Estimated world population as of Oct. 31, 2011 7 billion
Estimated population of the U.S. for 2012 313,281,000
Estimated number of U.S. citizens living abroad 6 million
Estimated costs to administer FATCA and chase those 6 million- billions of dollars forever. Net benefit to be derived at the best is most likely zero but is more than likely to be negative because the taxes collected are not likely to ever exceed the cost of FATCA compliance. Of course we will never know because the U.S. very conveniently refuses to establish any criteria for costs calculation.
I learn alot from your posts. I have never filed a 1040 (having left the States as a University Student) but it does sound like the US tax requirements of the expat community are much more onerous than for US persons, resident in the US. I know that they don’t recognize Canada’s RRSPs and if you have one you must file something called a ‘private letter’, I assume through a tax attorney, in order to get permission to not pay tax on the RRSP. I am probably a bit confused on all of that, but I do think a Canadian who also has to file US returns, and has registered funds in Canada, has a much more complicated process to go through.
Ok that’s interesting the only thing I found said you could never re-apply for naturalization. I trust you all with your knowledge, at least we don’t hold a grudge against ex-citizen’s.
You know overall I think the IRS sucks, but I did read the advocate report and it seems to me that it is overly complex, the whole tax code needs an overhaul. While I think citizenship based taxation isn’t a bad idea, I also think it should be as straightforward as filing a domestic return is.
I am curious – why do you think citizenship based taxation isn’t a bad idea? If all countries of the world had citizenship based taxation (instead of only US and Eritrea), wouldn’t that spell disaster for the world economy. I am sure there are millions of immigrants in the US, who would face poverty if they suddenly had to also remit tax money back to the country they were born in or perhaps a country, their parent was born in.
To me it’s just a better idea. Citizenship grants privilege and also has responsibility, the more successful a country’s citizen’s are the more they will earn and the more revenue there will be to collect.
I think if every country in the world turned to citizenship based taxation we would see the end to recognition of dual and triple citizenship by public demand, probably an increase of citizenship by jus soli rather than the awkward jus sanguinis, which to me makes sense, why have citizenship in a country in which you may possibly never have been to or will ever want to go to?
I’m not sure it would ruin world commerce, nations compete with each other as it is now, wouldn’t they compete with each other in a situation in which taxation was based upon your homeland?
@whoait’ssteve- Citizenship based taxation would destroy world commerce because it would destroy the mobility of people. Right now a good deal of the new wealth that the world has created is the unacknowledged result of individual citizens being free to take their talents to other nations where their knoweledge can be more effectively used. If a potential immigrant with an engineering degree were to be faced with the prospect of having to pay taxes in two countries then this would serve as a strong disincentive to going to a country that offered more opportunity. Also citizenship based taxation would present an impediment to the flow of capital if taxes on investment gains would have to be paid to your country of citizenship in addition to the country where the gains are generated. Citizenship based taxation would make it impossible for capital and human ingenuity to meet each and therefore be most efficiently employed. The proof for this can currently be seen with the behaviour of international countries. Double taxation is bad for captial accumulation.
Citizenship based taxation is morally wrong because it allows the country of a person’s citizenship to actually tax the wealth that is generated by the person’s country of residence in a totally different currency. Citizenship based taxation is nothing more than a free ride for the country of citizenship. I have no doubt whatsoever that the U.S. would vigorously object to having citizens of other countries, who are resident in the U.S., converting their U.S. dollars into another currency and sending that money away to pay a tax obligations to a country that did not generate the wealth.
You sound to me to be a reasonable enough guy, who confronted with a subject you didn’t know much about before, (even though you instinctively had a bias) has been willing to dig in an learn about it. That is pretty mature of you, and appreciate your openness to new learning.
So much about our Tax system and its complexity and adverse effects on Expats arises out of our Politics and the Money game that caters to special interests. I just posted the link to a “This American Life” podcast, I would really recommend you listen to….
It is a little off subject, but to me it explains a lot why we have what we have, and why it will be very hard for Expats to exert any influence to change things.
Even I, who only recently learned that I had to fill out FBARS, and a Form 1116, foreign tax credit with an instruction booklet that no one could fathom and now an FATCA form 8938, didn’t fully realize how complex our system had become until I saw this…
Then when you read stories of tax returns 17,000 pages long for Berkshire Hathaway and 57,000 pages for GE, you know a lot of the complexity in the tax code leads to this. I am sure both Warren Buffet and Jeffrey Immelt would complain about the complexity too, but yet it is their lobbying that creates the loopholes and exceptions which requires filings like this that basically let them push the limits while engaging in audit lottery. They rightfully conclude that the IRS will not have the resources or time to challenge every credit and deduction that is claimed in the filings. That is why GE has a Tax department with the best attorneys money can buy which is a profit center.
