Will High-Value Taxpayers Vote with their Feet Against Biden?

For most of the world, American citizenship is highly coveted. Indeed, foreigners have even been willing to invest a lot of money to increase the odds of getting to the United States.

But changing one’s nationality is a two-way street. Beginning with the Obama years, there’s been a big jump in the number of Americans willing to give up U.S. citizenship.

This is mostly because of bad tax policy (high rates, double taxation, FATCA, etc).

Simply stated, these successful households make a completely rational assessment that the benefits of being an American aren’t worth the fiscal costs.

Especially if they already live overseas and are being victimized by “worldwide taxation.”

Sadly, it’s quite likely that more Americans will be giving up their citizenship if Biden is able to push through his class-warfare tax agenda.

Jennifer Kingson explains in an article for Axios.

The number of Americans who renounced their citizenship in favor of a foreign country hit an all-time high in 2020: 6,707, a 237% increase over 2019. …While the numbers are down this year, that’s probably because many U.S. embassies and consulates remain closed for COVID-19, and taking this grave step requires taking an oath in front of a State Department officer. …The people who flee tend to be ultra-wealthy, and many of them are seeking to reduce their tax burden. New tax and estate measures proposed by the Biden administration could, if implemented, accelerate this trend. …The IRS publishes a quarterly list of the names of people who have renounced their citizenship or given up their green cards. The numbers started swelling in 2010, when Congress passed the Foreign Account Tax Compliance Act, or FATCA, which increased reporting requirements and penalties for expats.

Here’s a chart from the article.

I speculated last year that the 2016-2019 drop was an indicator that Trump’s tax cut was having a positive impact.  But the spike in 2020 suggests I was being too optimistic.

Here’s some more analysis from the article.

As you can see, there’s a big backlog, so we only speculate how many Americans will be escaping the IRS in coming years.

David Lesperance, an international tax lawyer based…who specializes in helping people renounce U.S. citizenship, says that with coronavirus shutting down interviews for renunciation, the next lists will only contain relinquished green card holders, who can do it by mail. “There are probably 20,000 or 30,000 people who want to do this, but they can’t get the appointment,”…”It’s a year-and-a-half to get an appointment at a Canadian embassy,” he tells Axios. “Bern [Switzerland] alone has a backlog of over 300 cases.” …A lot of people who take this drastic step are tech zillionaires: Eric Schmidt, the former Alphabet CEO, has applied to become a citizen of Cyprus. …President Biden has proposed raising the top capital gains tax to 43.4%, and while it’s unclear whether that will pass, it did prompt a lot of calls to Lesperance from people wanting to find out which foreign countries might grant them citizenship.

By the way, this issue has macro consequences for the rest of us. Given the economic importance of innovators, entrepreneurs, and inventors, it’s bad news for the United States when they move to low-tax nations such as Singapore.

P.S. Companies also move from one country to another so they can protect workers, consumers, and shareholders from bad tax policy.

P.P.S. One of the most odious parts of American tax law is the imposition of Soviet-style exit taxes on people who want to change citizenship.

P.P.P.S. Today’s column is about tax migration across national borders, but don’t forget there’s far more tax migration across state borders.

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The Venal Corruption of the Political Class

In the past week, I’ve written two columns (here and here) extolling the benefits of federalism.

So I now feel compelled to warn that my support for decentralization is not motivated by some Pollyannish view of sub-national governments.

State and local government officials are perfectly capable of adopting policies that lead to the absurd waste of taxpayer money and grotesque abuse of citizens.

And they also are just as proficient at sleaze as their cousins in Washington.

Politico has a sobering report on pervasive state-level corruption. They start with a rundown of what’s been happening with the criminal class in the Empire State.

Other states have plenty of corruption, but it’s hard to beat New York when it comes to sheer volume. The criminal complaint Monday against Dean Skelos, the state Senate majority leader, and his son Adam came just three months after charges were brought against Sheldon Silver, then the Assembly Speaker. Having the top leaders in both chambers face criminal charges in the same session is an unparalleled achievement, but Skelos is now the fifth straight Senate majority leader in Albany to face them. …Senate Republicans are standing by Skelos, but if they decide to make a change, they probably won’t turn to Thomas Libous, the chamber’s Number Two leader. He faces trial this summer on charges of lying to the FBI… All told, more than two dozen members of the New York state legislature have been indicted or resigned in disgrace over the past five years.

New York seems to breed corruption, probably because it is a profligate state and there is a well-established relationship between the size of government and the opportunities for malfeasance.

But other states are doing their best to show corruption and government go hand in hand.

Silver was one of four state House Speakers to face criminal charges over the past year (Alabama, Rhode Island and South Carolina are home to the others). In Massachusetts, three Speakers prior to current incumbent Robert DeLeo all resigned and pleaded guilty to criminal charges. When Dan Walker died last week, it was hard for obituary writers not to note that he was one of four Illinois governors over the past five decades who ended up in prison. …Give any U.S. attorney a year and 10 FBI agents and he or she can probably come back from the state capital with a passel of indictments.

