As Deutsche Welle noted, earlier this week the United Nations Population Division released their report on international migrant stocks for 2015, based on a hodgepodge of sometimes-reliable national-level statistics on either the citizenship of local residents (thus undercounting dual citizens) or their birthplace (thus undercounting Americans born in other countries). Most countries’ figures were based on birthplace.
These statistics put the size of the American diaspora at about 2.8 million, an increase of 320 thousand since five years ago. The State Department, whose estimates attempt to capture children of American emigrants as well as naturalised immigrants who returned to their place of birth or moved to other countries, claimed in 2014 that about 7.6 million Americans live outside of the Homeland, whereas in 2006 they stated that the number was 4 million.
Why are all these hundreds of thousands or millions leaving? Well, a recent article from the Homeland (thanks to Tom Alciere for posting it) made a rather audacious claim, probably because the author is confused about the difference between leaving the country and renouncing citizenship.
Tax laws main reason for US citizens’ decision to move abroad …
When it comes to tax rates, the US is no safe haven. It’s 22.7 percent tax rates makes it the eighth (!) highest in the world. Mexico’s tax rate is 9.5 percent. Few countries can compete with the US when it comes to the notion that the last person entitled to your hard earned money is you. The IRS has it down to a science …
Why would anyone in their right mind willingly leave the US? The most common reasons are tax laws.
In reality, aside from Mexico and Ecuador, all of the countries reporting the largest increases in their U.S.-born/U.S. citizen population in the last five years have larger governments relative to the size of their economies and higher tax burdens than the United States. (As it turns out, most of the people moving to Mexico are kids, who don’t have much choice in the matter.)
This has obvious implications for U.S. diaspora tax policy: even if Washington eliminates the Foreign Earned Income Exclusion, they are obligated by treaty to provide foreign tax credits to emigrants who are paying taxes in treaty countries, and most emigrants who actually have income are also likely to have plenty of FTCs. Thus, the only way Washington can get money out of the diaspora is by fining them, by inventing “income” out of thin air, or by deliberately making their tax system incompatible with that of other countries. And that’s exactly what they’ve been doing.
Table of contents
Overview
The U.N. collected statistics from 220 non-U.S. states and territories, and made estimates for six. Among those, 70 (mostly in Africa and the Pacific) either had no U.S.-connected people living there or didn’t provide data; a few of these are known to be major destinations for American expats (e.g. Malaysia, Saudi Arabia), though none are likely to be places of permanent emigration.
Another 30 adopted the citizenship-based reporting standard, and said that they had 250,302 U.S. citizens living there, up by 23,181 from 2010; nearly four-fifths of those were located in just five countries (South Korea, Japan, China, the Philippines, and the UAE). The remaining 126 territories adopted the place-of-birth standard, and said that they had 2,569,074 U.S.-born people living there, up by 299,439 during the same period. No country besides Jordan reported a decrease of more than a few percent in their American population.
The countries for which the U.N. made estimates rather than using actual reported data look extremely dubious (I’m quite curious about the 94 U.S.-born people who allegedly moved to North Korea), but fortunately they comprise only a small amount of the total. Americans in some countries, particularly in Southeast Asia and the Middle East, may have been undercounted; I discuss that possibility below.
Migration destinations and taxes
Using Heritage Foundation data on different countries’ tax burdens as a percentage of GDP, I divided the world up into countries with a higher tax burden than the U.S.’ 25.1% of GDP, and countries with a lower tax burden, and looked at the number of migrants to countries in each group. I separated out Mexico — by far the most common destination — for reasons discussed below.