That is how GE pays no taxes on $14 Billion in profits last year. And guess what? Since they are a super person, they can keep their profits offshore and are not taxed until they expatriate them, but I, a mere mortal as an Expat, can not. I have to declare my income and pay the taxes now. See what lobbying dollars buys you? An exception that Expats without lobbying dollars can not participate in.
Maybe if everyone, including CEOs and you, had to do their own taxes without software or CPA help, there would be a revolt against what we have created. Expats are up in arms, partially, because they more closely feel the effects of the complexity and see the absurdity of the practices. With all the extra forms they have to file, and all the “non willful” “guilty until you prove your innocence” forms with serious penalties for foot faults, it does get up your nose at what Congress has created with it’s Statutes. Also, we see the hypocrisy of one rule for Corporations and one for Humans when it comes to foreign (offshore) earnings.
When you think about it, the IRS, in many ways has almost has an impossible task enforcing the will of Congress. It seems to change the code almost daily in response to some special interest. As a lobbyist gets some Congressman to insert this provision into the code or deletes another unfavorable provision, they have to try to keep up churning out the new (or modifying) rules, regs, publications and forms that accompany the change. You could almost feel sorry for them until you experience how they go about enforcing the will of Congress in such a bungling way that the TAS had to criticize them publicly and issue a TAD, which they ignored by the way.
These are all subjects that you wouldn’t have learned about even in your Finance class, or on NBC nightly news. 🙂
The problem with the Tax code and all the problems it creates (including IRS enforcement practices) is that it really is not a revenue document and or a tax document, but a political document. So politicians look at a net figure they want to get to, gross it up, and then create ‘exceptions’ for all the interest groups so they can all claim victory. The members of the Committee get their re-election contributions, and everyone except the little guy is happy. If you were to wipe the slate clean and start with a 2 page flat/fair tax code today, given our political system and the money that drives it, it would only be a matter of time before it is back to the monstrosity it is today.
Time for a Constitutional Amendment to somehow restrict the growth. But that would strip lobbyists of their power, and Congressman of their money, so that is a hard row to hoe.
So it goes.
@whoait’ssteve- I have read material to the contrary. Also when I was at the Consulate I was told that I could regain my citizenship but that I would have to go through the naturalization process in order to do so.
@whoait’ssteve- here’s a thought. If Congressional spending power cannot be authroized for purposes of directly funding services for citizens- eg. education, medical care, roads etc.- who live outside U.S. jurisdiction then how is it the taxing power isn’t also similarly restricted?
Part of the pact that a citizen has with his government is that taxes are remitted in exchange for services both now and in the future. The U.S. citizen who is not resident in the U.S. has entered into a pact with the government of his/her country of residence and has abandoned the arrangement that previously existed with the U.S. government.
@tiger- thank you tiger for your kind words. I have learned much from you and the many others who participate on this blog. We owe a great deal of debt to our shared knowledge and the comfort that we derieve form sharing each other’s burdens.
My only regret in all of this are the horrible circumstances that have brought us to this place. This is all costing us a lot of LCU’s with no gain.
@recalcitrantexpat… Well, the LCUs may have no $ gain, but frankly for me, it has helped my mental sanity to have a place for civil exchange. Also, I too have learned a lot. You never know what future benefit could arise from that knowledge. It has been a good schooling for me at least.
@WhoaIt’sSteve and recalcitrantexpat
I was told at the consulate, that it was virtually impossible to regain citizenship again; he didn’t explain further and I didn’t ask. Later, I became worried (a bit) about what would happen if my son (dual) got a job in the States and my husband died. He could sponsor me for a green card. I was afraid I wouldn’t be able to afford living in the US. Though he has changed his mind and also decided to renounce.
Steve, I am curious. I only left the US because I met my husband and we married. I don’t see that as something “against” the US. Having lived half of my life in each country (more or less), I don’t understand, being gone for 30 years, why I have any financial obligations to the US. I was a stay-at-home Mom and have always been involved in volunteer work. IOW, I never earned much money at all. The issue with FUBAR is that my husband’s account numbers, balances, etc. are none of the IRS’ business. But we had to report them since my name is on them. There’s just no way I can accept that as fair, reasonable, or neccessary.
