I found this paper today as I was researching another topic for the Flophouse and the title alone, Sharing The Spoils: Taxing International Human Capital Flows, intrigued me. So I had a look (Petros has probably already read it), thought it had some interesting ideas and so I offer it up to you for your reading pleasure. After all, it is Friday (the 13th no less).
For our purposes I thought the section four on Alternative Worldwide Regimes for Individual Income Taxation starting on page 25 is worth a read:
“Several alternative regimes are available to countries for taxing individuals participating in global labor markets. The United States stands out as the country with the most expansive and detailed rules on taxing citizens residing abroad as well as the only country with detailed data on those efforts…”
“The most sweeping alternative for a developing country would be to orient their tax system along the lines of the American model described above. Such a change would require altering the basis of taxation from residency to citizenship for most countries and then enforcing a system that would demand compliance from citizens residing abroad.” (they call this the “American Model”).
“Finally, for countries that already have large stocks of citizens abroad, only the American model offers the potential of tapping into those labor income streams. Effectively enforced, the American model may offer the largest ultimate gains to countries with high human capital emigrants.”
“Other obstacles to applying the American model also arise. First, without more precise estimates of the distribution of earnings for citizens abroad, revenue might be limited by overly generous exemptions or credits. Second, many citizens of rich countries working overseas have the incentive to remain tax compliant because of their intention to return home. The trade-off may be distinct for developing countries resulting in citizens giving up their citizenship if such a system is imposed. As such, the “price of citizenship” could be set too high, resulting in waves of expatriation.”
“The recent experience of the U.S. demonstrates the feasibility of efforts to tax citizens who reside abroad, and using the recent example of skilled migrants from India, the paper demonstrates that modest tax instruments yield large revenues to source countries.”
In other words, the authors of this paper seem to think the Americans are on to something and that it just might be worth the while of the Indian government to go after Indians in the U.S.
As I said before, “Tax the Diaspora” is a game any country can play….
I am convinced that there are some real problems with citizenship based taxation that would actually serve as a disincentive for any country willingness to take in immigrants. The problem is that moving citizens between countries is not supported by the same fiscal sharing between nations that exist within nations.
In other words if I live in Alberta and want to move to Ontario there is a certain portion of federal tax money that will travel with me and enable Ontario to provide me with the same public services in Ontario that I received in Alberta. As we know the system is not perfect but an imperfect revenue sharing system is better than a non existent one, as is the case with nation states.
When a nation state takes in someone from a foreign country that person doesn’t bring any supporting tax revenue and there is no guarantee that he/she will generate enough productivity that will provide the receiving state with tax revenue sufficient enough to pay for his/her support. I know that in my case I ended having a disabled child who now, that he is out of school, requires me to stay home with him and provide his care. Obviously there isn’t any tax revenue here. We are now consumers of tax revenue as opposed to being providers.
Therefore I sincerely believe that if countries of origin engage in the taxing of their expat citizens that it will serve as a big disincentive to other countries to accept immigrants. At the least dual citizenship will have to go by the way side if a person really wants to immigrate. And that my not be a bad thing.
Who wrote that paper? I would like to send an email to tell them to actually look at the tax revenue that the US received from people overseas (I mean REAL taxes, not FBAR money grabs). Even processing the Zero returns has a cost behind it because you have to pay someone to process the tax return.
And the author has made a faulty assumption that most people want to return to their countries after a period abroad. I can tell you now, I would live in ANY European or South American country before I would move back there. I think that the US system, combined with FACTA, has created animosity. I don’t want to go back there, not even for a shopping trip. The US is either too proud, blind, or stupid to notice that, but I don’t think most other countries are that way.
The way the US is, it wouldn’t surprised me one bit if they are trying to make other countries “converts” of citizenship-based taxation. They are probably paying for lobbyists of foreign governments. It wouldn’t surprise me one bit if this ever came to light. Yet I doubt that even a few countries would try this because their systems that are in place now benefit them just fine.
My first response without even reading the whole thing is nausea that anyone would even think about this as a viable strategy for any government – this is a discussion, note, of “managing” the flow of humans from one place to another. Now this can be done in one of two ways: carrots and sticks. Which do you think a government is most likely to apply first? How will they get people to leave so they can tax them, if that is their objective? Overtax them at home, so they leave so you can overtax them while away? It strikes me as akin to a scholarly discussion of the upper and lower limits of torture to get the maximum amount of information from someone. The mind reels.
