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
It’s brilliant … absolutely brilliant!!!
Shadow Raider,
Again, I am indebted for all of your work, including this, your personal submission of make-sense suggestions for the Senate Finance Committee to consider. Thank you for the time and dedication you’ve made in face to face meetings in Washington, as well as each well thought-out submission you’ve presented to the government and share with us at Brock. *Wow* of course does not do justice, but it’s all I can formulate right now.
Thank you Shadow Raider.
Great submission Shadow Raider. In a clear and concise manner, it describes the problem (CBT), the solution (RBT), and some simple changes to the tax code to reach the solution.
Mods– I would suggest a heading for Shadow Raiders submission so we can Tweet it and post it to Facebook.
Thank you Shadow Raider!
@ BC_Doc
Could you post the direct link to Shadow Raider’s submission on Twitter and FB?
https://drive.google.com/file/d/0B7VqDyDIAgW2SVZPSE1aX0xoZzg/view?usp=sharing&pli=1
@ShadowRaider Fabulous document. I will post at Sandbox.
Are you willing to speak with me about a possible article on this?
Hi Embee,
I don’t do FB but I’ve Tweeted the link widely (Sen Finance Committee, GOP Sen Fin, Sen Hatch, Dem Abroad, Rep Abroad, Massachusetts Senators from my former home state, WSJ expats page).
If other folks could post to FB– American Expatriates, AARO, Rep Abroad, Dem Abroad– that would be super.
Shadow Raiders proposal should be widely promoted– it’s simple and it works.
Cheers,
BC Doc
@ BC_Doc
Good work! I don’t do Twitter or FB so I’m no help there. You often hear — Problem, Reaction, Solution — and Shadow Raider has a great solution. This needs to be widely distributed. Personally I like to print it out, roll it up and use it to whack the heads of all the FATCAphiles in the USA.
It is up on the AARO and AE FB sites! I’ll head over to the DA and RO sites to post it also.
Thank you all for your compliments and for distributing the link.
@Blaze, I can talk to you if you want. You can ask a moderator for my email address.
Moderators: Could someone help me contact SR please.
@ Blaze and Shadow Raider,
Sure. Just sent it.
Also, this paper is terrific, Shadow Raider!
I got a meeting with Tony Coughlan of the Senate Finance Committee next week.
@Shadow Raider
This is wonderful news!! What do you think he wants? Did he see your amazing rewrite of the US internal revenue code? We’re going to climb that mountain…one step at a time.
@2terrified2sleep, Don’t get too excited, I’m the one who requested the meeting. But he did respond very quickly.
Folks, I’m representing you so feel free to suggest what I should say at the meeting.
@Shadow
I would ask for a justification of the US’s practice of extraterritorial taxation. If he cannot provide valid justification at your meeting then it is his duty to US deemed citizens living abroad to seek an answer to this question from the legislators/president. Ha, maybe you could even ask if he could get back to you in 30 days or so just to add a little “heat”. (If indeed an attempt is made to justify this it would be great if you could have it documented).
@Charl, I can do that if he supports CBT, but I don’t think he does. Almost all congressional staff I’ve met and most of the Finance committee staff already thinks that CBT should be eliminated. I don’t see a significant oposition in either party. The problem is just motivating them to do something about it, because they don’t see it as a priority.
That’s very encouraging to hear, Shadow Raider. Thanks.
@Shadow
How do we make it a priority? Ah, the question of the day huh! What about going locked and loaded with information from US exporters/business folks that are being decimated by this debacle. Present a completely US centric stance….the Berlin Wall angle with USC unable to leave as they can no longer bank abroad.
If you think that might be a worthwhile strategy to light a fire under these folks maybe we can help collect data for you, gather stories like:
http://genevalunch.com/2013/01/29/packing-up-going-home-one-american-vents-his-anger-at-us/
@Charl, Thanks for the link, this should motivate the Republicans. For the Democrats, I think the best motivation is Ruth Mason’s brilliant observation that CBT prevents wealthy foreigners from immigrating and becoming US taxpayers.
New development: Tony Coughlan invited four other staff members to the meeting, including Eric Oman and Tiffany Smith. He’s definitely on our side.
@Shadow Raider, in your toolbox do you have 31 U.S. Code § 5314 ?
It is here that the Secretary has the ability to increase FBAR limits, exempt catagories of persons and exempt countries.
This is the opportunity to bring a Nixon era law into the 21st Century and the Secretary can do it by order.
https://www.law.cornell.edu/uscode/text/31/5314
Seriously does FINCEN really need reporting from countries that have robust know your customer rules and anti-money laundering rules? To be blunt most of the EU and Canada is far ahead of the USA in KYC and AML.
@George, Of course, the FBAR law is in my list of sections to erase, or at least to change it only to residents and make the penalties dependent on unpaid tax. The FBAR used to be my first priority but I lowered it below CBT after the IRS made the streamlined procedure with no or minimal penaltes available to everyone.
You’re right, the law already gives Treasury the authority to increase the FBAR reporting threshold, and to exempt classes of individuals such as nonresident citizens or accounts in countries not considered tax havens. But I’m not planning to meet anyone from Treasury right now.
Newest from Democrats Abroad / 10,000 messages / at least messages getting through and getting attention / One can use this push to send their own suggested solutions
Dear Democrats Abroad Members,
We are pleased to report that after 2 days our FATCA grassroots campaign has yielded an excellent response! We asked you to message members of Congress asking them to sign the Congressional letter to the Treasury Secretary and IRS Commissioner in support of the Foreign Account Tax Compliance Act (FATCA) Same Country Safe Harbor reform.
More than 3,000 of you have participated! Nearly 10,000 messages have been sent to your Representatives and Senators asking them to sign the letter and throw their support behind this common sense reform to provide relief to Americans abroad from the burden of FATCA reporting.
Please help us send that number soaring towards 20,000 messages! We need your help URGENTLY!
The sponsors of the letter (Rep Maloney and Rep Mulvaney) anticipate “closing it off” to signatures at the end of this legislative session – that’s the end of this week! We need to demonstrate that there is growing momentum in Congressional support for this reform in order to keep the letter open to more signatures. The more signatures on the letter the louder the call coming from Congress for Treasury and the IRS to act.
If you have not yet participated, please send your message to your Senators and Representative RIGHT NOW, reminding them about the letter and asking them to sign it
I made a presentation for my meeting with the Senate Finance Committee tomorrow. Comments are welcome.
@Shadow Raider,
Excellent. Thank you!
Minor suggestion: For your bullet point,
“Disproportional number of comments sent on tax reform”
I might add in parentheses after that “(290/347 submissions on International Taxation)”, or whatever the real numbers were if my memory is wrong there.
Thank you, and good luck!