There is also the very real issue that the majority of us (as well as many, many others), had no idea we had a tax filing requirement and had never even heard of an FBAR. There has been no effort whatsoever, by the IRS, to see that this information was communicated and spread. Most of us first heard of this linked to people who had come forward and were losing their retirements. First there is terror, endless anxiety and eventually, anger. I don’t hate the US, after all, it is my “home.” But I cannot fathom the need for this kind of “punishment” just due to marrying a Canadian. I am not sure what you are getting here is really “anti-Americanism” as much as really strong anger. But I could not take the risk of losing our retirement, we could never recover at our age. So I felt there was no choice to renounce and I was not happy about it.
BTW, also a buckeye.
PS-I admire your guts to stick it out here and appreciate your efforts to learn what is going on…..Thanks!
You might want to think Citizenship tax to its logical conclusion, if you think it is a good idea. What if all Countries in the world asserted that right? What if it wasn’t just the sole providence of the US? What would the world look like? Would we have to have a world court of citizenship arbitration when two or three countries claimed the same person as citizens of their country as a revenue source? Who would decide? Would there be a fight between countries for the taxing rights to a person?
What if that happened in the States. What if you move from Ohio to California, but Ohio considers you an Ohio Citizen for taxation purposes just based upon the lottery of your birth. Now, even though you are living in California, you have to send taxes back to Ohio? Does that make any sense at all? Of course it doesn’t, and that is why if my Australian wife moves from Australia to New Zealand, Australia release her tax filing requirements. She comes Tax resident in New Zealand and pays taxes there. If she moves back to Australia, the reverse happens. Very logical and simply administered, and Australia spends no time trying to chase her around the world to collect taxes when she is no long tax resident there. And, I might add, they do not threaten her and force her to reveal her NZ bank account details, nor do they add tax filing complexity and penalties on top of her NZ life either.
The Citizenship thought experiment has already been done for you to contemplate.
@geees, tax treaties sometime help non-us citizens who do not reside in the US to avoid double taxation, but rarely do they avoid double taxation for Americans abroad. Their prime function in the case of US citizens is to confirm the recognition by the foreign country that the US has the right to tax its citizens who reside in that foreign country. It confirms the right of the US to impose double taxation on US citizens (and green card holders) who live in that particular country.
@rogerconklin- you are correct. The U.S. does not enter into these treaties in order to protect its citizens but purely to make sure that it’s own interests are protected. What a way to lie to your own people. It shows a lot of nerve and lack of morals, that the U.S. is wiling to have the lie put on paper.
The fact that the US government collects taxes from money earned in foreign jurisdictions also creates a conflict of interest.
If they were on a territorial tax system it would benefit workers in the United States because the government would have to become competitive to attract companies to manufacture in the US. This would create more jobs.
As it stands, the government doesn’t care if you ship jobs overseas because they’re going to see tax dollars from that too. They pay lip service to US residents when they bad mouth companies shipping jobs overseas but the government is also betraying them through the tax code.
If they want to bring manufacturing back to the US now would be a great time because shipping rates are so high and not likely to go down anytime soon.
But companies are not going to switch manufacturing to the US when they have the world’s highest tax rate and the threat of never being able to disconnect from the US once attached to them.
If they switched to a territorial tax system and greatly reduced the corporate tax rate they might even be able to attract foreign companies into relocating to the US if their customer base is primarily there.
Mr. Conklin you wouldn’t happen to be affiliated with Mr. Norquist’s group would you? Your commentary sounds awfully familiar.
I think you’ve got the politics of this issue too neatly pigeonholed. The NDP, which is well to the left of any mainstream US party, has made a point of taking up the cause of the US/Canadian duals caught up in this thing.
Nina Olsen reported that US tax system is more or less impossible to comply with from outside the country, and I have certainly found this to be the case:
the system puts people with shallow-end finances – who may have very simple Canadian taxes, over and done with in an evening or two – into deep-end tax reporting, regardless of the size of their actual incomes.
All the tax-sheltered accounts that the financial advice columnists keep recommending – the TFSAs and RESPs and all the rest of it – are arcane foreign trusts from the IRS’s point of view, and come attached to either seriously expensive accounting fees – depressingly disproportionate to the size of the actual account – or high-stakes home accounting, with the threat of penalties terrifyingly disproportionate to the size of the actual account.
More or less any fund a Canadian is likely to invest in is likely to qualify, from the IRS’s point of view, as a “passive foreign investment company,” or PFIC.
Scotiabank put it bluntly in a recent newsletter:
“All Canadian mutual funds … are now considered by the IRS to be PFICs for U.S. tax purposes. The tax treatment of PFICs under U.S. tax rules is complex. Recent changes to these rules impose harsher U.S. taxes, penalties, and interest on U.S. Persons who hold PFICs.”
