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.
Great Shadow Raider. Good luck!
I had a blast! Today I met with Charlie Bolton, assistant of senator Rob Portman. He was already aware of the situation, which he described as “ridiculous”, and said that they were “on our side”. He even read the suggestions that I had sent to Ways and Means and considered me an expert on the subject. Wow! I said that since they already agreed, I would like to continue the dialog regarding the details. I mentioned some points and he took notes. He said that they have been meeting to discuss international tax reform, mostly on corporations of course but that they should bring the subject of individuals at some point. I said that I remain available to provide more information and references, and we thanked each other.
That must have felt wonderful — and certainly a big blast — to have Charlie Bolton, assistant to Senator Rob Portman, say they were on our side, etc. He considers you an expert on this subject BECAUSE you ARE an expert!!!
Congratulations on your positive, encouraging meeting and even having him read your suggestions to the Ways and Means Committee.
As always, I am grateful for your meetings with those who one day may be able to effect change in the absurdity of it all. Thanks, Thanks, Thanks, Shadow Raider!
Shadow Raider, I could cry hearing you quote Charlie Bolton saying that the situation us “ridiculous”. Thanks to you and so many others, we are no longer a voice in the wilderness! You deserve to feel great for this, CONGRATULATIONS!
Good work @ Shadow Raider! And indeed you ARE an expert. You had a blast and your report made my day (along with just having finished reading the Taylor Denson paper titled “Goodbye, Uncle Sam?”). Thank you.
@Shadow Raider Thank you so very much. You have also made my day. Hopefully your visit combined with our SFC submission and the lawsuits will start to wake up those with power to rescind this atrocity. With your having actually spoken with them I am now assured that they at least KNOW about this. I had some doubts before.
@Shadow Raider
You are an inspiration for those of us who may feel hopeless! I remember how despondent you were at one point, but you always came back with different approaches to the problem, and although we wouldn’t hear from you for some time, YOU NEVER GAVE UP! BRAVO!
A big hat tip and three cheers for Shadow Raider!
Please just keep going!
@ShadowRaider – I would like to read your suggestions to the Ways and Means Committee. Is it posted here on IBS?
@ JC
It’s a pdf but you can go here – http://waysandmeans.house.gov/taxreform/workinggroups.htm – and look for the Pinto submission.
Congrats @ShadowRaider. Thanks for continuing to carry on, for keeping the faith and keeping us updated – and keeping us company.
Good Luck Shadow Raider and thank you very much for all your efforts!
A thousand thanks, Shadow Raider! You are giving a voice to those who have none. I’m deeply grateful!
@ShadowRaider
Thank you very much for all of your work.
You’re welcome.
More news: The Senate Finance Committee is seeking comments on tax reform from the general public. The whole process is exactly like the Ways and Means Committee did two years ago: each working group will gather its respective comments and the Joint Committee on Taxation will write a report with recommendations to the committee chairman. Even the dates are the same, the deadline for comments is April 15 and the report will be released in May. But unlike Ways and Means, the Finance committee has paid attention and already agreed with RBT in principle. It would be useful to send comments again so they don’t forget to put it into practice.
Thanks Shadow Raider. When the W & M was collecting submissions, they were accessed on line. Do you know if or where these are being posted for public viewing?
RE: the Senate Finance Committee submissions
Let’s not forget about the extraordinary effort being made to present videotaped testimonies for the committee. Between that and the written submissions we can only hope the Senators will take notice and then take constructive action.
http://isaacbrocksociety.ca/2015/02/14/let-the-testimony-begin/
http://isaacbrocksociety.ca/2015/02/01/call-for-all-americansabroad-expats-accidentals-lprs-submissions-to-senate-finance-committee-by-february-14-2015/
Shadow Raider,
Your work is truly remarkable – thank you so much. I trust that you are submitting to the SFC the same (or similar) work that you did for Ways & Means.
I gave my written SFC submission to the collection of submissions that EmBee notes above (thank you again Tricia).
@Bubblebustin, According to the notice, the submissions will be “made public at a later date”. I suppose they will be posted on the SFC website.
@EmBee, Of course, the video testimony is an excellent effort too.
@Mr. A, Thank you for sending your submission too. I intend to send something similar to what I sent to Ways and Means, but updated to reflect the current situation.
@Shadow Raider
BC_Doc found this. Is it really as simple as changing the definition of “US person for tax purposes”? I really trust your judgment on tax code matters.
http://blogs.wsj.com/expat/2015/03/18/opinion-expats-can-give-uncle-sam-their-views-on-u-s-tax-policy-by-april-15/
@EmBee, Removing Americans abroad from the definition of US person would only remove them from some reporting requirements and FATCA, which refer to “US person”, but not from actual taxation or the FBAR, which refer to “citizen or resident” directly. So this change would be inconsistent, and it would still require legislative action by Congress anyway, as the IRS can’t change the law. Eliminating CBT means erasing the words “citizen or” from “citizen or resident” everywhere in the tax code, not just in the definition of US person. It’s repetitive, as the term appears about 300 times, but simple. The definition of resident, which is already in the tax code but only used for aliens, could remain the same and would automatically apply to everyone regardless of citizenship.
@ Shadow Raider
Thanks. I knew you would be able to analyze Hernandez suggestion. It did seem too simple to be true. Now I know for sure.
@EmBee
Thank you for “bumping” the article/comment I found to the right person.
@Shadow Raider
And thank you for your astute analysis.
@ Shadow Raider & BC_Doc
There’s a handy little word processing feature called Find/Change. If we could only teach and persuade congress and the tax coders to use it, CBT would rightly and very much belatedly become RBT. However, we’d also have to teach them the meaning of “total amnesty” and I’d rather like an apology too. Dream on I guess.
I just sent my suggestion for tax reform to the Senate Finance Committee. You can read it here.