Although this is not the most well written piece I want to try to write some posts looking at specific situations to show the unfairness of the US Tax System. Two industries I keep coming back to are airlines and shipping. Some historical background. For many decades the US was historically very dominant in both airlines and the manufacturing of aircraft and as such tried to encourage a very liberalized system of regulating international air transport on the basis that the US would always be dominant especially in the face what were for many years bloated inefficient state owned air carriers that existed in much of Europe and South America. While there were some bumps such as domestic de-regulation in the US itself the US has always pushed for something known as “Open Skies” something that culminated in an agreement between the Netherlands and the US in the early 1990s that basically eliminated all commercial restrictions on airline service between the two countries. The US quickly went to town signing “Open Skies” agreements with as many countries as they could including many small ones that had no history of direct air service with the US. Some enterprising countries though such as the United Arab Emirates, Qatar, and Singapore started their own state owned carriers that being much more competitive than the US historical competition in Europe could now under the US Open Skies policy “dump” an virtually unlimited amount of seat capacity into the US and setup their home countries as a sort of hub and spoke system to fly passengers onward to other neighboring larger countries. Thus you have Emirates Airlines with the largest fleet of Airbus A380s in the world flying passenger nonstop from San Francisco to Dubai and then on to India. Now whatever the merits of the US “Open Skies” policy it is I suspect water under the bridge. However want to make two key points first the success of Emirates has hurt both the main US airlines and their US Citizen employees and second almost no one who works for Emirates Airlines is a UAE national. Thats right almost no one right up to the CEO and its same thing for other Middle Eastern airlines such as Qatar Airways and Ethihad.
So who works for Emirates Airlines. In terms of pilots Europeans, Canadian, Australians, and “some” Americans. Flight Attendants as I understood are a mix of everywhere. However as we all know Americans have a very distinct disadvantage in applying for these types of jobs. Just in terms of pure economics as Dubai and the UAE have no income tax a Canadian or European applicant can have the same standard of living as a competing American by simply lowering their salary demand to less than what the American will have to pay in US tax residing outside the US.
Now what about the Foriegn Earned Income Exclusion. Well it does help having said that the going rate airlines pilots is now above $95,000 and here is the real kicker the FEIE doesn’t apply to income earned in international waters so thus an American pilot working for Emirate Airlines would still have to pay US tax on a prorated basis for the time he spent flying over the Persian Gulf or the Indian Ocean on the otherside of the Earth from the USA.
Next up I will try to look at some specific situation involving international shipping which is now almost completely devoid of US citizens working in it.
@all, All of which brings into focus the following observation and question: From the Taxpayer Advocate’s 2011 Report to Congress, 91% of the overseas filers, with the Foreign Earned Income Exclusion and the use of Foreign tax credits on the remaining earned income above fhe FEIE exclusion, end up owing zero tax to the IRS. It is the remaining 9% of the filers that generate 100% of the tax revenue raised through this US tax on its citizens resident outside of the United States. This comes almost exclusively from US citizens in countries which have much lower income tax rates than then those of the US, in most cases because these countries, like Dubai, Quatar, UAE, etc. raise the bulk of their tax revenue through consumption and other non-income taxes, rather than a US-style income tax. It is precisely in these countries where US citizens are at the biggest disadvantage in competing for jobs. So the number of US citizens in these countries is very low. The primary result of this tax policy is to make US citizens unemployable in countries with tax systems different from that of the US.
Pray tell me, what sense does it make for 91% of US citizens abroad to have to go through the motions of filing US tax returns, filing FBAR reports and the new FATCA Form 8938; paying professional fees for the necessary assistance they absolutely must receive which starts with a minimum of about $2,000, in order to submit a tax return that generates Zero revenue for the US Treasury? The primary beneficiaries of this citizenship-based taxation are the professional tax preparers. They collect as much or more than the US Treasury does through this tax. And it must also cost the IRS a horrendous amount of money to process tax returns that generate zero revenue.
Only a government completely off-track could have dreamed up a scheme like this. It is primarily a make-work program for professional tax preparers.
@Tim great post, looking forward to the next one.
@Roger, as usual – right on! The problem with the U.S. is that it is so self-absorbed and narcissistic that it lacks the capacity to see beyond its reflection in the mirror. It is in a sense blinded by its own reflection making it impossible for the U.S. to see how it is hurting itself by citizenship-based taxation.