| Country category | Total | Increase | |||
|---|---|---|---|---|---|
| Count | % of U.S. migrant stock | Count | % of U.S. migrant flow | % growth since 2010 | |
| Higher-tax | 1,491,220 | 52.9% | 152,789 | 47.4% | 11.4% |
| Lower-tax | 1,302,393 | 46.2% | 169,186 | 52.4% | 14.9% |
| — Mexico | 876,528 | 31.1% | 134,610 | 41.4% | 18.1% |
| — elsewhere | 425,865 | 15.1% | 34,576 | 10.7% | 8.8% |
| No tax rate data | 25,763 | 0.9% | 609 | 0.2% | 2.4% |
| Total | 2,819,376 | 100.0% | 322,620 | 100% | 12.9% |
Below is a more detailed table with the top 10 destinations having higher tax burdens than the U.S., and those having lower tax burdens than the U.S., ranked by the number of U.S.-born people or U.S. citizens who moved there in the last five years (countries which used citizenship rather than place of birth as their reporting standard are indicated in italics). Note also that even among the lower-tax destinations, only three (Guatemala, Panama, Singapore) have territorial tax systems; the rest have residential tax systems in which residents pay tax on all their income whatever its source. And according to Wikipedia, none of these countries have a top statutory individual tax rate lower than 20%, aside perhaps from Libya.
| Top 10 higher-tax destinations | Top 10 lower-tax destinations | ||||||
|---|---|---|---|---|---|---|---|
| Country | U.S. migrant population | Tax burden (% of GDP) | Country | U.S. migrant population | Tax burden (% of GDP) | ||
| Count | Increase | Count | Increase | ||||
| Canada | 343,252 | 36,109 | 31.0% | Mexico | 876,528 | 134,610 | 10.6% |
| Australia | 110,643 | 25,313 | 25.6% | Ecuador | 26,802 | 8,376 | 17.6% |
| United Kingdom | 212,150 | 23,307 | 35.5% | China | 26,777 | 3,509 | 19.0% |
| South Korea | 68,784 | 15,206 | 25.9% | Chile | 8,058 | 3,156 | 18.7% |
| Switzerland | 38,347 | 5,716 | 28.5% | Singapore | 17,161 | 2,817 | 13.8% |
| South Africa | 18,114 | 4,775 | 27.3% | Bangladesh | 46,008 | 2,498 | 9.9% |
| Brazil | 28,068 | 4,760 | 34.8% | Panama | 14,040 | 2,084 | 17.8% |
| Spain | 39,825 | 4,586 | 31.6% | Dominican Republic | 25,814 | 1,357 | 12.9% |
| Germany | 137,575 | 4,584 | 37.1% | Colombia | 18,841 | 1,254 | 15.1% |
| Netherlands | 27,285 | 2,917 | 38.7% | Libya | 9,885 | 1,117 | 1.0% |
Also worth noting in relation to taxes: among the ten countries reporting the largest increases in their U.S. populations (all birthplace-based, except South Korea), four did not have U.S. Social Security totalisation agreements, including the top destination, Mexico. Every single one of the most popular lower-tax destinations also lack totalisation agreements with the U.S. In total, 138,011 U.S.-born people or U.S. citizens moved to countries with totalisation agreements, 134,610 moved to Mexico, and 50,999 moved to other countries without totalisation agreements.
Undercounting
It looks like some destination countries have severely underreported their foreign populations. For example, here’s South Korea’s Ministry of Foreign Affairs statistics on South Korean citizens abroad for 2015 compared to the UN data, for 10 major destination countries which reported migrants based on citizenship rather than place of birth (meaning their data should be directly comparable to the South Korean MOFA data, aside from time mismatches). In my experience, the South Korean MOFA data is generally pretty good given the South Korean government’s need to track citizen migration in order to implement the conscription laws, and it shows that some countries may have missed hundreds of thousands of South Korean citizens (and probably hundreds of thousands of Americans as well, particularly in the Philippines):
| Country | South Korean MOFA stats. | U.N. stats. | Understatement | ||
|---|---|---|---|---|---|
| Count | Source page | Count | % | ||
| China | 369,349 | pg. 28 | 186,786 | 182,563 | 49.4% |
| India | 10,165 | pg. 31 | N/A | 10,165 | 100.0% |
| Laos | 1,890 | pg. 31 | N/A | 1,890 | 100% |
| Malaysia | 12,685 | pg. 31 | 3,424 | 9,441 | 74.4% |
| Myanmar | 3,106 | pg. 31 | N/A | 3,106 | 100.0% |
| Philippines | 89,037 | pg. 31 | 6,906 | 82,131 | 92.2% |
| Qatar | 1,720 | pg. 41 | N/A | 1,720 | 100.0% |
| Saudi Arabia | 5,157 | pg. 41 | N/A | 5,157 | 100.0% |
| United Arab Emirates | 10,356 | pg. 41 | N/A | 10,356 | 100.0% |
| Vietnam | 108,850 | pg. 31 | 1,805 | 107,047 | 98.3% |
| Total | 612,315 | 198,921 | 413,394 | 67.5% | |
In addition, the report does not include UN non-member states. Most — e.g. South Ossetia and Transnistria — aren’t likely to be major destinations for U.S. emigrants. However, the most economically-developed non-member — the Republic of China, which controls Taiwan and a few other islands — does have quite a few U.S.-connected people living there.
