The following was submitted in the form of a comment:
I’d like to have some opinions about the bill that I’m writing to replace citizenship with residence-based taxation. Maybe someone could move this to a different page if it gets too long. By the way, I’m about one third of the way through with the relevant sections in the Internal Revenue Code.
1. To define residence, I am using the current substantial presence test with all of its rules and exceptions. This is the definition that is currently used for foreigners without a green card, so I am just applying it to everyone. I am also adding an exception to consider US government or military employees abroad as residents, because their salaries are sourced in the US and they would pay higher taxes if they were considered nonresidents. I am also adding that US citizens and permanent residents who don’t satisfy the substantial presence test may elect to be treated as residents for tax purposes by simply filing the normal resident tax forms (1040). I understand that there are some cases where this may be beneficial, and I don’t want to increase taxes on anyone.
2. Because some people may elect to be treated as US residents even if not acually residing in the US, I am keeping the foreign earned income exclusion and the exclusion of income from US possessions available. It may be hard for you to imagine, but there are situations where using the exclusions is better than being a nonresident. For example, this occurs for those residing in a low-tax country or US possession who have income from US sources and a low total income.
3. To be consistent with the concept that citizenship should not be used for taxation, I am removing the requirements that certain dependents be “citizens or residents”. If I changed the requirements to only “residents”, some people might not be able to claim dependents that they currently claim, and again I don’t want to increase taxes on anyone.
4. Also to be consistent with eliminating the use of citizenship, I am repealing the sections that allow higher taxes on those whose country of citizenship or residence impose higher taxes on Americans. (I don’t think this provision has ever been used anyway.)
5. Again to be consistent, I am removing the requirement that the spouse be a US citizen for the estate tax exemption. I am also allowing the exemption from US estate taxes to all residents of US possessions, not just who were born there.
6. I was trying to restructure the exit tax based on termination of residence, but I decided to repeal it completely. My understanding is that the main reason for the exit tax in the US is not to collect revenue on unrealized gains, but to penalize rich people who renounce US citizenship to avoid taxes, because certain dual citizens, permanent residents with less than 8 years of residence, any residents only by virtue of the substantial presence test, and any people not considered “rich” are exempt from it, while those who do not certify current tax compliance are not exempt even if not “rich”. The whole idea of renouncing citizenship because of taxes does not exist in a residence-based system. One could argue that taxes would then be a motivation for terminating residence, but I’m not aware of any US state that imposes an exit tax. Some countries have foreign exchange control but not an exit tax per se. As far as I know, only Canada has a real exit tax, and the Netherlands can only impose it under a treaty with the new country of residence. I also don’t agree with taxing unrealized gains because they are not final and could decrease, just like what happened to Eduardo Saverin’s Facebook shares. Besides, the gains may be taxed by the new country of residence once realized; if it doesn’t tax capital gains, it probably collects more revenue from other taxes or other sources instead, or it spends less. Likewise, I decided to repeal the estate tax on inheritance from “covered expatriates”.
7. I am getting tempted to include in the bill a complete repeal of FBAR, FATCA and even the whole estate tax. It’s very easy to write “section #### is repealed”. But those are separate issues and I guess I shouldn’t try to fix everything, I don’t even know if my bill will be introduced at all. I think it’s better leave the unconstitutionality of the FBAR penalties for the courts to decide, a repeal of FATCA for the banks to lobby, and a repeal of the estate tax for the Republicans in Congress. Citizenship-based taxation is the issue that no one else cares about.
I think with more cases like the most recent one posted here today (the oil exec who was working in Kazakstan) — I bet that any sort of residence-based taxation plan will only happen when you see pigs flying and cows coughing.
They have too much power with citizenship-based slavery. They’ll never give it up now, no matter how much it makes sense to adopt a residency-based scheme. They’ll only notice when tens of thousands of people have already left.
*You also need to think of someway of combining both the section 877 “exit tax” and the sailing permit. In theory both Form 8854 and the sailing permit should be combined.
http://www.irs.gov/pub/irs-pdf/f1040c.pdf
*Also get in touch with Paula Singer and Cynthia Blum.
@Petros, Thanks for moving my comment to a new thread.
@geeez, If no one writes this bill, for sure nothing will change. If someone does, there is a chance. Thousands of Americans are already renouncing and people are starting to notice. Don’t be so pessimistic, we have many arguments and congressmen can be convinced. They just don’t know about the problems that Americans abroad face.
@Tim, My intention is to eliminate both the exit tax and the sailing permit. I don’t want to keep any taxes or filing requirements that depend on citizenship or immigration status. Do you think that the exit tax should remain, based on termination of residence? If you give me good reasons for it, I’ll rewrite the exit tax sections. In any case, I would eliminate the sailing permit, it has no penalties and no enforcement mechanism anyway. Even the name sounds like something from the 19th century.
