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.
@Shadow Raider, I don’t know if you’ve seen the notice for this event, and the list of speakers;
‘Taxation of Americans Abroad in the 21st Century:
Citizenship-Based Taxation vs. Residence-Based Taxation’
Friday, May 2, 2014, 8:30 a.m. to 4:00 p.m.
“ACA Global Foundation launches its educational program with a forum/debate between Professor Michael S. Kirsch and Dr. Bernard Schneider, two distinguished academic tax specialists, on Citizenship-based taxation vs Residence-based taxation, followed by practical observations on the impact of current law on Americans resident abroad, presented by tax experts, investment advisors, businessmen and citizens abroad.”
http://isaacbrocksociety.ca/2014/04/23/toronto-friday-may-2nd-forum-debate-on-cbt-citizenship-based-taxation-vs-rbt-residence-based-taxation/comment-page-2/
http://www.acaglobalfoundation.org/events?eventId=865796&EventViewMode=EventDetails
“Program
Welcome: Marylouise Serrato, American Citizens Abroad, Inc., Executive Director
Academic Host: Dr. Stephen J. Kish, Professor of Psychiatry and Pharmacology, Institute of Medical Science, University of Toronto
Moderator: John Richardson, Toronto lawyer, Citizenship Solutions
Keynote Speakers
Prof. Michael S. Kirsch, Professor of Law, Notre Dame Law School
Dr. Bernard Schneider, Teaching Fellow, Centre for Commercial Law Studies, Queen Mary University of London School of Law
Phil D.W. Hodgen, International Tax Attorney, Hodgen Law Group PC, Pasadena, CA
David Kuenzi, Certified Financial Planner,® Founder, Thun Financial Advisors, Madison, WI
Charles W. Cullen III, CFP® (Canada and U.S.), RBC Dominion Securities, Inc., Investment Advisor and Financial Planner
Neil Sinclair, Chapter Chair, Amcham Canada – Ontario Region
Closing comments: Jackie Bugnion, American Citizens Abroad, Inc., Director of Tax Team”
It’s good to know that each status is being discussed by what I assume is the Foreign Affairs Committee?
@badger, Yes, I’ve seen the notice. I can’t help thinking that this debate should be happening in a congressional hearing in Washington, instead of in a university in Toronto, but in any case it will be a great event, as I don’t think the subject has ever been debated in public. Very respectable and relevant speakers. I won’t be able to attend but I’m looking forward to watching the video if available later.
@bubblebustin, It’s the Subcommittee on Immigration Policy and Border Protection, part of the House Judiciary Committee. It deals with immigration and nationality law. The Foreign Affairs Committee deals mostly with relations with other countries.
@ShadowRaider
I’d check out the committees that Ted Poe sits on, and thought (wrongly) that foreign affairs would be the most likely. Thanks for the correction and insight into all of this stuff that I know little about!
@Shadow Raider
The Us already has two huge internal loopholes that Homelander Fat Cats are already jumping through: Puerto Rico (tax holiday for American investors) and US Virgin Islands (10% income tax for Americans).
If people from the Homeland are looking to escape taxes, they don’t need to leave US territory to do it.
I suspect that CBT and FATCA are more about capital control (human capital) than they are about taxes.
In case anyone is interested in trying to repeal CBT through the courts, here is my argument of why CBT is unconstitutional. But I’m not a lawyer so I can’t guarantee that this is correct or feasible.
That’s really interesting Shadow Raider. The FEIE and foreign tax credits are just really a workaround something that’s intolerable. A band aid that’s now starting to rub off to expose the festering wound CBT is.
@Shadow Raider
Your argument that CBT being unconstitutional may actually be valid. But that raises another problem — nobody in the US (save the Ron Paul crowd) gives a darn about the constitution anymore.
http://www.journalofaccountancy.com/News/201410179.htm
‘Tax lawyer: Code reform stymied by dysfunctional Congress’
By Paul Bonner
May 20, 2014
“Passage of major tax reform legislation appears unlikely soon, partly because of partisan gridlock in Congress as bad as any in the past century and a half, a noted tax lawyer told the AICPA spring Council on Tuesday in Scottsdale, Ariz.