The statistics of Taiwan’s Ministry of the Interior — which count only foreigners who got residence visas on their U.S. passports — showed 12,742 Americans with valid residence permits in June 2010, and 12,647 in June 2015, a decrease of 95. There are also believed to be tens or even hundreds of thousands of dual citizens and green card holders living there as well (though unlike in South Korea, the government doesn’t keep very good track of them). For an example of the higher estimate, see this Apple Daily article — which at least has the courtesy to call them “Taiwanese people with U.S. citizenship or green cards” (擁有美國籍及綠卡的台灣人) rather than “American citizens abiding in Taiwan”.
Homeland tax myths
Homelanders of all political stripes share the perverse fantasy that U.S. natives who move abroad are “fleeing taxes” — the Republicans because they imagine it as vindication of their desire to lower taxes on Homeland corporations, the Democrats because they think the emigrants are moving to tax havens and so will have few Section 901 foreign tax credits to protect them from the IRS, and both sides because they think America is the World’s Greatest Country and the only reason anyone could possibly want to leave is for tax reasons.
In reality, as Amanda Klekowski von Koppenfels discussed, most emigrants are moving to places where they or their spouses have relatives and/or employment prospects. Those destinations will tend to be upper-income ones — employment prospects aren’t likely to be good in poor countries, and if your relatives are in a poor country, you’ll often find it better to bring them to the U.S., or to support them by working in the U.S. and sending money. And most upper-income countries have higher tax burdens than the U.S., meaning that emigrants should have plenty of foreign tax credits available to offset U.S. tax.
Many of those who do move to a lower-income countries (the majority of the popular lower-tax destinations) are children of non-citizens, and not earning any income at all. Even those who are adults often earn less than when they lived in the U.S. (either because they’re retiring or because their new job pays lower wages), almost always leaving them below the FEIE threshold and sometimes leaving them with too little income to have to file a U.S. tax return at all. This is particularly true of Mexico, one of only two lower-tax countries among the top ten destinations for American emigrants: the majority of U.S.-born people moving there are children, accompanying Mexican parents who are returning to the country (sometimes voluntarily, sometimes due to deportation). A 2015 study by the Pew Hispanic Center found that among the 1 million people who left the U.S. for Mexico from 2009 to 2014, 100,000 were U.S.-born children under the age of five. I suspect that something similar may be true for Ecuador, though I have not found any sources stating so explicitly.
As a result, the tiny minority in the U.S. government who know the actual situation of the American diaspora — some Treasury officials and Senate Finance Committee members — understand that the only way they can extract more money from us is by creating fictitious types of “income” on which no tax credits will be available, by breaking into foreign government-subsidised savings plans to pilfer their contents, by refusing to ameliorate double social insurance taxation, and by imposing obscene fines for paperwork errors. Different parties have emphasised different parts of this formula when in office, but all four of these trends were seen as early as the 1980s, and have expanded greatly since the 1990s.