I read Paula Singer and Cynthia Blum’s article (http://www.vanderbilt.edu/jotl/manage/wp-content/uploads/Blum-Singer-changes-made-ARJ-final.pdf), that’s where I got the idea of using the substantial presence test for everyone. I just don’t like their idea of the 3-year residence period and the exit tax. Still, they recognize that the exit tax may burden taxpayers too much, that it should not be treated as a punishment, it should have a large exemption, US real estate should not be included because it is taxed from nonresidents anyway, and the deferment of tax should not carry interest. These conditions make the exit tax better, but I still don’t agree with the concept of taxing something that hasn’t happened yet. I may contact them later after I finish writing my bill.
Thanks Shadow Raider
*A Canadian tax question that might help me help Shadow Raider: Do “Deemed Residents” have to pay departure tax? I am pretty sure its a yes but I can’t think of it off the top of my head. Canadian Diplomats and Canadian Forces Members serving abroad are all considered Deemed Residents.
http://www.cra-arc.gc.ca/tx/nnrsdnts/ndvdls/dmd-eng.html#183
*”Deemed Resident” is effectively the Canadian equivilent of substantial presence. However, deemed residents don’t provincial tax instead paying a federal surtax which is in fact a lot higher than they would pay in Alberta Income Tax for example.
Shadow Raider, put this into google documents, sharepoint, wiki or anything with version control where everyone can attempt to contribute their ideas.
@swisspinoy, What I have is still a draft with notes, once I have something more presentable I’ll put it online for everyone to contribute. Meanwhile, if you want to get familiar with the Internal Revenue Code, I suggest http://uscode.house.gov/lawrevisioncounsel.shtml. The search function is pretty good, that’s what I’ve been using.
Some important sections:
Definition of resident: title 26, section 7701(b)
Exit tax: title 26, sections 877 and 877A
FATCA: title 26, sections 1471-1474 (withholding), 6038D (form 8938)
FBAR: title 31, section 5314
Reed Amendment: title 8, section 1182(a)(10)(E)
Somehow this just seems appropriate:
To comment on the exit tax, the scariest part of it (even Canada’s version) is what happens to entrepreneurs who start a small business. Are they to pay xx% tax on whatever the government declares that they think the business is worth (10x, 15x, 20x p/e?) when they haven’t even sold the business and this tax could be substantially more than a person has ever even earned from the business if it’s a new start up. That’s scary. The exit tax just doesn’t make sense to me. If a person still owns property within the country, such as a house, when they sell it they will still pay tax on that US-sourced income even as a non-resident, which is fair enough. And this is accomplished with residency-based taxation alone. So I vote no exit tax is most fair.
If an exit tax is to exist though, it should be exceptionally clear to apply only to specific liquid assets such as publicly-listed stocks and bonds. IMO, it should also explicitly be stated not to apply to any other assets such as privately-held business that an individual started himself or herself and still owns because a small business itself is not liquid. Such a tax would caused forced sales of ones small business itself just to pay taxes on its claimed asset value and would be truly destructive. Policy should encourage entrepreneurship anyway, never harm people for it. The government will continue to receive income tax revenue on such a business’ US-sourced income anyway.
So if it is to exist, it should be only for liquid assets like stocks and bonds (though I fear even that might be a slippery slope given government always try to grab for more). All that said, I’d still far prefer residency-based taxation even with an exit over the present citizen-based taxation.
No exit tax. You keep assets somewhere, you might be subject to a tax there. You convert them somewhere else, you pay tax that somewhere else. That’s globalization isn’t it? Thats what the powers that be want? Why a double standard? Why outsource call centers to other countries when there are plenty of people in the US that can do the job?
Update: I finished reviewing subtitle A of title 26 (Internal Revenue Code), which deals with income taxes. This includes 160 of 293 relevant sections, so I’m now more than halfway through.
For the reasons that I and others explained above, I removed the exit tax completely. I also changed my mind and decided to deal with FATCA and FBAR in my bill. I removed the parts of FATCA about foreign banks and withholding, but I decided to keep form 8938 and remove the FBAR instead. My reasons are that FATCA is an application of US law outside its jurisdiction, and that the FBAR is duplicative reporting. (FATCA itself contains a provision against duplicative reporting, but for some reason the IRS decided not to apply this provision to the FBAR.)
Next: subtitle B, estate and gift taxes.
Update: I finished subtitles B, C and D, concerning estate and gift taxes, employment taxes (social security) and miscellaneous excise taxes (the penalty for not having health insurance is here). Subtitle E doesn’t have anything relevant. I have now reviewed 244 of 293 relevant sections, only 49 left.
I noticed that the exemption on estate and gift taxes, currently around $5 million, was only available for US citizens and residents, and for nonresident foreigners (who pay US estate and gift taxes only on assets located in the US) only under a tax treaty. If I included nonresident citizens in the second category, in the absence of a tax treaty they would not be able to use the exemption on their US assets. To avoid increasing taxes on anyone, my solution was to allow the exemption for nonresidents always, regardless of the existence of a treaty.