“A U.S. taxpayer who owns shares in a PFIC (directly or indirectly) is taxed under one of the most Byzantine regimes in the tax code,” a Wood Porter newsletter warns, cautioning accountants that the work involved “may appear to be daunting.”
A dual citizen who wants to start a company, incorporate herself, or own more than 10% of a business (however small) is faced with Form 5471, which the IRS itself estimates takes 38 hours to complete – though tax experts say it could take far longer. Failure to file it comes attached to a $10,000 fine – per year the form should have been filed. 5471 is an informational return, not connected with actual taxes.
“Form 5471 is so difficult to prepare that professional American tax preparers abroad speak of it as an administrative horror,” American Citizens Abroad laments, “and the IRS staff is not permitted to answer questions related to the forms.”
Preparing Form 5471 in the first place assumes that the company concerned doesn’t object to an enormously detailed data set on its finances being sent to the IRS every year. Some do, ACA points out:
“ACA has received reports from Americans who were instrumental in establishing a business plan for a new venture overseas, but were subsequently shut out from the final investment project by financial advisors who counseled the foreigners not to have any American partners.”
(The U.S. Office of Management and Budget estimated that one year in the 1990s, 7,432,000 human hours had in fact been spent on Form 5471.)
(My own view is that a needlessly complex tax system is necessarily regressive – the more complexity, the more loopholes for the wealthy to find.)
If it helps you think about the problem, switch countries. Suppose your mother was Australian, but you’d lived all your life in the U.S. The Australians consider you a dual citizen (you had no choice in the matter, but it was never a problem in your life). Suddenly, because of a financial crisis in Australia, the Australians become very insistent on your filing Australian tax returns. Really complicated, expensive returns that eat large amounts of your time. Also, the Australians say they can levy enormous fines, higher than your net worth, for not having filed returns in the past. It’s ambiguous whether these would ever actually be applied (the US government has said their tax treaty with Australia doesn’t require them to help collect them in the United States) but the discussion is alarming.
As an adult, you have no plans to live in Australia, and no connection there except for an elderly aunt in Wollomoloo. Do you really find it all that hard to imagine going through the paperwork to renounce your Australian citizenship?
@WhoaIt’sSteve, No,I am not affiliated with Mr. Norquist’s group nor do I know anything about nor or am I even aware of this group.
America’s founders: a bunch of whiners?
Did the British colonists relocate to America in pursuit of economic, religious or political freedom? Yes or no?
Did the British Government run out of money due to its wars of imperial expansion? Yes or no?
Did British Parliament promulgate a series of laws to restrict the colonists’ ability to trade with countries outside the empire? Yes or no?
Did British Parliament promulgate a series of laws to tax the colonists in America? Yes or no?
Did the colonists have representation in British Parliament? Yes or no?
Did the colonists believe they were being treated fairly? Yes or no?
Did the colonists choose to suffer in silence with British laws or declare their independence?
Were America’s founders a bunch of whiners? Yes or no?
@A broken man on a Halifax pier
Excellent commentary laying out clearly some of the detailed complexity of the Citizenship taxation system for Americans. I have been lucky, as I did not have PFICs, but when I saw Phil Hodgen’s write up on the correct way to do this my eyes glazed over at the complexity. I now praise my wife’s wisdom / reluctance to invest in some of the Mutual funds that the NZ bank was selling when we first moved here. Sometimes you get lucky!
Thanks again for that write up. The next time one of my friends doesn’t get it, your comment will be the first on the list as a reference…
BTW. It goes along well with this video posted elsewhere on Isaac Brock. This is created as a “buyer beware” warning to new Immigrants to be sure they know what they are getting in for, but I am sure most Americans don’t know this either…
You could have added some more forms (like 1116) to the video, but it made the point well enough, and at 9 minutes it maybe beyond the attention span of most.
Many of us have cherished our US citizenship, just like @WhoaIt’sSteve, but after the last 3 years of the offshore jihad we have come to realize there are some real costs attached that have previously been pretty much unadvertised.
Now, every chance I get, I issue the warning to those Kiwis and Aussies I know who think they want to immigrate to America. Know what you are buying into before you make that decision.
What ever happened to WhoaIt’sSteve? Did he give up, or go away to study up?
Hey, WhoaIt’sSteve… come back and engage a bit. Don’t be a one night stand! You were fun, and seemed to be open to understanding the issues. I am inviting you to listen to Petros’ recent interview with Pete-the-Planner which you might have missed.
or go here…
You need to continue your outside the classroom education. 🙂
I, also, noticed WhoaIt’sSteve’s time on ISB was very short-lived. I figured he was perhaps home sick for a day or two, or even a college student playing on his computer for a couple of days and that he has gone ‘the way of the dodo bird’.
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