Conclusion
Contrary to Homelander myths that people “flee America because of taxes”, taxes are not what drive people to leave the country. However, taxes certainly are what drive emigrants to despair once they’ve arrived in their (mostly higher-tax) destinations and settled down, leaving them with only three options: paying thousands of dollars for tickets back to the U.S. for the whole family, paying thousands of dollars to get all their IRS paperwork in order, or paying thousands of dollars to give up citizenship.
@Eric
Great post:
Yes, PFIC taxation is certainly an example of “reinventing income”. It’s an “interest charge on deferral”.
Yes, as your last paragraph indicates it is now impossible to live as a “U.S. tax compliant” citizen abroad.
Finally, I would add to your introduction what is in caps:
Thus, the only way Washington can get money out of the diaspora is by “INVENTING MORE OF THEM OUT OF THIN AIR”, fining them, by inventing “income” out of thin air, or by deliberately making their tax system incompatible with that of other countries. And that’s exactly what they’ve been doing.
Comical.
As a US tax slave, living off the plantation in the EU, my US tax bill for 2015 is estimated (at this point) to be ~$28000. If I left for tax purposes, I must be a moron.
Each year, I cut a similar sized check and each year I tabulate in my mind just how much I could be/have saved if I just renounced. This time of year is the worst because as the 1099s, K1s, etc. start rolling in the prior years tax carnage becomes clearer and clearer.
One day…
They have the Fed, that creates money out of thin air, but that’s not enough–they come after us and invent ways to extract money from us.
Because of the treaty, as you point out, most Americans abroad don’t owe the US any taxes. But they treat us like criminals if we can’t afford to take the risks of filing with them! Name me one homeland American family that has to pay an accountant thousands of dollars to file with the IRS to avoid penalties when they don’t owe any taxes. Name me one non-US-tainted Canadian family that has to pay an accountant thousands of dollars to file with a foreign tax agency to avoid penalties when they don’t any owe taxes.
We refuse to play their game because the risks are too high and the even the costs to pay compliance vultures would force our family into greater financial hardship and our kids would be forced to drop out of university.
@ Eric
Thank you for this terrific analysis. I’ve always wondered about Mexico which has a large American diaspora (estimates of 1 million plus) and yet is so silent on FATCA and not terribly supportive of attempts to fight it. I was picturing American retirees living there (they can live better on less in Mexico) and not considering there would be hundreds of thousands of this “diaspora” who are children born in the USA to Mexican parents. Of course they aren’t FATCA affected … YET. I’ve read that the flow across the US-Mexico border has been reversed in recent years. The whole Mexico picture is becoming clearer to me now. Mexican mamas and papas need to hone up on CBT/FBAR/FATCA … for the sake of their children. But will they?
http://www.pewhispanic.org/2015/11/19/more-mexicans-leaving-than-coming-to-the-u-s/
@EmBee:
the reason why we don’t see many Mexican/Americans complaining about FATCA and CBT might be that all the posts are in Spanish, not English.
@all:
Undeniably there must have been hundreds of thousands (if not millions) abroad Americans completely oblivious and tax non-compliant. My question as somebody who has just been introduced to the topic, has anyone been charged/sued, hit with hefty penalties for not filling tax return? Does IRS persecute such people on daily basis or are we worrying about something that may never come true?
Bill O’Reilly’s prepared to flee to Ireland for tax reasons.
@Fake Name. Hedge your bet and contribute to the lawsuits.
@Eric
Very interesting. It is pretty clear that diaspora has been a target since Credit Suisse, and the unwillingness of officials to change things in recent years speaks volumes. The evidence for deliberate targeting since the early 1980s is much sketchier, although there was some acknowledgement that this has been going on in AARO door knock video from two years ago.
@EmBee
The head of the Mexican accounting association spoke out about this in 2014, but in Spanish.