At some point, even non-libertarians need to recognize that 2+2=4. In other words, the evidence is overwhelming that the public sector is a breeding ground for corruption because it is premised on buying votes with other people’s money.

Which is the basic message of my First Theorem of Government.

By the way, I’m not making a partisan point. It should be obvious from the story cited above, but I’ll reiterate that Republicans are just as capable of venal behavior as their opponents.

And don’t delude yourself into thinking that “principled” Democrats are immune to sleazy behavior.

Here’s the video I narrated explaining how bloated government enables corruption.

P.S. You can enjoy some government corruption humor here, here, here, here, and (my personal creation) here.

P.P.S. If you’re a fan of Barack Obama, you may be pleased to know that we’re setting records as a result of his policies.

We already know America has experienced a record drop in labor force participation.

And we also have a new record for weakest recovery since the Great Depression.

As well as a record for declining household income.

Now we have a new record. More Americans than ever before have decided to give up U.S. citizenship. Here are some of the details from a Bloomberg report.

More Americans living outside the U.S. gave up their citizenship in the first quarter of 2015 than ever before, according to data released Thursday by the IRS. The 1,335 expatriations topped the previous record by 18 percent, according to data compiled by Bloomberg. Those Americans are driven to turn in their passports in part because of laws that have expanded bank reporting and tax compliance requirements for expatriates. The increase in early 2015 follows an annual record in 2014, when 3,415 Americans gave up their citizenship. An estimated 6 million U.S. citizens are living abroad, and the U.S. is the only country within the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

Here’s one example from the story.

“The cost of compliance with the complex tax treatment of non-resident U.S. citizens and the potential penalties I face for incorrect filings and for holding non-U.S. securities forces me to consider whether it would be more advantageous to give up my U.S. citizenship,” Stephanos Orestis, a U.S. citizen living in Oslo, wrote in a March 23 letter to the Senate Finance Committee. “The thought of doing so is highly distressing for me since I am a born and bred American with a love for my country.”

There are two lessons from this story.

• First, it is absurd that our tax laws are so onerous (even worse than France in this regard) that some people feel compelled to give up American citizenship.
• Second, while there are lots of ordinary Americans who are being pushed to give up their passports (folks married to foreigners, for instance), the average expatriate presumably has above-average income and is an asset to be welcomed rather than a burden to be repelled.

But such considerations don’t matter to politicians who like to demagogue about the supposed pot of gold at the end of the rainbow of overseas Americans. So we get awful laws like FATCA.

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Everything You Ever Wanted to Know about Obama’s Failed Approach to Corporate Inversions

I don’t know whether it’s because I’m a libertarian or because I’m an economist, but I get very frustrated by the issue of corporate inversions.

It galls me to hear demagogic politicians like Obama make absurd statements about “unpatriotic” corporations that re-domicile overseas when the problem is entirely the result of bad policy that penalizes U.S.-domiciled firms trying to compete in global markets.

1. The United States imposes the world’s highest corporate tax rate.

2. The United States is one of the few countries to impose “worldwide tax” on domestic firms.

3. The United States maintains very anti-competitive tax rules.

So when politicians grouse about “Benedict Arnold” companies, my reaction is to be happy that companies are taking steps to protect workers, consumers, and shareholders.

But, given what he’s done on amnesty and Obamacare, you won’t be surprised to learn that the President has unilaterally changed policy to make inversions more difficult.

That’s the bad news. The good news is that the President’s bad policy doesn’t change reality.

An editorial in the Wall Street Journal looks at the latest example of an American company getting a new address.

Ireland-based drug company Actavis on Monday announced a $66 billion agreement to buy California’s Allergan , maker of the Botox anti-wrinkle treatment. …the tax savings…could be hundreds of millions a year beginning in 2015.

The folks at the WSJ make the obvious point about bad American tax laws.

…the deal highlights how desperately U.S. tax policy needs a makeover. …As if a combined state and local corporate tax rate of 40%—the highest in the industrialized world—isn’t harsh enough, the U.S. is also one of the few countries in which the government demands to be paid even on earnings that have already been taxed in foreign jurisdictions. Given this competitive disadvantage for U.S.-based firms, it’s no coincidence that both of the suitors that have been seeking to acquire Allergan are based overseas.

And what’s really remarkable is that both the suitors used to be U.S.-based companies!

Both Actavis and Valeant used to be based in the U.S. but moved their headquarters offshore in so-called inversion transactions in which they adopted the home country of businesses they acquired. Moving offshore allows businesses to invest more in the U.S., as Actavis has already done with its recent purchase of New York’s Forest Laboratories.