It is also so blinded by its reflection that it can’t imagine that there are parts of the world that don’t share its values. A great example of this is the following from Rick Santorum:
http://abcnews.go.com/blogs/politics/2012/02/santorum-obama-wrong-to-apologize-for-quran-burning/
In any case, the rest of the world is passing the U.S. by. As Adriana Huffington notes, the U.S. is well on the way to becoming a third world country.
The next step will be that other countries will not accept U.S. citizens as permanent residents.
“The next step will be that other countries will not accept U.S. citizens as permanent residents.”
Isn’t that already happening by proxy? The banks won’t touch you if you have to open an account as an american citizen.
If they do not even open an account, how is it that you are going to get a loan from that same bank for your business, if you plan to have one outside of US. Also if you want to start a business as a partner with the locals, they would not want you as an american citizen. So in effect you may reside in the country but with all these restrictions you will feel like a third class citizen.
@Roger,
“It is primarily a make-work program for professional tax preparers.”
… and many, many of these tax preparers are not even in the US, but other countries in which we US persons are resident and in which we have to go through this pointless yearly exercise.
It would make more sense to me to pay the US Government a yearly fee of 5 to 1000 dollars to maintain US citizenship.
disguise it as a management fee of sorts…or a citizenship status payment…i don’t know.
At least the US would get something out of it. I would suggest that, even if someone owe’s $500 dollars, it probably costs the IRS $1000 dollars to process the paper work.
What I do know is that my Accounting fee’s are three foldi in order to file a return showing zero tax! Not to mention the LCU’s i have spent on this matter!
@calgary411,
Yes it is indeed primarily a make-work program to create, not US jobs, but foreign jobs for tax preparers located outside of the US. with depression-level unemployment in the US, It is about time that the US Congress pay atention to creating US jobs instead of keeping legislation on the books like this, the primary effect of which is to create foreign jobs?
We Americans have got to hold the fire to their feet on this, until they feel the heat and get rid of Citizenship-based taxation. But we need the unified resistance of the Governments of Canada and every other country on the face of this terrestrial globe to put their collective feet down, in unision and say NO to this nonsense of making their banks subservient to the IRS. I am unable to understand how the Europeans are climbing all over themselves to “please” the US, when it is going to cost their banks and financial institutions billions of dollars to be compliant. It makes no sense to me at all.
@Everyone
One reason I used this example is it not exactly a great job market for airline pilots in the US right now and hasn’t been for quite a while. I used the term “dumping” because thats what Canada in their own relationship with the UAE considers it and has thus limited Emirates operations to Canada to level they perceive as meeting the actual need for air travel between Dubai and Canada. What is interesting is why aren’t the various unions and professional organizations representing US airline pilots aren’t doing more to help change the law and benefit their “members.” Its not a case of fairness between US citizens in the and US citizens abroad as long of the rest of world taxes based on residency US citizens will be at an economic disadvantage in these circumstances.
@all, Last week (Feb. 24) the Miami Herald published an article on a recent recruiting activity here in Miami. Some 30 or 40 Chinese airline executives were here to interview some 100 American Airlines pilots who may lose their jobs as a result of the bankruptcy of American Airlines. They are still flying but must make major cutbacks of this airline is to merge from bankruptcy. China is recruiting experienced pilots all over the world.
.
http://www.miamiherald.com/2012/02/24/2657806/facing-a-bankrupt-american-some.html?story_link=email_msg
The article makes no mention of the tax issues US citizen pilots will face if they accept job offers and relocate to China, but some of the submitted comments, which you can read on-line, do touch on this important subject..
Great post, Tim.
Aren’t the vast majority of people working in the UAE not citizens, pilots notwithstanding? If the FEIE were done away with there wouldn’t be any US citizens left there since it would cost a fortune to remain. The UAE has no income tax, capital gains tax, inheritance tax, or even a rental income tax. There is a 10% tax on services and a 5% tax on some rental accomodations. Could you imagine a worse place to work as a US citizen overseas? This would already be a nightamare even with the FEIE!