@ Jim
Yes, hefty fines and penalties have happened. This is an example of a “homelander” who paid 26 million in penalties because of her deceased husband’s foreign accounts, even though taxes owed were less than one million.
http://www.cnbc.com/id/100366680
There is Just Me’s ordeal which you can read about here. If he hadn’t fought tooth and nail his penalty would have been $175,000. Not everyone can do what he did.
http://isaacbrocksociety.ca/2012/02/04/letters-to-shulman-or-a-case-study-of-ovdp-communication-attempts-with-the-irs/
And then there’s Patricia’s terrible and costly ($80,000 FBAR fine) experience as reported to the Senate Finance Committee.
http://fatca.eu.pn/ (look under “Individuals” for Patricia M. Anderson d’Addario)
They are rolling out this pogrom slowly but you can be sure that it will pick up momentum. So yes there is need to worry but an even bigger need to contribute to whatever efforts are out there to fight FATCA.
Please explain:
In total, 138,011 U.S.-born people or U.S. citizens moved to countries with totalisation agreements, 134,610 moved to Mexico, and 50,999 moved to other countries without totalisation agreements.
Re:
and if your relatives are in a poor country, you’ll often find it better to bring them to the U.S., or to support them by working in the U.S. and sending money.
…and they often provide assistance-in-kind, such as good purchased in the USA and transported in checked luggage or shipped in packages, but either way, sales tax was paid in the State or District of Columbia where the cash register is located.
This is particularly true of Mexico, one of only two lower-tax countries among the top ten destinations for American emigrants: the majority of U.S.-born people moving there are children, accompanying Mexican parents who are returning to the country (sometimes voluntarily, sometimes due to deportation).
…and as a footnote, some persons seized by the Feds in the U.S.A. returned to Mexico “voluntarily” by waiving the deportation hearing. If they cannot earn wages while in custody they might as well waive the hearing to get home sooner.
@EmBee: thank you, but these were people who basically voluntarily turned themselves in. If they had not, how would the US government ever find out? Let’s say that was even before FATCA kicked in
“Tax laws main reason for US citizens’ decision to move abroad …”
Really? So US-born infants who have moved overseas with their parents are tax dodgers? When will this madness come to an end?
@Tom Alciere: re “please explain” — the U.S. has Social Security totalisation agreements with just 25 countries. If you’re self-employed or work for an American company in any country besides one of those 25, you end up owing both US SECA or FICA tax and whatever the local system charges you. (If you work for a local company you’re unaffected, for now.) The U.S. doesn’t allow foreign tax credits against SECA/FICA. And when it comes time to draw benefits, the U.S. will hit you with the Windfall Elimination Provision because of your foreign benefits.
Basically, the U.S. has two cynical fiscal incentives not to sign more agreements. First, they can double-tax U.S. citizens who move to countries w/o agreements. More importantly, they can pay nothing at all to the H-1B workers from those countries who go back home before ten years. H-1B visa lasts three years and normally you can only renew it once; if you can’t get a green card you have to leave. (When politicians say “immigrants will save Social Security”, this is what they really mean.)
The Social Security Administration under Bush II negotiated a totalisation agreement with Mexico. However there was such backlash from Democrats & Republicans alike that he gave up on it. I don’t expect that the current negotiations for a totalisation agreement with India are going to produce any better results. And the US is even dragging their feet on negotiating agreements with developed countries.
Three major first-world no-totalisation-agreement destinations since 2010 for American migrants: Singapore (+2,817), New Zealand (+2,506), Israel (+2,402).
Powerful post, Eric. Thanks!
