French professor of Latin American studies Salim Lamrani proposes that his country should adopt that uniquely American system of taxing based on what passport you hold rather than what society you actually live in, the way the rest of the civilised world does things. His facile idea about “how to end tax exile”, originally floated in French last October at Canadian website Mondialisation.ca and in Portuguese at Opera Mundi, has recently reared its ugly head again in English over at the Huffington Post, thanks to a translation by Larry R. Oberg.
To halt this drift that deprives the French state, and therefore its citizens, of significant resources, it would suffice to simply link the imposition of taxes to nationality, not to place of residence, and then apply differential tax rates. This device would automatically end this scourge. For example, a French taxpayer who sought refuge in Switzerland would be required to pay only 35 percent in his new place of residence instead of the 41 percent he would be required to pay in France. But he would nonetheless be legally obligated to pay the 6 percent difference to the French state, thereby rendering unnecessary any expatriation for tax avoidance reasons …
This practice already exists in countries such as the United States. U.S. citizens living abroad pay exactly the same amount of taxes as do their compatriots who remain in the country, and they are taxed on the basis of their worldwide income.
This paragraph evinces little understanding of how tax works in the real world. There is no such thing as a mere “differential tax rate” between two countries. There are, instead, dozens of combinations of different marginal rates and exemptions, kicking in at different levels on different categories of income — and the categorisation itself will differ between any two systems. Under the U.S. system that Mr. Lamrani admires so much, an American emigrant pays the highest of the local rate and the U.S. rate on every separate category of income, leading to a blended tax rate that is higher than what is faced by any American in the Homeland or any non-American living in the same country.
France for example imposes high taxes on most types of income — and many taxes that cannot be credited against U.S. taxes at all, like VAT and charges against wealth — but shockingly a zero percent rate of tax on other kinds of income. What are these dastardly tax shelters that filthy rich French people have managed to carve out for themselves? Why, unemployment payments, of course. But to the American IRS, unpatriotic foreign welfare checks are “unearned income” and get taxed at ordinary marginal rates. French people should be thrilled that their system of social support is making payments to support the destitute of the world, like the unfortunate folks at the U.S. Treasury.
From a technical point of view, all countries of the world provide the Treasury Department annually with a list of U.S. citizens established on their territories. Thus, tax exile is no longer possible and the only alternative remaining to escape taxation is illegal tax evasion … The wealthy will then need to make a choice: their nationality or their money.
I have no idea whence Mr. Lamrani gets his bizarre idea that the governments of every country in the world violate their own countries’ privacy and human rights law, not to mention any pretension of national sovereignty, to provide a foreign tax authority with information about legitimate immigrants in their country. Perhaps this is a second-hand, grossly-misinterpreted understanding of FATCA, which of course is not even in effect yet.
But the real howler here is the idea that “tax exile is no longer possible”. Renunciation of citizenship is very possible — as Mr. Lamrani seems to have belatedly realised at the end of his article — and it is far easier for the wealthy than the middle-class or the poor. Ordinary emigrants have to live in a country for five to ten years or even more to qualify for naturalisation, while meeting all of the host country’s strict criteria on language ability, social integration, financial support, and the like. In the mean time Mr. Lamrani proposes that they should continue spending thousands of dollars or euros each year to file useless tax returns to their countries of origin.
But rich people can simply spend about US$400,000 plus fees to enter Saint Kitts and Nevis’ Citizenship-by-Investment Programme, and within the year they’re free of Mr. Lamrani’s allegedly-ingenious plan to “end tax exile”. Certainly you could deny them the visa-free treatment that SKN citizens otherwise enjoy in the European Union if they try to come back for extended holidays to their French houses … but what about the even richer who can afford to spend about five million euros on Henley & Partners’ fee for Austrian citizenship? You’ll have a rather hard time excluding them without violating the Schengen Agreement.
In some Swiss cantons, foreign residents are not taxed on their income and wealth, but rather on their lifestyle. This makes them very attractive territories for the wealthy. In Switzerland, where nearly 2,000 French tax exiles reside, the 43 wealthiest families alone have accumulated a fortune of 36.5 billion euros.
It is quite telling that Mr. Lamrani does not compare this number to the total number of wealthy people in France, nor to the total number of French citizens residing abroad (Wikipedia claims, for example, that a million French voters are registered outside of France) — who would collectively have to waste billions of dollars on tax preparation under his plan, due to the complexities of trying to reconcile two disparate tax systems — all in order to ensure that a tiny minority do not get away.
And huge piles of evidence from the U.S. have found that the overwhelming majority of rich people do not move in search of lower taxes. Certainly the U.S. system means they derive no benefit from moving to other countries — but they can’t even be bothered to move to other U.S. states, or to Puerto Rico (Paulson, in the end, said he would not move there either). Indeed, if the rich want lower taxes, they’re far better off staying wherever home might be — where they have connections to politicians and the the social finesse to bribe them without being blatant about it, so that those politicians will write loopholes into the tax laws.
Emigration, in contrast, requires you to learn a whole new language and a new set of social rules — in particular if you want to try to naturalise in your new country, as mentioned above. If you weren’t already raised abroad, you wouldn’t put in that kind of effort without some other pull factor beyond the monetary — a great career opportunity, a spouse, or simply an irrational love for the culture of your new home.
Docteur ès Etudes Ibériques et Latino-américaines at the University of Paris Sorbonne-Paris IV, Salim Lamrani is also Associate Professor at the Université de la Réunion, and a journalist who specializes in relations between Cuba and the United States.
Mr. Lamrani, a highly-educated member of the Paris elite, no doubt thinks of himself simply as a French citizen proposing what is best for his country. But of course as the Canadian “border babies” in the Isaac Brock Society audience understand quite intimately, governments arrogate to themselves the right to determine who their nationals are, and that determination often accords not at all with one’s self-perception, identity, or domicile.
Lamrani is one way of spelling of the Arabic name more commonly transcribed Al-Amrani. Al-Amrani is a common name throughout the Arab world, but this particular spelling is typical of two countries: Algeria and … Morocco. Morocco attributes nationality by jus sanguinis and, famously, makes it nearly impossible to renounce citizenship (though apparently it has happened in some cases). Mr. Lamrani seems to have done all of his education in French. I imagine his Arabic or other language skills may not be good enough to read the tax laws and fill out tax returns in all the different countries of his ancestors, so under his proposal for citizenship-based taxation he would have to hire a bilingual specialist who is familiar with both tax systems in order to help him out. Bonne chance!
(This, of course, is an example of a phenomenon also seen in the U.S.: descendants of immigrants who use a broad brush to paint all emigrants as “tax evaders”).