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.
You’re welcome.
@bubblebustin, Here are the links to my two presentations: citizenship-based taxation, FBAR. Google doesn’t seem to preview them, but you can download the files and open them on your computer.
Thank you Shadow Raider!
Regarding the IRS forcing people to file the FBAR only electronically, while denying them the ability to have an advisor/accountant file for them.
Here is some evidence of the technology gap:
In the US:
“…Full Show: Who’s Widening America’s Digital Divide?
February 8, 2013
America has a wide digital divide — high-speed Internet access is available only to those who can afford it, at prices much higher and speeds much slower in the U.S. than they are around the world….”
http://billmoyers.com/episode/full-show-who%E2%80%99s-widening-america%E2%80%99s-digital-divide/
“…Millions are still offline completely, while others can afford only connections over their phone lines or via wireless smartphones. …” ….”Public libraries are taking up the slack and buckling under the strain.
Nearly half of librarians say that their connections are insufficient to meet patrons’ needs. Even worse, sequestration will cut an estimated $19 million of public library funding at a time when many Americans rely on libraries for Internet access. The Pew Internet and American Life Project recently reported 26 percent of Americans depend on Internet access at libraries.[1] …” http://www.impatientoptimists.org/Posts/2013/03/Dissolving-the-Digital-Divide
In Canada:
http://www.thestar.com/business/tech_news/2013/04/05/canadas_digital_divide_likely_to_widen_geist.html
“…two issues are emerging as key concerns: access and adoption. The access issue is no surprise as there are still hundreds of thousands of Canadians without access to broadband services from local providers. While this is often painted as an urban vs. rural issue (with universal access in urban areas vs. sparse access or reliance on pricey satellite services in rural communities), the reality is that there are still pockets within major cities in Canada without access to either cable or DSL broadband service. ….” ……”….nearly half of all Canadians with incomes of $30,000 or less do not have ready access to the Internet and programs aimed at closing this gap are sorely missing in Canada…..”
http://business.financialpost.com/2013/03/21/digital-divide-persists-in-canada-both-in-access-and-internet-fluency/?__lsa=null
‘Digital divide persists in Canada, both in access and Internet fluency’
Misty Harris, Postmedia News | 13/03/2
“…Access issues also persist, with a fifth of Canadians reporting that they hadn’t used the Internet even once in the previous 12 months……”
http://mashable.com/2012/02/05/digital-divide-infographic/
“….There are vast gaps between Internet accessibility in cities and rural areas, racial disparities in Internet access (which isn’t as pronounced as it was a decade ago), and the growing gap between rich and poor and its influence on who goes without computers or Internet access…..”
In Ireland:
“…………By contrast, one in five Irish people aged over 40 has still not been on the internet.
The statistics, from the Irish branch of the EU Commission, were discussed at a conference on technology driving business.
Government and EU officials admitted that a ‘technology gap’ has emerged between older people who shun the internet and the younger generation, which has embraced it…….” http://www.independent.ie/irish-news/technology-gap-is-widening-as-older-people-shun-internet-29087116.html
@Just Me, He’s not the top aide, but I was also very suprised that he had never heard about these things. There is hope because now they know about it. I think it’s just a matter of getting the right person to actually read Nina Olson’s report.
@Shadow Raider
I have someone in contact with Republicans abroad, going to a staff meeting with Congressional several aids, and looking for material…
I tired to open your two links above, on Citizenship taxation and FBAR, but they will NOT generate a view of the document right now….
Any chance you could email me a copy, or see what is wrong with the links…??
@Just Me
I hit ‘file’ then ‘download’, which worked for me.
Thanks bubblebustin
Why didn’t I think to try that? I was just expecting an online power point, but you are right. It works perfectly as a download. Thanks for bailing me out. I imagine Shadow raider is asleep on the East coast. 🙂
I wasn’t trying to get more meetings, but an assistant of Senator Rand Paul just responded to an email I sent a while ago and scheduled a meeting with me for later this week. This should be interesting.
Indeed. Might as well try to get a meeting with a Representative Posey assistant, eh?