As I said, we are seen as little more than geese ripe for plucking.
I looked to see who the authors were. Two from Harvard Business school, and one from Canada’s own Queens University. Egad!
This truly does take me back to the question of the morality, or lack of it, in the concept of taxation itself.
Where is Roger Conklin when we need him?
“The American Model” Ideas to further cripple the world economy!
I agree that’s why I tend to be suspiscious of the likes of Diane Francis who seems to have a lot a bad things to say about her adopted country(Canada) all the while having a lot good things to say about the more populist culture of her country of birth(US)(Maybe I am being too harsh on Ms Francis but the “US” is the real sucker nation as she puts its). The problem as I recall with proposals in Canada from the likes of Tom Kent, Rudyard Griffiths, and too a lesser degree Ms. Francis to go to a citizenship based taxation system is that they were coupled with some pretty hefty anti immigrant retoric. Now I am the first to acknowledge there are some pretty hefty abuses of Canada’s immigration system but I don’t believe they are nearly as bad as what happens between the US and Mexico and politically the issue is a dead letter as all major parties in Canada support current immigration policies.
I tried to imagine what might happen if the “American Model” was used by other states and this is what I came up with:
1. U.S. starts enforcing the FBAR and income tax filing requirements on citizens of the sending country (basically doubles their taxes)
2. Sending country citizens react by not sending as much money back to home country in remittances
3. Sending country gets desperate to get some of that money back and levies taxes on citizens living in the U.S.
4. Sending country citizens give up in despair and move back home or to third country that will not report their earnings to the home country.
Hard to see how anyone would win here. Not the U.S., not the sending country and surely not the emigrants/immigrants. Anyone else have another scenario?
If you take a look at the Taxpayer Advocate Services report you will see that there are several times in the report where the IRS is critisized for its lack of overseas services to U.S. citizens abroad. I believe that there are only about five countries where the IRS has a meaningful presence with Beijing and England being two of the five. Mexico and Canada, although each country has a large expat community, do not have any IRS presence.
The reason why five countries do have an IRS presence has nothing to do with the size of the expat community but with the commerical or military significance of those communities to the U.S.
Another reason why the IRS doesn’t bother with posting offices overseas is because there is not enough tax revenue to offset the costs associated with maintaining such offices. This because the tax treaties that are in place with most of these countries does not usually leave much revenue to be collected and certainly not enough revenue to offset the costs of maintaining a fully staffed office. This is why the authors say that special care has to be exercised with regards to exemptions and credits when writing tax treaties.
But the big question is will people be willing to be subject to double taxation? If a person is still going to be obligated to pay tax in your home country as well as your adopted country then what is the point in moving? It is a heavy burden to have to pay the costs of supporting two governments. Under such a scenario renunciation is the only way to avoid such an injustice.
The problem with their analysis is that citizen migration is only seem in terms of revenue loss without any attention being paid to expenditures that are avoided. This is the erroneous way that the U.S. looks at emigration from its shores.
Victoria, on remittances, I think that’s too logical for the US. After all, if you speak to anyone who takes a university-level economics course knows that remittances are bad for the place where the person is working. But since this is a serious issue, and the US has a LONG history of NOT attacking serious issues, I don’t think remittances are the case.
I think it’s more ideological. It’s quite common for people to want to try to “convert” people to their belief system. I see no difference with the US and their idiotic laws.
Believe it or not, but Japan and South Korea mimic the US’s handling of the financial markets. A while back, I was quite shocked to discover a UK broker who had a notice that they would not accept Japanese residents or “citizens”. I thought to myself, “Oh gosh, the US has convinced the Japanese!” There are a lot more specific issues, but they are too technical for this comment. Not surprising, both of these countries mentioned had or have a sustained US military presence.
Well, this is an issue which I hope does not spread because I believe that people deserve choices for everything – across the board, even if that means the right to go live in another country without restrictions due to where they were born.
“Another reason why the IRS doesn’t bother with posting offices overseas is because there is not enough tax revenue to offset the costs associated with maintaining such offices.” Now that I hadn’t considered. Makes sense.
Will people be willing to undergo double taxation?
At the risk of sounding like one of the authors of this paper I think most folks will sit and do a cost/benefit calculation based on their personal circumstances. What do I lose? What do I gain? What are my alternatives? How can I reduce my risk?