I added that the penalty for not having health insurance applies to US residents only. I believe this was the intent of the law, because some parts of the law assume a US state of residence. But the way that it’s currently written is too complicated, it first declares that it applies to all US citizens and all foreigners legally present in the US, then lists various exemptions that include US citizens who reside abroad and all residents of US territories. However, actual foreigners who reside abroad, and are in the US temporarily as tourists for example, are not exempt. This doesn’t make any sense because the penalty is charged in the US tax return, which visitors don’t normally file. I think this was a lapse by whoever wrote the law. To make it clear, I added that it only applies to “a resident of the United States”, not “an individual”.
Next: subtitle F, procedure and administration (mainly reporting requirements).
FINISHED!
I used the current substantial presence test for everyone regardless of citizenship or immigration status. If citizens or legal immigrants don’t satisfy the test, I added an exception to consider them as residents if they are US government employees, active of members of the US military, or elect to be treated as residents by simply filing a US tax return for residents. Also, I removed the FBAR and the Reed amendment.
ShadowRaider;
Thank you for all your time and efforts spent on this project. It seemed a Herculean job, and I don’t have the specialized understanding to knowledgeably comment on the task, but appreciate that you were willing to undertake it.
@badger, You’re welcome.
The draft of the bill is available here: https://docs.google.com/file/d/0B7VqDyDIAgW2Ukhaam0xNzhpbFE/edit. To read the current US code and understand the changes, I recommend http://uscode.house.gov/search/criteria.shtml.
I also need another title, “Ex-Patriotic Act” was just a joke.
@ Shadow Raider
I’m quite in awe of what you have done. I won’t pretend to understand it all since I didn’t understood US tax code in the first place. We just did our best and naively mailed away the 1040s every year — with nothing owing by our calculations. Now what is the next step? Who do you present this to?
@Shadowraider, Yes, thanks for taking on this task. I wonder though who will read it and who will consider proposing it in Congress.
One aspect of the bonafide test is that it favors too much the United States, to the point of greatly reducing the number of days one can stay in the US to about 120 a year during a period of three or more years. I would suggest that you increase that to 1/2 of a year no matter how many years in a row. It is also an unworkable policy since a person will not tolerate being a bonafide resident of the two countries, they will sell their Florida condo and move to Barbados or Grand Cayman.
@Em, I’m waiting for ACA to setup their Washington, DC office next month, so I’ll go there and discuss the bill with them (I live near DC). After it’s finished, I’m hoping ACA could setup a meeting with a congressman and ask to have it introduced.
@Petros, During my survey of personal income taxation systems around the world, I noticed that almost all residential systems use a half-year rule (180-183 days). From what I remember the lowest period was for India (90 days in average over 5 years), but that was an exception. I agree with you, so I changed the substantial presence test in my bill to 183 days in a year. It aligns the rule with the rest of the world and it makes things more simple.
Now that Grover Norquist supports this idea, I suppose some congressmen would be interested.
I turned my draft into the text of a real bill. It is now ready to be presented to Congress. I also changed the title to “Residential Taxation Act”. The link remains the same:
https://docs.google.com/file/d/0B7VqDyDIAgW2Ukhaam0xNzhpbFE/edit
This bill removes every use of citizenship in the Internal Revenue Code, and bases taxation of individuals on residence only. It also repeals the exit tax, FATCA (but keeps form 8938), FBAR, and the Reed amendment.
Now the real battle begins. I’ll contact ACA to see if we can set up a meeting with a congressman.
@ShadowRaider; please keep us posted on your progress with this. Your efforts are greatly appreciated. Am hoping that the ACA can facilitate the meeting with a representative. At the very least, it puts this on the radar as an issue that you and many others are very serious about. No-one puts that much effort into a task unless they are sincerely concerned with the issue. If corporations (who the US considers ‘people’) can get politicians to tax them on a territorial basis, then why not real people living outside the US.
Update: Marylouise Serrato, the director of American Citizens Abroad, personally moved from Switzerland to Washington, DC last week. She contacted me and we should meet next week to discuss the residential taxation proposal. She is also planning meetings with the IRS/Treasury and several congressmen.
That’s wonderful, Shadow Raider. I’m sure what you’ve been working on on behalf of all of us here will be of great use to Marylouise Serrato — teamwork and moving in the same direction. Thanks so much for all you are doing and for meetings with those in Washington, DC. You and she will be among our lobbyists in Washington, DC — so we don’t have to pick up our lives from the countries we live in to be lobbyists in the bounds of the US (as suggested by WhoaIt’sSteve).
ShadowRaider, as bad as things are, the fact that you would put so much work into this, from inside the US, lifts my spirits a bit. Thank you for being so steadfast in your efforts.
It would have been really good to hear that either Romney or Obama, or both had deigned to respond to the ACA request for a public statement as to where they stood on the situation of US citizens abroad, and whether they were prepared to be the President of ALL Americans, not just residents. And to have seen anything else that would indicate that Carolyn Maloney’s proposal is getting any support. But I haven’t been surprised to hear nothing at all. All indications are that the US only wants to keep us as citizens for access to our already fully taxed assets and intends to contine with its confiscatory schemes inventing methods to assess penalty revenues based on our legal and locally held bank accounts – and are prepared to continue to harass us, and deny us any justice.
My US citizenship is making me very depressed.
I want it excised.