But hold on a second, didn’t the Obama Administration enact rules to prevent inversions?

President Obama views such rational decisions as unpatriotic, because he wants to tax both foreign and U.S. operations. So this fall Treasury Secretary Jack Lew reinterpreted longstanding tax regulations to make it more expensive to execute such deals—a punishment for companies that didn’t exit the U.S. when they had the chance. …Mr. Lew has decided the best response to foreign tax competition is to bolt the door to prevent more corporate escapes.

But here’s the catch. The White House and Treasury Department did make it more costly for companies to re-domicile, but the Administration can’t actually prohibit cross-border mergers.

So let’s summarize the net effect.

Before the Obama Administration imposed new rules, American-based companies would acquire foreign-based companies and use that maneuver to technically re-domicile in a nation with less punitive corporate taxation. But there’s very little risk of American jobs being lost.

After the rule changes, American-based companies are the ones being acquired by their overseas competitors. This means the White House can’t argue that the change in domicile isn’t real. And it means that there’s a far higher probability of jobs going overseas.

I guess the White House thinks this is a victory.

Let’s now step back and put this issue in context. This is the educational part of today’s column.

Here are some slides from a presentation by Professor Dick Harvey at Villanova University School of Law. He presents lots of information, but here are the three slides that are probably most interesting to non-tax geeks.

First, here’s the key thing to know about inversions. They’re a do-it-yourself version of territorial taxation.

And since territorial taxation is the right policy, nobody should be upset about inversions.

Second,  here’s a look at how many inversions occur each year. As you can see, we’re in the midst of another wave.

You’ll notice that these waves roughly coincide with periods featuring corporate tax rate reductions in other nations.

So the lesson is that bad American policy is making it more and more difficult for U.S.-domiciled firms to compete in global markets.

Third, here’s a slide showing where companies are re-domiciling.

Some of my favorite places, particularly Cayman, Bermuda, Switzerland, and Hong Kong!

Now let’s zoom out even further and consider the leftist view that multinational corporations are getting away with some sort of scam because of so-called stateless income.

Sinclair Davidson, a professor at Australia’s RMIT University, writes about the issue. Here are a few excerpts from his scholarly paper.

It is commonly argued that the corporate income tax system is ‘broken’. …The latest theoretical argument suggesting that the corporate income tax base is likely to be eroded is the ‘stateless income doctrine’.

But there’s an itsy-bitsy problem with this theory, as Sinclair explains.

…there is no evidence to support the view that the corporate income tax base is being eroded. At best, the concern about the tax base is not so much that it is being eroded, but rather that multinational corporations do not pay tax in every host economy.

He also points out that companies are obeying the law, which is a point I’ve also made on this topic.

…there is little evidence of any wrongdoing by any of the three corporations that are regularly singled out for abuse. It is true that these corporations do not pay as much tax in the UK or the US as those governments would like them to pay, but they pay as much tax as is required by the laws that those governments have passed. …‘None of this required a Senate “investigation” to  discover because Apple is constantly inspected by the IRS and other tax authorities. These tax collectors are well aware of Apple’s corporate structure, which has remained essentially the same since 1980. An Apple executive said Tuesday that the company’s annual US tax return adds up to a stack of paperwork more than two feet high. …These corporations are fully compliant with the tax law in the jurisdictions in which they operate.

So what’s his bottom line?

There is no such thing as ‘stateless income’, rather there is income that the governments of the UK and the US do not tax because under their own legal systems that income is not sourced in their economy. When these governments complain about stateless income, the question rather should be, ‘Why do the owners of intellectual property not locate their property in your economy?’. An implicit assumption of the stateless income doctrine is that multinational corporations maximise their value to society only when they pay tax. Of course, this is not the case. … It is one thing to point out that multinational corporations do not pay tax in some jurisdictions but that says nothing about the actual corporate  income tax base. … So-called ‘stateless income’ is a return on intellectual property.

Amen.

Let’s close with another perspective on the issue. Stewart Dompe and Adam Smith of Johnson and Wales University in North Carolina have a column in The Freeman.

…the United States is unique in that it taxes corporations at 35 percent regardless of where the income is earned, and hence regardless of whether the corporation benefited from any public goods. Payment without benefit is simply bad business. Avoiding particularly high tax rates like those of the United States can yield significant savings for companies—and their shareholders. Charlotte-based Chiquita Brands International, for instance, hopes to save $60 million via its recent acquisition of Ireland-based Fyffes PLC. Burger King’s merger, according to analyst estimates, could cut its overall tax bill by 13 percent. …Populist themes like “economic patriotism” may appeal to voters, but such arguments are nonsensical: Firms are ultimately responsible to their shareholders. As Judge Learned Hand wrote, “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” If anything, firms have a moral responsibility to minimize their taxable liabilities. The legal structure of a firm establishes the relationship between shareholders, who own the capital, and managers that make operating decisions. Executives have a fiduciary responsibility to pay the lowest tax possible because they are the stewards of their shareholders’ wealth.