And from people’s behaviour (keeping citizenship, renouncing citizenship, staying/going home and so on) we will all get a very good idea of what a country’s citizenship is worth in this “market”.
With FATCA and the enforcement of the U.S. tax code abroad are we about to see a cold clear (re)evaluation of the value of U.S. citizenship? And is this really something the American people want to know? This is chess, not checkers, and the stakes are high.
Victoria, I think the US will remain a net positive immigration country for a long time just because of the way it portrays itself with its Hollywood movies. They may soften the FATCA a litle bit or they may lose some skilled immigrants. I know lots of people who have dual US citizenship, but the FATCA doesn’t really affect them very much because they just use a the other passport to open accounts in other countries, if necessary. They are foreign born, so they are lucky!
The people who bear the brunt of the “you’re American, so you can’t open an account” are people who are born in America. It’s like we carry a *stain*. And like a said on another comment somewhere on this site, I DO expect in the future that larger “international” banks will start asking questions to see if there is ANY US affiliation.
Also, the potential that I wrote a “story” in the “DOJ Nabs Foreign National..” — that is a situation that *IS* happening right now. It’s not a hypothetical. If a skilled foreign national moves to America, they have to play by US laws.
And after a lot of thought on the issue, I believe that world governments are in favor of this; I’m highly sure that the US is promising them BILLIONS in tax revenue as well.
The idea of everyone doing what America is doing is preposterous. Can you imagine the confusion? If everyone in the world was taxed on citizenship and residency as they do in the US. Anyone who lived outside of his home country is automatically double taxed. Dual nationals would be double (maybe triple) taxed, wherever they go. That should put an damper on any international mobility.
And then the problem with people having to pay tax which was not deigned around the community they live in. ie TFSA’s RRSP’s designed for Canada but taxed in US.
And then there’s this: “revenue might be limited by overly generous exemptions or credits” Heaven forbid we might give workers overseas a break!
I can’t believe any educated economist could suggest it. Yes, it might look like a good revenue source at first glance, but there’s only so much revenue to go around, before people can’t live on what’s left. And that’s a recipe for social unrest.
My blood is starting to boil. I have to stop now….
geeeez, I am reluctantly beginning to conclude that you are right and that governments are actually OK with this provided that they think they will get a cut. Even if it hurts them in the long-term, they might be able to get some quick cash to balance those budgets. This article was written in 2002!
Canuckdoc – I know exactly what you mean. I am trying to stay as cool and as calm as I can – I am doing my best to be patient with my friends and family in the U.S. and to respond thoughtfully.
But, frankly, this whole business is stressing the hell out of me. I start thinking about filling out my next FBAR which will mean a talk with my bank or the hassle and expense I’m going to go through next summer dealing with this and once again having to pay someone to prepare my taxes because I just can’t figure it out myself. I’m having to “educate” my husband and that is going VERY slowly because he just can’t conceive that any government would be that insane (and besides he’s French so he’s asking why does any of this apply to him anyway and why should he care?) And right now I am not working and am desperately looking for a job (I have one kid in college and another 2 years behind). And I am furious at my friends and family in the U.S. who are (with the exception of one person) not terribly supportive. One mail I got recently called me a “crybaby.” Another one came to me in response to an article I sent and the reply was, “Got a job yet?” It’s 10 PM and Madame is just so tired of all of this and should probably get off to bed before she says something she will really really regret on a forum on the Internet. And, yes, she does know better.
Good night, everyone.
Maybe the ease of getting a Canadian passport makes the situation different vis a vis than in Europe. You already hear annectdotal stories of Canadian expats around the world being asked whether they were born in the US and became Canadian citizens in order the escape the long arm of the IRS. If you are currently a US citizen who is already wealthy or relatively young with a lifetime of earnings in front of you and desire to travel and work around the world immigrating to Canada and going through the three year time frame to get citizenship is not at all a bad move(and Canada is a much neater country to live in than many Americans think). In the past there was a lot of criticism of so called Canadians of convience but I now think there is a realization in the case of American immigrants to Canada that Canada is pulling a real “fast one” on the US(There is also a sometimes forgotten history that most of English Canada was originally settled by Loyalist American political refugees after the American Revolution). I think the biggest danger in this regard is that in the medium term the US tries to take some type of very populist punitive measure towards Canadians that previously renounced US citizenship.
Hi Victoria!
Thank you the link to “Sharing The Spoils: Taxing International Human Capital Flows.”