Break a leg, Shadow Raider! Tell him I say “hi” 🙂
Today I went to one of the Senate office buildings in DC. I passed through the nice Union Station, and it was a pleasant summer day, lots of tourists (even some foreign tourists) on the streets. The Senate building was complicated and I took a while to find Senator Rand Paul’s office (and quite some time to find the way out afterwards).
I met with his assistant John Gray. He didn’t ask questions or took any notes. He said that he was aware of the FBAR, but didn’t know that it was such a large scale problem. He was surprised by the number of US citizens living abroad. I mentioned the RBT proposal, he said that the senator supports territorial taxation, and I explained that Congress only seems to mention corporations in this subject. He understood, and said that territorial taxation should include individuals too.
I asked if it was possible to amend Senator Rand Paul’s bill to deal with the FBAR too. He answered that he would have to introduce a new bill, and that the process takes a while. He asked me to send him my presentation, but he didn’t say if they were going to do anything. Overall, it didn’t seem to me that he was really interested in the subject. He also suggested that I contact Senator Marco Rubio. I don’t know if Marco Rubio would be sympathetic to Americans abroad because he loves making inflamed speeches about how the US is the “greatest country in the world”, but I guess it wouldn’t hurt to try.
Thanks once again, Shadow Raider.
Is it not too sad for words that these government representatives have no idea of the number of US citizens living abroad?
They listen to what and who they want to — and it is not, for the most part, US Persons Abroad. The lot of them are quite effective in tuning us out it seems.
All the work you’ve put into this and your continuing efforts in having one-to-one conversations on our behalf are impressive and so appreciated by me and so many others here.
@shadowraider,
Thank you for making this visit and making your views known to Sen. Rand Paul’s staff member. If you are still in Washington I do also recommend you go to Sen. Marco Rubio’s office and make your convictions known. It might be well for you to make contact with Marylouise at the ACA office in Washington. You can contact her via the ACA website.
@Roger Conklin, I live in one of the suburbs around Washington, that’s why it’s easy for me to go there. I have been in touch with ACA too.
Once again I thank you (we all do), Shadow Raider, for entering the labyrinth (glad you found your way out) and advocating to bring some sanity into the US tax code. It just seems sad that you would be met with what appeared to be a degree of disinterest after it was Rand Paul’s office which contacted you to schedule that meeting. The aide should have done a little investigation in advance if for no other reason than curiosity. I worry about the lack of curiosity these days.
To those who thanked me, you’re welcome again.
I found out that Senator Richard Shelby (R-AL) introduced a tax reform bill called the SMART Act. (Congress just loves acronyms, doesn’t it?) It would implement a flat income tax, only on salaries and business profits, totally exempt investment income, and repeal the estate and gift taxes. The tax would be territorial for both individuals and corporations, as the bill explicitly says in various places that it only applies to income from US sources. It’s a massive simplification and reduction of tax rates and incidence.
Of course, this proposal is too radical so I don’t think the bill has any chance of getting anywhere, but I thought it was interesting. The proposal already exempts all investment income, so the territorial limit of the tax would only benefit Americans actually working abroad. Therefore, I suspect that the senator considered Americans abroad in his proposal. I contacted the senator’s office to discuss international taxation of individuals, and his assistant said that he can’t meet with me but that I can send him something by email. He seemed sincere that he would really read it.
I was going to send him what I had submitted to the Ways and Means Committee in March, but I read the document again and it seemed a little confusing to me. The suggestions were out of order, and I didn’t really explain the reason for each one. So I rewrote the document, expanding the text in each suggestion (instead of the long introductory text), combined some sections, and reordered them to match the order of importance. You can read the new document here. Any comments? Do you agree with my order of importance?
@ShadowRaider, Thanks for the incredible amount of work and detail (and good reference material).
I wonder about the order of importance, but only because I am so narrowly focused on RBT almost to the exclusion of everything else. RBT might appear to be given only equal weight to the other issues in your submission.
Your RBT proposal is in the middle, #5 out of 8 plus. But if #5 RBT happens, then shouldn’t FBAR, FATCA, and even expatriation tax etc. become mostly irrelevant for those US citizens abroad (majority?) who elect to be removed or are removed by non-residence from the IRS system and wish to keep their US citizenship? State explicitly that with your RBT, then FBAR and FATCA reporting etc. will be eliminated for non-resident US citizens?