I particularly like their conclusion.

This competition among legal regimes is a powerful constraint on government—and that is a good thing for all of us. America has the second-highest corporate tax rate in the world—the highest when state taxes are included. The solution to this problem lies not in closing loopholes or imitating poor Oliver pleading for more, but in offering a simpler, more competitive tax system.

They hit the nail on the head. As I argued just yesterday, we need to restrain the greed of the political class.

But the fight isn’t limited to national capitals. International bureaucracies such as the Organization for Economic Cooperation and Development also are promoting schemes to squeeze more money out of companies – which, of course, means harming workers, consumers, and shareholders.

The pro-tax crowd can concoct all sorts of theories, such as stateless income, but this assault on companies is happening because government have spent themselves into a fiscal ditch and they want taxpayers to pay the price for this profligacy.

P.S. If you read this far, you deserve a reward. You can enjoy a good Michael Ramirez cartoon about inversions by clicking here, and there are several additional cartoons included in this post.

P.P.S. But if you’re a glutton for punishment, you can watch my video on international corporate taxation instead.

P.P.P.S. One final point worth sharing is that folks who try to complain about “low tax burdens” on the foreign-source income of American multinationals need to remember that they pay a lot of tax to foreign governments.

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Obama, Corporate Inversions, and Grotesque Hypocrisy

Last month, I put together a list of six jaw-dropping examples of left-wing hypocrisy, one of which featured Treasury Secretary Jacob Lew.

He made the list for having the chutzpah to criticize corporate inversions on the basis of supposed economic patriotism, even though he invested lots of money via the Cayman Islands when he was a crony capitalist at Citigroup.

But it turns out that Lew’s hypocrisy is just the tip of the iceberg.

It seems the entire Obama Administration was in favor of inversions just a couple of years ago. Check out these excerpts from a Bloomberg story.

President Barack Obama says U.S. corporations that adopt foreign addresses to avoid taxes are unpatriotic. His own administration helped one $20 billion American company do just that. As part of the bailout of the auto industry in 2009, Obama’s Treasury Department authorized spending $1.7 billion of government funds to get a bankrupt Michigan parts-maker back on its feet — as a British company. While executives continue to run Delphi Automotive Plc (DLPH) from a Detroit suburb, the paper headquarters in England potentially reduces the company’s U.S. tax bill by as much as $110 million a year. The Obama administration’s role in aiding Delphi’s escape from the U.S. tax system may complicate the president’s new campaign against corporate expatriation.

But that’s only part of the story.

…his administration continues to award more than $1 billion annually in government business to more than a dozen corporate expats.

And since we’re on the subject of hypocrisy, there’s another Bloomberg report worth citing.

President Barack Obama has been bashing companies that pursue offshore mergers to reduce taxes. He hasn’t talked about the people behind the deals — some of whom are his biggest donors. Executives, advisers and directors involved in some of the tax-cutting transactions include Blair Effron, an investment banker who hosted Obama for a May fundraiser at his two-level, 9,000-square-foot apartment on Manhattan’s Upper East Side. Others are Jim Rogers, co-chairman of the host committee for the 2012 Democratic National Convention; Roger Altman, a former senior Treasury Department official who raised at least $200,000 for Obama’s re-election campaign; and Shantanu Narayen, who sits on the president’s management advisory board. The administration’s connections to more than 20 donors associated with the transactions are causing tensions for the president.

Gee, I’m just heartbroken when politicians have tensions.

But I’m a policy wonk rather than a political pundit, so let’s now remind ourselves why inversions are taking place so that the real solution becomes apparent.

The Wall Street Journal opines, explaining that companies are being driven to invert by the combination of worldwide taxation and a punitive tax rate.

…the U.S. has the highest corporate income tax rate in the developed world, and that’s an incentive for all companies, wherever they are based, to invest outside the U.S. But the current appetite for inversions—in which a U.S. firm buys a foreign company and adopts its legal address while keeping operational headquarters in the U.S.—results from the combination of this punitive rate with a separate problem created by Washington. The U.S. is one of only six OECD countries that imposes on its businesses the world-wide taxation of corporate profits. Every company pays taxes to the country in which profits are earned. But U.S. companies have the extra burden of also paying the IRS whenever those profits come back from the foreign country into the U.S. The tax bill is the difference between whatever the companies paid overseas and the 35% U.S. rate. The perverse result is that a foreign company can choose to invest in the U.S. without penalty, but U.S.-based Medtronic would pay hundreds of millions and perhaps billions in additional taxes if it wanted to bring overseas profits back to its home country. …Keep in mind that the money invested in corporations was once earned by someone who paid taxes on it. And it will be taxed again as dividends or capital gains.