“Now, the members aren’t even acting in their own best interest as much as posturing,” said Daniel M. Berman, a principal in McGladrey LLP’s international tax practice and adjunct professor at Boston University School of Law. “It’s all based not on whether a bill is something the country could use, it’s based on staking out a position for the next presidential election.”
Consequently, Berman said, despite recent congressional committee hearings and several pending proposals to reform the Internal Revenue Code, “There’s just no productive legislating going on, and that means there aren’t going to be any major developments in the tax law passed until something major changes in the way Congress operates. That’s not happening in the next few years.”…….
Shadow Raider, if you are ever speaking to legislators in the US again about CBT, you might want to mention this bill ABLE and how CBT makes any parallel benefit (ex. the Canadian RDSP) impossible for those living outside the US – directly at the hands of US legislators, the US Treasury and the IRS.
See;
Achieving a Better Life Experience Act (ABLE)
https://beta.congress.gov/bill/113th-congress/house-bill/647/cosponsors
Schumer, likes to pose for media ops to demonstrate his humanity, and his support for this bill.
http://www.silive.com/news/index.ssf/2014/09/schumer_backs_bill_for_tax-fre.html
http://www.autismspeaks.org/news/news-item/sen-schumer-and-autism-speaks-push-passage-able-act
Yet, he will not act to assist the very same population of those deemed US citizens with the very same disabilities – ( ex. http://www.cbc.ca/news/canada/u-s-fatca-tax-law-catches-unsuspecting-canadians-in-its-crosshairs-1.2493864 ) when they are deemed UScitizens and thus ‘US taxable persons’ living outside the US. He supports the destruction and harvesting of the RDSP in Canada via FATCA and the FBAR and the treatment as ‘foreign taxable trusts’. He supports the erosion of even the principle via steep accounting fees to report them on the 3520 and 3520 A. He tacitly supports the FINCEN instruction for children – and presumably those also deemed legally incompetent for intellectual/neurological/psychological reasons to file their own FBAR (see online instructions). He and his fellows do not allow those very same children and those very same individuals deemed legally incompetent to renounce, or to have guardians renounce for them, nor to benefit from the grants, benefits and tax exemptions that their own home government and country provide as supports from non-US tax revenues, yet he will not lift a finger to help them with any US provisions.
Schumer and the rest of the sponsors of the US bill are hypocrites of the worst order if they voted to burden the disabled in Canada and around the globe, yet sponsor ABLE.
So much for the ‘benefits’ of involuntary US citizenship.
This is why this is going to turn into a PR and diplomatic nightmare for the US.
The hypocrisy and injustice becomes more and more obvious – and a lot easier to convey.
It will keep many of us in this fight even though we have ourselves expatriated.
My “plan B” (renunciation of citizenship while keeping nationality) went nowhere, and the lawyer I contacted about my constitutionality argument declined to take the case. Meanwhile, the Senate Finance Committee unexpectedly announced that it agrees with RBT, so I decided to return to the original plan.
I want to go talk to Congress again. I’m concerned that they still don’t truly understand the problem and will try to “implement” RBT with a sort of FEIE expansion. No, RBT is not an exception to be added to the tax code, it’s CBT that is the exception that has to be erased. Americans abroad shouldn’t be mentioned at all, because the idea is to make citizenship irrelevant for taxation. Just replace “citizen or resident” and “nonresident alien” with “resident” and “nonresident” everywhere, as I did in the draft I wrote over two years ago (I can’t believe it’s been so long). It actually simplifies and shortens the tax code.
I just sent some meeting requests, let’s see who will respond.
We’re going to have to start thinking of you as Shadow White Knight Raider. May the meetings happen and may you meet some open minds. Good luck!
@Shadow Raider
You really deserve some kind of medal. Thanks for everything you do!
Great initiative @Shadow Raider. Thanks again for doing that.
The main difficulty, I think, will be to PROVE that these changes are revenue neutral, if not saving money to the government. At least, the IRS will be able to focus more on tax fraud here at home, than spending tons of time processing simplified OVDI procedures for no additional revenue.
If the presentation and attached documents could lean in that direction, that would certainly help, as the main train of though is not intuitive: how can removing people from the tax base decrease costs?
If we can’t prove it, then the effort will be in vain. They’ll never push legislation that would decrease revenue, even if it is the right thing to do.