Perhaps make the point that RBT will solve most of the problems in your submission? “The best solutions to these problems (in #5), as well as the problems created by FBAR, FATCA, ….. …is to change…to a residence-based…?”
Start with RBT, or lead up to and end with RBT as THE SOLUTION?
@Shadow Raider, IRSCompliantForever
Wouldn’t it be nice if US lawmakers were to argue over which would be the best way to exempt USP’s abroad from taxation? Nice fantasy…
IRSCompliantForever, If RBT is adopted, Americans abroad will no longer be subject to any of the other problems, but only Americans abroad and from that point on. RBT doesn’t do anything for immigrants in the US, they will continue to be subject to the draconian penalties of FBAR and form 3520, and to the perverse transfer tax on covered expatriates if they leave the US. RBT also doesn’t do anything for people who already renounced US citizenship as a result of the “war on foreign accounts”, they will still be subject to the Reed amendment and the transfer tax.
Even without RBT, if the draconian penalties are repealed, the fear of the IRS by Americans abroad will be repealed with it. And if the Reed amendment and the transfer tax are repealed, renunciation will no longer be so scary. Of course, CBT would still be there, but if those other things are repealed, people who suddenly realized that they were supposed to file things and didn’t will be able to comply (a huge paperwork burden, yes, but no penalties) and have the option to renounce (another burden and emotional process, yes, but no punishment). Right now, the options are horrible and people feel trapped.
But if you don’t agree, don’t worry, it seems that Congress is more interested in RBT than any of the other items.
@bubblebustin, I really, really want one of the committees to have a hearing on this subject, and see experts on international taxation rebuking the absurd misconceptions about Americans abroad and pointing out the perverse punishments that Congress has written over the years. If Congress would just invite Kenneth Kies, John Harrington, James Hines, Philip West and Reuven Avi-Yonah again, plus Paula Singer and Bernard Schneider, they would explain everything.
@ShadowRaider, Thanks, I understand now that our aims overlap but yours are much broader.
I like:
“But if you don’t agree, don’t worry, it seems that Congress is more interested in RBT than any of the other items.”
-Hoping that “more” must mean “at least some”…
I followed John Gray’s and Roger Conklin’s advice and contacted Senator Marco Rubio’s office. They responded right away and scheduled a meeting for the end of the month.
@Shadow Raider…
You are quickly becoming my hero for your efforts, and trust me, cynic that I am, I have very few!
@shadow Raider, I live in Miami, as does Sen. Rubio. When he is home he, with his family, always attends the same church that we do at the 10:30 am morning service on Sunday. Always very unconspicuous with his attendance, but he is always there.
Today I went to Senator Marco Rubio’s office. It was in the same building as Rand Paul, but this time I knew my way around. Nice summer day again.
I met with three assistants, two who handle immigration and one who handles taxes. They seemed well informed about international taxation. One of the assistants said that he has a sister who lives in France and hasn’t filed US tax returns for years. When I mentioned that taxes from Americans abroad only represent 0.3% of federal revenue, he said that he wondered how much it costs for the IRS to process all the forms. They were all very aware of FATCA and said that the senator opposes similar reporting by US banks. I had to finish my presentation quickly because the room was scheduled for another meeting, but I think they understood the problems. They didn’t say if they agreed or disagreed with my suggestions, but asked me to send them my files.
In the end, they said that the senator sent his proposals for tax reform to the Finance Committee last week, and that tax reform will not be easy. They mentioned that the senator is concerned with international taxation of corporations and FATCA’s impact on US banks and investment, but that he is also sympathetic to the problems of individuals (confirming what Rand Paul’s assistant had said).
OK, folks, Congress got the message, so I don’t think there is much else I can do for now. I’ll be patient and see what happens. They should release more details about tax reform in a few months.
@Shadow Raider, Thank you for the visit to Sen. Rubiio’s office. Did the staff member whose sister lives in France and has not filed US tax returns for years recognize that his sister is flagrantly violating US tax laws? Few people would reveal that they have a close relative who has total disregard for our tax laws. It is really a surprise to me that he would “broadcast” that.
If you turn her in for tax evasion perhaps you might receive a cash award from the IRS.
Roger