Amen. And kudos to the WSJ for pointing out there the internal revenue code imposes multiple layers of taxation on income that is saved and invested.

That’s very bad news for workers since it means less capital formation.

Let’s close with this great cartoon from Michael Ramirez…

…and also a couple of videos on international taxation.

First we have this video on “deferral,” which is very relevant since it explains why worldwide taxation is so destructive.

And we also have this video about Obama’s anti-tax haven demagoguery.

I particularly like the reference to Ugland House since that’s where Obama’s Treasury Secretary parked money.

But it’s all okay, at least if you’re part of the political class. Just repeat over and over again that rules are for the peasants in the private sector, not the elite in Washington and their crony donors.

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More Companies Escaping America’s Masochistic Corporate Tax System

Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

From a logical and ethical perspective, we should applaud companies for protecting shareholders, workers and consumers. If a government is imposing destructive tax laws (and the United States arguably has the world’s worst corporate tax system), then firms have a moral obligation to minimize the damage.

Writing in the Wall Street Journal, an accounting professor from MIT has some wise words on the issue.

Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system. The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings. To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. …Some firms have taken the next logical step to stay competitive with foreign-based companies: reincorporating as foreign companies through cross-border mergers.

Unsurprisingly, some politicians are responding with punitive policies. Instead of fixing the flaws in the internal revenue code, they want various forms of financial protectionism in order the stop companies from inversions.

Professor Hanlon is unimpressed.

Threatening corporations with stricter rules and retroactive tax punishments will not attract business and investment to the U.S. The responses by the federal government and U.S. corporations are creating what in managerial accounting we call a death spiral. The government is trying to generate revenue through high corporate taxes, but corporations cannot compete when they have such high tax costs. …The real solution is a tax system that attracts businesses to our shores, and keeps them here. …The U.K. may be a good example: In 2010, after realizing that too many companies were leaving for the greener tax pastures of Ireland, the government’s economic and finance ministry wrote in a report that it wanted to “send out the signal loud and clear, Britain is open for business.” The country made substantive tax-policy changes such as reducing the corporate tax rate and implementing a territorial tax system. Congress and President Obama should make tax reform a priority.

Here’s some info, by the way, about the United Kingdom’s smart moves on corporate taxation.

For more information on territorial taxation, here’s a video I narrated for the Center for Freedom and Prosperity.

And here’s my futile effort to educate the New York Times on the issue.

And if you want some info on the importance of lower corporate taxation, here’s another CF&P video.

P.S. Last February, I shared a hilarious video spoof about some action figures called the “Kronies.” These fake toys symbolize the sleazy insiders that have made DC a racket for well-connected insiders.

Well, the Kronies are back with a new video about the Export Import Bank, which exists to subsidize companies that give lots of contributions to politicians.

I’ve written before about the Export-Import Bank being a perfect (in a bad way) example of corruption in Washington, but if you want to know the details about this crony institution, Veronique de Rugy of the Mercatus Center is a walking encyclopedia on the topic.

By the way, the recently defeated House Majority Leader has been a big supporter of Ex-Im Bank subsidies, and it’s very revealing that Boeing’s share price fell after his defeat. Investors obviously think those handouts are very valuable, and they’re worried that the gravy train may come to an end with Cantor on his way out the door.

Addendum: Some readers have already asked whether it would have been better to say that America’s corporate tax is “sadistic” rather than “masochistic.”

From the perspective of companies (and their shareholders, workers, and consumers), the answer is yes.

But I chose “masochistic” because politicians presumably want to extract the maximum amount of revenue from companies, yet that’s not happening because they’ve set the rate so high and made the system so unfriendly. In other words, they’re hurting themselves. I guess they hate the Laffer Curve even more than they like having more money with which to buy votes.

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More Americans Going Galt

President Obama promised he would unite the world…and he’s right.

Representatives from dozens of nations have bitterly complained about an awful piece of legislation, called the Foreign Account Tax Compliance Act (FATCA), that was enacted back in 2010.

They despise this unjust law because it extends the power of the IRS into the domestic affairs of other nations. That’s an understandable source of conflict, which should be easy to understand. Wouldn’t all of us get upset, after all, if the French government or Russian government wanted to impose their laws on things that take place within our borders?

But it’s not just foreign governments that are irked. The law is so bad that it is causing a big uptick in the number of Americans who are giving up their citizenship.

Here are some details from a Bloomberg report.

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier… Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008. The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

I’m glad that the article mentions that American law is so out of whack with the rest of the world.

We should be embarrassed that our tax system – at least with regard to the treatment of citizens living abroad and the treatment of tax exiles – is worse than what they have in nations such as France.

And while there was an increase in the number of Americans going Galt after Obama took office, the recent increase seems to be the result of the FATCA legislation.

Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport. …Fatca…was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.

