authority, which they are prohibited from releasing to any third party.

So please, President Obama, get your priorities straightened out.”

and how about another comment by Roger Conklin  with respect to the reason for the trade deficit with China:

“There was a 11.6% increase in the 2011 US trade deficit with China over 2010 while China’s world trade surplus decreased by 14.5%. Rather than the Obama Administration appointing a commission to “monitor Chinese trade practices” it would be much more productive to appoint a commission to determine why the US does so poorly selling our competitively priced agricultural and high tech products in China. If it were not for the US trade deficit with China, that country would have ended the year with a $47 billion world trade deficit. While the rest of the high-wage industrialized nations are going gangbusters in racking up trade surpluses with China, the second-largest import market in the world, the US trade deficit continues to skyrocket. If such a commission were appointed its report delineating the reasons for our massive trade deficit would take about 5 minutes to prepare. It is a direct result of our unique world-wide and citizenship-based tax policies. They punish companies that export and our citizens who live and work abroad. This is what has destroyed the export mentality of US industry and made it impossible for Americans to compete for overseas jobs. The real loser is the US economy. Our $700 billion world trade deficit represents 7 million destroyed American jobs and $130 billion in tax revenue that these destroyed jobs fail to generate. Every other nation practices Territorial taxation. Their companies pay taxes to China on their profits in China and remit their earnings back home tax free. US companies pay a 35% tax on repatriated foreign earnings. And their citizens who relocate to China to sell their exports pay taxes to China on their world-wide income but are never double taxed back home. US citizens who relocate abroad are taxed by their host countries as well, but then they are double taxed by the IRS on this same income as if they never left home. The US tax system creates an unlevel playing field tipped against ourselves. US exporters have a competitive tax disadvantage that other exporters do not have, imposed not by China, but by our own tax laws. It takes American feet on the ground in China to sell American products, just like it took Navy SEALS to take out bin Laden, but our double taxation makes US citizens from 3 to 5 times more costly than citizens of all other nations in order to end up with the same after-tax income when employed in China.. Americans are priced out of the foreign job market, not by their wages but by our tax laws. But nobody on Capitol Hill or at 1600 Pennsylvania Avenue seems able to understand these simple economic facts. Every US citizen, anywhere in the world with income of $9,350 income must file a US tax return. The most recent Treasury Department statistics indicate that 12,000 individual tax returns were filed by US citizens and green card holders in China. There are 2.16 million Chinese citizens legally resident in the US. How many of them also pay taxes in China? Not a single one of them do. China, like every other nation, except the US, does not tax the income of its citizens residing outside of China. The freedom to deploy their own citizens abroad is an advantage our industrialized trade competitors have, and why they have China trade surpluses Their citizens go abroad and create jobs at home by selling their exports.. The additional tax burden imposed on US citizens if they are deployed abroad makes them far to costly. So they stay home and we hobble along depending on foreign mercenaries making a half-hearted attempt to sell our exports.. That’s like subcontracting the Venezuelan Navy to keep the Iranians from closing the Straits of Hormuz.”

The message – “Stop Citizenship-based taxation – Repeal FATCA“

Once again, don’t forget to read the Conklin report.

http://waysandmeans.house.gov/UploadedFiles/Retired_International_Sales_and_Marketing_Executive.pdf