@Noone
“At least, the IRS will be able to focus more on tax fraud here at home”
The problem with this is that putting the squeeze on Homeland taxpayers can cost votes. Because expats have no representation squeezing comes without blowback.
I imagine that if the US did adopt RBT, it would also include a ‘departure tax’ like Canada has (and on which the renunciation ‘exit tax’ was apparently modelled). So, that would potentially be a whole new battle in determining how the assets of people who have lived out of the US for a long time should be dealt with. E.g., if I haven’t lived in the US for 30 years, but bought a vacation home in my country of residence 10 years ago, should the departure tax apply to that property (resulting in paying the US a capital gains tax)?
Thank you for your compliments.
@noone, I don’t think that the changes are revenue neutral, but they don’t have to be. CBT is a very minor issue for Congress, as it doesn’t affect the US population and the revenue from it is insignificant. Congress passes measures that slightly decrease revenue all the time, just look at all the changes to the tax code throughout the years. And they do this even when there are no “special interests” or votes. For example, in 2004 they eliminated the limit on the foreign tax credit for the alternative minimum tax, stating that they believed that the foreign tax credit was a matter of fairness and not a “tax preference”. They saw it as a technical correction of a past mistake, while at the same time simplifying a section of the tax code. I see CBT as a similar issue.
@tdott, The current expatriation tax already exempts dual citizens since birth who did not reside in the US for the last 5 years before renouncing. So I imagine that Congress would easily agree to still exempt citizens who have been living abroad for at least 5 years from the exit tax, even if they are not dual citizens since birth, and probably also all other citizens currently abroad. After all, the only purpose of the exit tax is to prevent tax avoidance, so it doesn’t make sense to apply it to people who are not actually taking any action that reduces taxation. Americans already abroad would become no longer subject to worldwide taxation by the US because of a change in the tax law, not because of something they did. The exit tax should only apply to US residents who become nonresidents after RBT is effective. If I have the chance to discuss this with Congress, I’ll insist so they understand this point.
@Shadow Raider, you have much more faith in Congress than I do. I’ll put on my devil’s advocate hat now: if Congress adopted what you’re proposing it would create a significant incentive for the very rich to move out of the US and wait out the 5 years in order to be able to change to RBT status and not have to pay any outstanding CGT. As such, it would result in a loss of tax revenue (the amount of which would no doubt be highly exaggerated) and thus would be unacceptable.
I also have doubts whether Congress would see fit to have it retroactively applied to those who have already been living out of the US. Although it may be logical, it would nonetheless irk a lot of Democrat Congresspeeps.
At any rate, good luck!
@tdott, I was referring to citizens who would have already been living abroad for 5 years at the time when Congress enacts RBT and the exit tax. And the 5 years was just an example, I actually prefer zero (all citizens abroad at that time). But after RBT is adopted, a US resident who moves abroad becomes a nonresident immediately, and therefore subject to the exit tax.
@tdott: if Congress adopted what you’re proposing it would create a significant incentive for the very rich to move out of the US and wait out the 5 years — if someone thinks that is a serious objection, point out that rich people can already do that right now by moving to Puerto Rico and applying for exemptions under Act 22, though the wait period is 10 years rather than five. Capgemini’s World Wealth Report estimated ~7 million high net-worth individuals in the United States. Puerto Rico says that a grand total of about 500 people have applied for the exemption since it was created in 2012 (i.e. fewer than 0.01%), and only half of those have actually moved so far.
http://www.forbes.com/sites/laurengensler/2015/02/11/puerto-rico-new-age-tax-haven/
Wealthy homelanders can also move to the US Virgin Islands, start a local business to employ some people, and get a 90% exemption on their US personal income tax.
Puerto Rico and Virgin Islands allow Wealthy Americans to legally escape US income taxes if they really want to. The exit tax is designed to punish those who move outside US territories/possessions, not necessarily those who want to avoid paying taxes.
I got a meeting! It’s set for Monday, with an assistant of senator Rob Portman (R-OH). The senator is co-chair of the international tax reform working group of the Finance Committee.
Wonderful, Shadow Raider. My and our continued thanks — godspeed in your meeting with co-chair of the international tax reforming working group of the Senate Finance Committee. Bravo!!
Congratulations, Shadow Raider! I hope they’re starting to listen.