I very much doubt, by the way, that the law will collect $8.7 billion over 10 years.

And it’s worth noting that President Obama initially claimed that his assault on “tax havens” would generate $100 billion every year. If you don’t believe me, click here and listen to his words at the 2;30 mark.

So we started with politicians asserting they could get $100 billion every year. Then they said only $8.7 billion over ten years, or less than $1 billion per year.

And now it’s likely that revenues will fall because so many taxpayers are leaving the country. This is yet another example of how the Laffer Curve foils the plans of greedy politicians.

You may be tempted to criticize these overseas Americans, but I’ve talked to several hundred of them in the past few years and you can’t begin to imagine how their lives are made more difficult by the illegitimate extraterritorial laws concocted by Washington. Bloomberg has a few more details.

For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said. “With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”

Imagine what your life would be like if you had trouble opening a bank account or conducting all sorts of other financial activities. Things that are supposed to be routine, but are now nightmares.

I collected some of the statements from these overseas Americans. I encourage you to visit this link and get a sense of what they have to endure.

And then keep in mind that all of these problems would disappear if we had the right kind of tax system, such as the flat tax, and didn’t let the tentacles of the IRS extend beyond America’s borders.

P.S. Based on people I’ve met in my international travels, I’d guess that, for every American that officially gives up their citizenship, there are probably a dozen more living overseas who simply drop off the radar screen. Many of these people can’t afford – or can’t stand – to deal with the onerous requirements imposed by hacks, bullies, and lightweights in Washington such as Barbara Boxer.

P.P.S. Remember the Facebook billionaire who moved to Singapore to escape being an American taxpayer? Many of us – including me – instinctively find this unsettling. But if we believe that folks should have the freedom to move from California to Texas to benefit from better tax policy, shouldn’t they also have the freedom to move to another nation?

The same is true for companies.

If our tax law is bad, we should lower tax rates and adopt real reform.

Unless, of course, you think it’s okay to blame the victim.

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Going Galt: More Americans Vote with their Feet against Obama

I’ve written many times about how investors, entrepreneurs, small business owners and other successful people migrate from high-tax states to low-tax states.

Well, the same thing happens internationally, as France’s greedy politicians are now learning.

It’s a lot harder for Americans to escape our tax system, though, in part because of reprehensible exit taxes that are disturbingly reminiscent of some of the awful policies of past totalitarian regimes.

But it still happens, and that’s a very damning indictment of Obamanomics and a worrying referendum on the future of the United States. Here are some blurbs from a recent Fortune article.

Americans are ditching their U.S. passports in record numbers, a sign of growing frustration with a system that taxes U.S. citizens on their global wealth whether they live in Montana or Mongolia. …on the list, published quarterly by the Internal Revenue Service, is Isabel Getty, the daughter of jet-setting socialite Pia Getty and Getty oil heir Christopher Getty. In total, more than 670 U.S. passport holders gave up their citizenship — and with it, their U.S. tax bills — in the first three months of this year. That is the most in any quarter since the I.R.S. began publishing figures in 1998. And it is nearly three-quarters of the total number for all of 2012, a year in which the wealthy songwriter-socialite Denise Rich (christened “Lady Gatsby” by Yachting magazine) and Facebook co-founder Eduardo Saverin joined more than 932 other Americans in tossing their passports. …Expatriations first picked up pace in 2010, when more than 1,530 Americans dumped their passports.

The problem is particularly serious for Americans who live and work overseas. The United States is one of the few nations (and the only developed nation) to have “worldwide” taxation, which means overseas Americans have to pay tax to the IRS as well as to the nation where they live.

And thanks to laws such as “FATCA,” that burden just became far more onerous.

While dumping citizenship may seem unpatriotic or smack of tax avoidance to some critics, tax lawyers blame the byzantine complexity of American tax regulations. The rules “are confusing, complex, and so complicated that even Americans with good intentions can easily find themselves running afoul of the law,” said Jeffrey Neiman, a former federal prosecutor who was involved in the government’s offshore banking probe and is now in private practice in Fort Lauderdale, Fla. “This very well may explain why we are seeing a record number of Americans renouncing their United States citizenship.”

No wonder more and more people are escaping Obamanomics.

The good news, by the way, is that Senator Rand Paul has introduced legislation to repeal the worst parts of FATCA.

But that’s not going to happen while Obama’s still in the White House, so let’s focus on the Americans who are “going Galt.”

I have mixed feelings about these rich people. Many of them did nothing to help the fight for liberty while they were U.S. citizens.

And notwithstanding my post about where I would go if America suffers a Greek-style fiscal collapse, I suspect I’ll stay in the United States and fight until my last breath. So I get a little bit irked that they escape and leave the rest of us to deal with the mess created by our political elite.

Nonetheless, I strongly believe that all individuals have the right to protect themselves from predatory government.

