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.
It’s important not to accept any argument that stopping to extort US persons abroad will hurt the revenue stream.
@Shadowraider – can you please clarify what it means that ACA will make residential taxation standard in its proposal and taxation on citizenship optional? Isn’t it one or the other?
@Lisa, In ACA’s current proposal, the US would keep taxation based on citizenship as it is now, but Americans living abroad may choose to be taxed as nonresident aliens, by filing a form, paying a $500 fee and the exit tax, if applicable. So Americans abroad would have to do something to be free from future filing.
In my proposal, the US would tax based on residence, but Americans living abroad may choose to be taxed as residents, by simply filing the 1040 form. So Americans abroad would be automatically free from future filing if they don’t do anything.
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Shadow Raider, the $500 fee and exit tax thing sounds strange, but that’s basically what I did. Not filing 1040’s would make more sense. I don’t understand the tax argument for Americans living abroad. By renouncing, I’ll probably end up paying more taxes than than I probably would have if I had remained an American, but will save much on processing fees and the US government will save by not having to think about me. Oh well. I hope that your efforts will be rewarding for the benefit of America.
Quick update, my meeting with Robert Cogan had to be rescheduled to January.
UPDATE: I rewrote the draft of my bill. I reordered the provisions by subject, added brief descriptions and a summary, and made the text more concise. I think now it’s easier to understand. I added an exit tax, but exempted from it US real estate, and US and foreign retirement plans. To be consistent with an exit tax, I added a provision to increase the cost basis of assets of immigrants to the value at the time they became residents. I based these provisions on the exit tax proposal made by senator Daniel Patrick Moynihan (D-NY) in 1995, and on the exit tax of Australia and Canada.
I also added a provision that would allow a redetermination of the exit tax and a foreign tax credit after the assets are sold, with a corresponding refund, to prevent excessive taxation if the assets end up decreasing in value before being sold or if another country also taxes the same gains. I based this “redetermination” provision on the exit tax of Denmark, Israel and Norway.
I would still prefer no exit tax, but if Congress insists, with these provisions I think it would be acceptable.
Links: summary and revised draft. Comments are welcome.
Shadow Raider,
Is the exit tax for exiting residency or exiting citizenship?
@John Brown, It’s for termination of residence, of course. My draft makes the entire tax system based on residence and not citizenship.
Three updates:
1. I got a meeting for next week with Julie Goldfarb, assistant of representative Andy Harris (R-MD).
2. For personal reasons, I decided not to be involved with writing a bill draft anymore. Instead, I intend to provide to congressional assistants a list of the relevant sections of the US code and general suggestions, and let them choose what to do.
3. Last year I met Alec Aramanda, at the time assistant of senator Jim DeMint (R-SC), who recently resigned. Alec Aramanda just informed me that now he will be working with senator Ted Cruz (R-TX), who was just elected. Ted Cruz was born in Canada from a Cuban father and an American mother who were living there at the time, and the family returned to the US when he was four years old. According to US and Canadian law, he is a citizen of both countries (unless he has renounced his Canadian citizenship), and from what I understand he would not be a Cuban citizen because Cuba does not allow dual citizenship. He may be sympathetic to Americans abroad, especially in Canada, and to legal immigrants in the US, especially from Latin America. Also, his state of Texas has a large immigrant population and a large amount of bank deposits from foreign investors, who may be impacted by FATCA.
There is a petition one can sign on the White House website. http://wh.gov/UqPtl there are only 236 signatures.
@Bertpug…
Hopefully you signed up for replies…
I have tried that link and it comes back with…
404 Page Not Found
The page you’re looking for is currently unavailable to view
We’ve been upgrading our site. It is possible that this page has been moved o
Kudos to Shadow Raider—-the one man who is truly making Contacts with the appropriate officials. This is the only way to make progress.
communicating with the Ways and Means committee could only help in the cause to chane these terrible laws
@Just Me,
Try the link below.
*https://petitions.whitehouse.gov/petition/change-us-tax-law-citizenship-based-law-residence-based-law/b6v4xfpV
I am going to try to talk to Ways and Means committe too.
Thank you everyone!
@Bertpug
Thnx Got it. We have a long way to go to the 25,000 required, but I definitely will sign. We might need to make this a headline post.
@Mark Twain… Regarding Shadow Raider. Hear Hear!
*@Just Me Yes, I do think we should make this a headline post. I don’t know how to do it on this website. Can you? Thank you. I also shared it on my facebook for my American friends to sign too. @Mark Twain, I sent an e-mail to Ways and Means committee as well.
@Bertpug…
I will do it later today, if someone else doesn’t take it up. I have family here, and my wife has me on restricted internet time.
I am doing a few tweets when she isn’t looking! 🙂
https://twitter.com/FATCA_Fallout/status/287701420411596801
@Bertpug…
ACA is announcing the petition on its website and in its news update and probably on its FACEBOOK.
*Bertpug, the petition tells me that there are 344 Americans abroad left in the world, with the rest already having renounced. It should be the other way around with 300+ million having signed the petition and 344 extremists like Senator Shumar opposing it. The US does not benefit from the current situation. I just read how banks in the UK are choosing to not have US customers to avoid unnecessary expenses:
*Just Me, great! Thank you. I know.. It is really frustrating. Swiss Pinoy.
Maybe Victoria could put a link to the petition on her blog as well.
@Bertpug…
Yes, it is frustrating, but it went from 271 yesterday when you alerted me, to 374. A long way to go to 25,000, who quickly signed the petition to deport Piers Morgan. Such is our culture and what they pay attention to these days…
And where is the awareness of the millions of Expats abroad? They should all sign it, if they are cognitively aware, (not playing ostrich) but how do you get them to pay attention without hitting them over the head with a stiff F-BAR or a FATC-AX ??
Sometimes you do think there is no hope! btw, I will headline the petition as promised. Just haven’t gotten around to it yet!
BTW, there was a great comment here of how to think about Citizenship taxation by Todundsteuer
@Christrophe
I will see if @Victoria is interested…
Pingback: The Isaac Brock Society - White House Petition to Replace Citizenship taxation with a Residency Based System
@ShadowRaider…
You mentioned Ted Cruz…
Thought you might be interested in an interview with him on PBS news hour last night…
Today I went to the House office building and talked to Julie Goldfarb, assistant of representative Andy Harris (R-MD). She was very nice, interested, took many notes, asked questions and seemed sympathetic to the issue. She was very surprised that the US is the only country (she disregarded Eritrea) that taxes based on citizenship, and agreed that the US should align its international tax policy with the rest of the world. Even before I finished explaining that part, she concluded herself that taxation of nonresident citizens generates a lot of compliance burden but very little revenue. She was also shocked by the FBAR penalties and the increase in the number of renunciations. She was familiar with FATCA.
She liked my presentation and thanked me for informing her of the issue because she had never heard about it. She also thought that it was great that I already wrote a list of suggestions identifying the relevant sections of law, and asked me to send her the files by email. She said that representative Andy Harris’s family is all from Hungary and therefore he should be interested in the subject. She said that he fully supports tax reform and legal immigrants, and although he doesn’t usually introduce tax bills himself, he can ask other congressmen to introduce one and cosponsor it. In the end, she recommended that I continue contacting members of the Ways and Means committee, of both parties.
She also asked if I knew of anyone affected by the subject who is Andy Harris’s constituent, either an American abroad from his district or an immigrant living there. I said that I didn’t know. Are any of you from Maryland’s first congressional district?
For the first time in all my meetings, I got the impression that she will really explain the issue to the congressman, that he will be interested, and that someone in Congress may finally do something about it.