As to US airline companies, I’m sorry to say, but I think that the damage has long been done. I don’t know a single person where I live who would fly a US airline even to the US itself. Lufthansa or British Airways would normally be preferred. From observation alone, I don’t think that I’ve even noticed any US airlines outside of London Heathrow for years- They just don’t have much of a presence here anymore and their reputation is almost as bad as Alitalia’s used to be (which was awful!).
Fly Lufthansa, the beer is free and I never lost a bag with them.
@Roger, it is indeed the having to fork out $2500-3000 each year for my accountant plus commission and fees for a US qualified financial planner which I resent. All this cuts into my potential returns and retirement
I daresay I may well decide to train up to be an enrolled agent dealing with expat tax returns, myself. If I can’t change the system, I might as well milk it for what it’s worth…and I am actually being serious here.
What I keep saying is that the US has to tighten-up their tax collection practices IN THE USA and drop all of this idiotic extraterratorrial nonsense.
1- They need to have a national VAT;
2- Lower Welfare payout amounts to incentive people to work (would this work??!!);
3- Incentivize people to use their heads and open businesses and create jobs other than tax professionals and IRS employees;
4- Since they have all of these laws like the Patriot Act, nationalize the ID card system. My favorite ID here is my drivers license because it has my tax ID on it, something I remember Americans being clearly against. I don’t know why though…
Here, at least, tax collection is so TIGHT that it is almost scary. There is even a special word in the language for tax evading/avoidance = sonegação. I’ll give a couple of examples:
1- I buy something from a store in the US with a value of $100. Most likely I will get a bill from the Receita Federal too. If I don’t pay this bill, then my tax ID will get “locked” until I pay it, and the bill will be “disputed”, which is almost like a mini-lawsuit of sorts. This means that my life will be made very difficult if I don’t pay the bill. A couple of times, I got these bills. I didn’t quite agree with some of the charges, but I just paid them anyway because the reprecussions are too strong.
2- If you need a loan, they will only accept your declared income. That means if you don’t declare the income properly and pay taxes on it, you will shoot yourself in the foot.
3- If I buy the equivalent of a “CD” bank deposit at the bank, then when I sell it, tax on the interest will come out at the SOURCE.
The US has a lot of work to do to enforce their laws within their own territory before they start trying to make our lives difficult. They are, in effect, alienating people that live abroad and are learning different processes and skills that could later be implemented in the US.
@geeez
“4- Since they have all of these laws like the Patriot Act, nationalize the ID card system. My favorite ID here is my drivers license because it has my tax ID on it, something I remember Americans being clearly against. I don’t know why though…”
Its not just people in the US – There is some sort of obsession in Anglo-Saxon countries with Identity Cards and viewing them as “Fascist”. The UK tried to introduce these a few years back, but Cameron’s government scrapped the whole proposal recently due to the cost of implementation and the huge uproar over their introduction.
I think that this is absurd, because every other citizen of an EU country can travel to other EU countries with just their ID cards, but Brits always need to carry a passport around. This is potentially annoying if you are in countries like Italy or Germany where you need to have an ID on you at all times, and in both a driving licence is only proof that you can drive – Its not considred sufficient for identification purposes. In Italy I could have only my ID Card and Health Card (which also has your codice fiscale on it- Italian equivalent of an SS number) in my wallet and never need to show anything else for ID in the whole of the EU at all!
@Geeez
I’ll try to post sometime on the implications of implementing a VAT in the US using the comparison of the Canadian GST. By most analysis the Canadian GST drastically reduced the underground economy in Canada.
@Everyone
Good article here on Canada’s sucess with VAT/GST.
http://fullcomment.nationalpost.com/2011/08/04/stanley-hartt-you-can-thank-the-gst-for-canadas-debt-cutting-success/
I also think that the US should increase import duties from China until they let their currency float, which I doubt China will ever do. I was just reading today that a Chevrolet Camaro here costs R$ 200.000 or USD $117,647 based on today’s exchange rate. In the US, Camaros start at $23,500, according to Chevrolet’s website. So why the price difference? Import taxes, VAT, and sales tax. The ONLY items I can find here that do not cost ridiculously more than in other countries are items that are very “popular” – everybody from all social classes buy and use.
The point is I hope the US can get its fiscal house in order. They have so many “tools” to fix their problems. I can’t understand for the life of me why they don’t use these other tools instead of harassing people who live overseas!