And when you add up the various forms of double taxation in the internal revenue code (particularly the death tax), it makes little sense for families with high net worth to stay in the United States when there are many jurisdictions around the world that will welcome them with open arms.

In other words, let’s not blame the victims and castigate Americans who redomicile in jurisdictions with better tax policy. Let’s fix the awful internal revenue code with a flat tax.

P.S. I’m ashamed to admit that France has a more pro-liberty policy on tax migration than the United States.

P.P.S. But that may not last too long. Other nations are looking to copy America’s disgraceful worldwide tax approach.

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Facebook Billionaire Gives Up Citizenship to Escape Bad American Tax Policy

It is very sad that America’s tax system is so onerous that some rich people feel they have no choice but to give up U.S. citizenship in order to protect their family finances.

I’ve written about this issue before, particularly in the context of Obama’s class-warfare policies leading to an increase in the number of Americans “voting with their feet” for places with less punitive tax regimes.

We now have a very high-profile tax expatriate. One of the founders of Facebook is escaping for Singapore. Here are some relevant passages in a Bloomberg article.

Escaping to Singapore, where success is encouraged rather than penalized

Eduardo Saverin, the billionaire co- founder of Facebook Inc. (FB), renounced his U.S. citizenship before an initial public offering that values the social network at as much as $96 billion, a move that may reduce his tax bill. …Saverin’s stake is about 4 percent, according to the website Who Owns Facebook. At the high end of the IPO valuation, that would be worth about $3.84 billion. …Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO. “Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time,” said Tom Goodman, a spokesman for Saverin, in an e-mailed statement. …Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there. …Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Avi-Yonah. “Once it’s public you can’t fool around with the value.” …Renouncing citizenship is an option chosen by increasing numbers of Americans. A record 1,780 gave up their U.S. passports last year compared with 235 in 2008, according to government records. …“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

What makes this story amusing, from a personal perspective, is that Saverin’s expatriation takes place just a couple of days after my wayward friend Bruce Bartlett wrote a piece for the New York Times, in which he said that people like me are exaggerating the impact of taxes on migration.

Here are some key excerpts from Bruce’s column.

In recent years, the number of Americans renouncing their citizenship has increased. …the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008. This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into “economic lepers.” The sharply rising numbers of Americans renouncing their citizenship “are canaries in the coal mine,” he wrote. The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, “Rich Americans Voting With Their Feet to Escape Obama Tax Oppression.” …the sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997. …The reality is that taxes are just one factor among many that determine where people choose to live. Factors including climate, proximity to those in similar businesses and the availability of amenities like the arts and cuisine play a much larger role. That’s why places like New York and California are still magnets for the wealthy despite high taxes. And although a few Americans may renounce their citizenship to avoid American taxes, it is obvious that many, many more people continually seek American residency and citizenship.

I actually agree with Bruce. Taxes are just one factor when people make decisions on where to live, work, save, and invest.

But I also think Bruce is drinking too much of the Kool-Aid being served by his new friends on the left. There is a wealth of data on successful people leaving jurisdictions such as California and New York that have confiscatory tax systems.

And there’s also lots of evidence of taxpayers escaping countries controlled by politicians who get too greedy. Mr. Saverin is just the latest example. And I suspect, based on the overseas Americans I meet, that there are several people who quietly go “off the grid” for every person who officially expatriates.

The statists say these people are “tax traitors” and “economic Benedict Arnolds,” but those views are based on a quasi-totalitarian ideology that assumes government has some sort of permanent claim on people’s economic output.

If people are leaving America because our tax law is onerous, that’s a signal we should reform the tax code. Attacking those who expatriate is the fiscal version of blaming the victim.

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When an American Company Redomiciles to the Cayman Islands, What Lesson Should We Learn?

Another American company has decided to expatriate for tax reasons. This process has been going on for decades, with companies giving up their U.S. charters (a form of business citizenship) and redomiciling in low-tax jurisdictions such as Bermuda, Ireland, Switzerland, Panama, Hong Kong, and the Cayman Islands.

The companies that choose to expatriate usually fit a certain profile (this applies to individuals as well). They earn a substantial share of their income in other countries and they are put at a competitive disadvantage because of America’s “worldwide” tax system.

More specifically, worldwide taxation requires firms to not only pay tax to foreign governments on their foreign-source income, but they are also supposed to pay additional tax on this income to the IRS – even though the money was not earned in America and even though their foreign-based competitors rarely are subject to this type of double taxation.

In this most recent example, an energy company with substantial operations in Asia moved its charter to the Cayman Islands, as reported by digitaljournal.com.

Greenfields Petroleum Corporation…, an independent exploration and production company with assets in Azerbaijan, is pleased to announce that the previously announced corporate redomestication…from Delaware to the Cayman Islands has been successfully completed.