The mentality of the government bureaucrats from India is beyond scary. Have a look at the youtube link below about India’s new national biometric database system. Over 1.2 billion people forced to have their fingerprints and irises scanned for the alleged purpose of gaining access to the state’s welfare system.
A cashless system will be probably be next, a high tax government’s dream.
Victoria, I’m not making this stuff up. We’re not hearing much of any complaints out of any countries- just a few from a 2-3 years ago.
Just to give you an idea of how it goes now with some countries, I am gathering the paperwork to enter in with citizenship here. Here is what is needed:
2 documents are needed to prove I’m not a criminal;
4-5 documents to prove I have paid my taxes.
WTF!?? My wife and I were joking earlier, saying “They don’t care if you’ve killed tons of people; they only care if you have paid your taxes.” My wife picked up my Federal Clearance certificate today. I have paid all my taxes n the Federal Level!!
But this insistence — this thirst for taxes — I think is the same everywhere. I really think that the countries are sitting back and waiting to see how much the US does for them. Why should a foreign government care if their banks have to pay compliance costs that will ultimately land them more tax money?? Zero.. it’s a win/win for them. They want this!!
Really, I’ve always paid what I owed, and since I pay, if someone is really doing something fraudulent, I hope they go to jail. But I’m against FATCA for the international overreach, limiting our options as overseas Americans, and this really unethical money grab on unsuspecting people. It still doesn’t affect my decision to renounce. For that matter, the US could rescind the FATCA tomorrow, but after seeing what they did, and are capable of, I’m still going to renounce.
Tim, you’re exactly right. If I heard someone who says they want to relocate to the USA, I would steer them to Canada. Me being a native of Louisiana, I love Québec (Even though my French is quite terrible due to non-use). The Ministry of Tourism of Québec owes me at least $1 million due to the propaganda/advertising I did for them in the US alone. In another episode, I remember driving lightning fast out of Ontario to get back to Washington DC to avoid a snowstorm.. that must have been 1996-1997.. but I was right because roads ended up getting closed. For me, I have nothing negative to say about Canada whatsoever. I think of Canada as being very similar to the US but without the major issues.
For me, I ended up where I am because I wanted adventure. During that time, I had recently left the US Army andI I was skydiving, bungee jumping, and doing lots of crazy stuff. I’ll bet most Americans, Canadians, and Europeans think South America is an adventure. But what happens? Once you create a life, possibly a family, it’s not so much of an adventure anymore. The requirements of paying taxes and living by the rules are the same. The rules are very strict here; I think that’s why I resent what the US is doing.
Mas se Deus quiser, vou ficar livre daqui à pouco! Eu vou pagar impostos do mesmo jeito que todo mundo paga aqui – paga onde mora! (God Willing, I am going to be free soon! I will pay taxes like everyone here pays — where they live!)
Back again, folks. Amazing what 6 hours of sleep will do for you 🙂
@Boiled Frog – oh yes, i.d. card tech is all the rage right now. I renewed my residency permit last year and the new format is quite the technological wonder. It’s an EU directive and all immigrants’ cards are now all the same all over Europe. Biometric. My husband was very amused until I told him that we are just the beta testers here – next step will be for citizens.
@Tim – Interestingly enough the first of my ancestors to come to North America did not come to what is now the U.S., they went to New France (Quebec) in the 17th century. For some reason they crossed the border and went south some time in the 19th century. I’m thinking these days that this was a bad move. 🙂 Both my husband and I have looked at Canada and if I had a job I think we would happily go. We suspect however that we are too old even though we are both IT professionals. Maybe the fact that we would bring the Frenchlings (two native French-speaking ladies) might make a difference? Not sure. All I know is that I was interviewing with companies in Quebec and I haven’t had a call back yet and I’ve kind of lost hope.
@geeeez – same here. I’ve filed those damn 1040’s over the years and once I figured out about those FBAR’s I filed those too. Last year I even PAID taxes to the U.S. and will pay again this year (capital gains on the sale of an apartment). I’ve always paid up even when I thought it was stupid. Last year I consoled myself by saying, well, the US needs the money right now. But now there is a new form, more hoops, threats, gross mischaracterizations that we are tax cheats and so on. I’ve just about hit my limit. If I wanted to renounce it would be very easy because I’ve got the tax returns, etc. Not there yet but if they keep pushing, I might tip and say “to hell with this.”