The US will never do a VAT type tax because the party that does will be voted out. All they care about is votes not fixing the problems.
The reason they’re harrassing people who live overseas is because their own well in the US has run dry. They already audit 12% of millionaires and 50% of their residents legally pay almost no tax.
They harrass small businesses and people who freelance in the US. They’re turning over every stone looking for loose change but there’s not much left.
Warren Buffet said that his housing related businesses (i.e. carpeting, windows etc.) is down almost 75% from 2006. So government revenues from big businesses are down alot too.
Harrassing foreigners just makes it look like they are doing something to solve the problem but their problems are so big it’s going to take alot more than that.
@geeez,
Last year the US had a trade deficit with China of $300 billion, but to blame it on China’s undervalued currency is not the reason at all. Germany imports more per-capita from China than the US, but because it exports 7.9 times per capita more than the US to China it had a $13 billion China trade surplus. They Euro has appreciated in value 55% over the dollar thus making German products correspondingly much more expensive in China that US products. How then does Germany do so much better selling its products in China than the US? It’s tax policy. Germany does not double tax its citizens when the relocate to a foreign country. It encourages them to go, and that is what they do. Germany has a larger world trade surplus than China by 23%. But the US does just the opposite: It discourages Americans from going abroad to sell US exports, so they stay home. Germany’s World trade surplus in 2011 was $$193 billion while the US trade deficit was $731 billion. Germany’s unemployment rate of 6.7% is its lowest in 20 years, while the US rate of 8.3% is close to Great Depression rates. Germans who go to China and sell their exports are patriots because they create jobs at home. Americans who go to China are “tax evading traitors” who deserve the punishment of double taxation, so they stay home. It is that simple.
China’s currency policy doesn’t stop the Germans, Swiss, Koreans, Japanese, etc. but it is the excuse used to expain why the US does so poorly in the China market. China today is the world’s #2 largest market for imports – for the products China does not make. That is where the US completely missed the boat.
@Tim – Great post
@All – Great discussion
Nothing to add but I did want to say I found this thread to be a really good read.
How could the USA possibly introduce a much needed VAT when, in order to get elected, politicians of all stripes promise ‘NO NEW TAXES’ over and over
Trying to secure the GOP nomination, the idiot Romney promised last night he would cut ‘taxes’ 20% across the board and eliminate estate taxes- all the while reducing the deficit. Good luck to him. Should generate lots of support from the 1% who would be the largest beneficiaries.
@Kalc – I just finished reading Bruce Barlett’s, The Benefit and the Burden. A good read. He too thinks citizenship-based taxation is a bad idea. However he makes a very interesting argument for tax reform – he thinks that it will take a Republican president and a Democrat Congress to make change possible. Anything else just won’t work. Read the argument – I think he may be right.
Here is an interesting piece about anti-Americanism in Canada.
http://politicalscience.dal.ca/Files/Bio_files/B_Bow/Bow_-_Anti-Americanism_in_Canada.pdf – –
Written in 2008, this attempts to explain differences between Angolphone and Francophone Canadians in attitudes towards U.S.
This describes Canada as “twins separated at birth.” It does not deal with anti-Americanism in 2012 among what I will call: Ameriphones. Those who were born and often raised in US are now among the most outspoken anti-Americans in Canada because of they way our country of birth is choosing to treat us.
@Victoria, remember that it was a Democratic Administration (John Kennedy) and a Democratic Congress that enacted citizenship based taxation through the Tax Act of 1962. There is a bill before Congress, introduced by a Democratic Congressman, to eliminate the current Foreign Earned Income Exclusion and subject 100% of foreign earned income to US tax. There is no sympathy on either side of the aisle for repealing citizenship based taxation at present. My personal opinion is that it going to take some “loud protests” on the part of foreign governments against extraterritorial taxation by the US before anything will ever happen in Congress to repeal it. There is a total lack of understanding, on both sides of the aise in Washington of the damage this policy is doing to the US in the world. Things may have to get a lot worse before it is on anybody’s agenda.
Blaze wrote: “Those who were born and often raised in US are now among the most outspoken anti-Americans in Canada because of they way our country of birth is choosing to treat us.”
Count me in that group. I am a US basher. AND I will keep my investments, for the most part, out of the United States. I have a large short position on the United States dollar.