Because it is a small firm, the move by GPC probably won’t attract much attention from the politicians. But “corporate expatriation” has generated considerable controversy in recent years when involving big companies such as Ingersoll-Rand, Transocean, and Stanley Works (now Stanley Black & Decker).

Statists argue that it is unpatriotic for companies to redomicile, and they changed the law last decade to make it more difficult for companies to escape the clutches of the IRS. In addition to blaming “Benedict Arnold” corporations, leftists also attack low-tax jurisdictions for “poaching” companies.

Libertarians and conservatives, by contrast, explain that expatriation is the result of an onerous tax system that imposes high tax rates and requires the double taxation of foreign-source income. Expatriation is the only logical approach if companies want a level playing field when competing in global markets.

I cover this issue (and also explain that the Obama Administration is trying to make a bad system even worse) in the video below.

My recommendation, not surprisingly, is that politicians fix the tax code. Unfortunately, politicians prefer the blame-the-victim game, so they attack the companies instead of solving the underlying problem (and then they wonder why job creation is anemic).

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Americans Voting with their Feet to Escape Obama Tax Oppression

The Financial Times reports that the number of Americans giving up their citizenship to protect their families from America’s onerous worldwide tax system has jumped rapidly. Even relatively high-tax nations such as the United Kingdom are attractive compared to the class-warfare system that Obama is creating in the United States. I run into people like this quite often as part of my travels. They are intensely patriotic to America as a nation, but they have lots of scorn for the federal government. Statists are perfectly willing to forgive terrorists like William Ayres, but they heap scorn on these “Benedict Arnold” taxpayers. But the tax exiles get the last laugh since the bureaucrats and politicians now get zero percent of their foreign-source income. You would think that, sooner or later, the left would realize they can get more tax revenue with reasonable tax rates. But that assumes that collectivists are motivated by revenue maximization rather than spite and envy.

The number of wealthy Americans living in the UK who are renouncing their US citizenship is rising rapidly as more expatriates seek to escape paying tax to the US on their worldwide income and gains and shed their “non-dom” status, accountants say. As many as 743 American expatriates made the irreversible decision to discard their passports last year, according to the US government – three times as many as in 2008. …There is a waiting list at the embassy in London for people looking to give up citizenship, with the earliest appointments in February, lawyers and accountants say. …“The big disadvantage with American citizens is they catch you on tax wherever you are in the world. If you are taxed only in the UK, you have the opportunity of keeping your money offshore tax free.”

To grasp the extent of this problem, here are blurbs from two other recent stories. Time magazine discusses the unfriendly rules that make life a hassle for overseas Americans.

For U.S. citizens, cutting ties with their native land is a drastic and irrevocable step. But as Overseas American Week, a lobbying effort by expatriate-advocacy groups, convenes in Washington this week, it’s one that an increasing number of American expats are willing to take. According to government records, 502 expatriates renounced U.S. citizenship or permanent residency in the fourth quarter of 2009 — more than double the number of expatriations in all of 2008. And these figures don’t include the hundreds — some experts say thousands — of applications languishing in various U.S. consulates and embassies around the world, waiting to be processed. While a small number of Americans hand in their passports each year for political reasons, the new surge in permanent expatriations is mainly because of taxes. …expatriate organizations say the recent increase reflects a growing dissatisfaction with the way the U.S. government treats its expats and their money: the U.S. is the only industrialized nation that taxes its overseas citizens, subjecting them to taxation in both their country of citizenship and country of residence. …Additionally, the U.S. government has implemented tougher rules requiring expatriates to report any foreign bank accounts exceeding $10,000, with stiff financial penalties for noncompliance. “This system is widely perceived as overly complex with multiple opportunities for accidental mistakes, and life-altering penalties for inadvertent failures,” Hodgen says. These stringent measures were put into place to prevent Americans from stashing undeclared assets in offshore banks, but they also make life increasingly difficult for millions of law-abiding expatriates. “The U.S. government creates conflict and abuses me,” says business owner John. “I feel under duress to understand and comply with laws that have nothing to do with me and are constantly changing — almost never in my favor.” …Many U.S. expats report being turned away by banks and other institutions in their countries of residence only because they are American, according to American Citizens Abroad (ACA), a Geneva-based worldwide advocacy group for expatriate U.S. citizens. “We have become toxic citizens,” says ACA founder Andy Sundberg. Paradoxically, by relinquishing their U.S. citizenship, expats can not only escape the financial burden of double taxation, but also strengthen the U.S. economy, he says, adding, “It will become much easier for these people to get a job abroad, and to set up, own and operate private companies that can promote American exports.” 

The New York Times, meanwhile, delves into the misguided policies that are driving Americans to renounce their citizenship.

Amid mounting frustration over taxation and banking problems, small but growing numbers of overseas Americans are taking the weighty step of renouncing their citizenship. …frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete. American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income. One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps. Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said. …Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad. Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

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