The Mexican government had tried in the past to get the US to assist them in tracking assets that were stashed in the US, but not visible to the Mexican tax authorities:
See:
Letter dated 9 February 2009 to U.S. Treasury Secretary Timothy Geithner from Mexican Finance Secretary Agustin Carstens;
http://www.letemps.ch/rw/Le_Temps/Quotidien/2009/07/22/Finance/ImagesWeb/Lettre%20du%20Mexique%20aux%20US.pdf
http://www.taxanalysts.com/www/features.nsf/Articles/522A39903AFD6CFB8525761D004F113B?OpenDocument
August 24, 2009
‘News Analysis: How the U.S. Is a Tax Haven for Mexico’s Wealthy’
by Robert Goulder
http://taxjustice.blogspot.ca/2009/03/mexico-asks-for-tax-information-from-us.html
Friday, March 20, 2009
‘Mexico asks for tax information from the US’
http://www.theyucatantimes.com/2015/09/u-s-irs-and-mexican-sat-begin-sharing-info-on-bank-accounts/
Published On: Tue, Sep 29th, 2015
‘U.S. IRS and Mexican SAT begin sharing info on bank accounts’
And now, under FATCA, this appears to be the latest on the FATCA ‘reciprocity’ situation:
http://tax-expatriation.com/2015/12/14/foreign-government-criticizes-u-s-government-for-not-providing-fatca-iga-information-on-their-taxpayers-with-u-s-accounts/
‘Foreign Government Criticizes U.S. Government for NOT Providing FATCA IGA Information on Their Taxpayers with U.S. Accounts’
Posted on December 14, 2015 Updated on December 14, 2015
“..“he Commissioner of the Mexican IRS (SAT – Servicio de Administración Tributaria (SAT)), Mr. Aristóteles Núñez Sánchez just announced that the U.S. government is not holding up its side of the bargain under the U.S.-Mexico IGA. See, the Dec. 12, 2015 article en the national Mexican newspaper, El Universal, EU incumple entrega de informacion: SAT: Mexico ha hecho su parte, asegura Aristóteles Núñez
The article, which is in Spanish, explains that Mexico has complied with its obligations under the IGA by providing detailed information about U.S. taxpayers with accounts in Mexican financial institutions to the U.S. government. However, the U.S. government has not complied with its side of the bargain. “…………..”…
These two English language sites tend to follow some of the issues re Mexican/US tax situations:
http://yucalandia.com/answers-to-common-questions/irs-tax-issues-for-americans-living-and-working-abroad-in-mexico-master-article/
This one has both an English and a Spanish version:
http://tax-expatriation.com/version-en-espanol/
Caveat:
I am not citing them as an endorsement.
@Jim
Mary Estelle Curran was an undisclosed Swiss bank account case. She was trying to come forward, but her lawyers dilly-dallied and the U.S. government found out about the account in the meantime. So she did put herself forward, but that’s not what caused her problems. Fortunately, she got a sane judge who felt that the federal government’s attitude towards the case was wrong, which kept her out of jail.
@Publius: thanks for the info about Mary E. Curran. How did (could) the US government find out? FATCA did not work at the time.
It wasn’t FATCA that got Mary Estelle Curran. A Swiss account she had inherited was found when the U.S. government got the UBS data. Her husband had millions in an account opened decades before he died. The government really pursued her with a vengeance. Fortunately, she was able to convince the judge that she didn’t know much about finance and had been let down by her lawyers, who had not contacted the government soon enough.
It is difficult to get inside the brain of the U.S. government/IRS. My sense is that the U.S. government greatly overestimates how much U.S. persons know about FATCA and U.S. citizenship law. As of last May, 45,000 people had voluntarily come into compliance, but that is a really tiny figure compared with the number of U.S. persons abroad. I suspect that they are wondering where everyone is, especially since people with U.S. birthplaces are sitting ducks. As for fines, a friend of an acquaintance was hit with heavy penalties for not filing U.S. income tax: she was born in the U.S., but left as a child and did not consider herself to be American. I am not sure how they found her.
Publius: are there publicly known cases of penalties for failure to file by US citizens abroad?
Personally FATCA and my US birthplace made me start filing before I was “found”, even though tax owed is zero (and ironically enough I’m actually now waiting for my first ever tax credit from Uncle Sam).
Oh by the way,
“When it comes to tax rates, the US is no safe haven.”
For non-US persons it is.
@Publius: interesting info.
Is there a fine or penalty for failure to file tax return?
I was of the impression that there was no fine for failure to file US income tax. It is a different story if you actually owe tax money to the IRS, then they can asses what you have owed + charge you interest and penalty. But what if you don’t owe and don’t file?
FBAR is a different story, there are known penalties.