Introduction – your assignment if you choose to accept it …
After having read this post, please consider the following questions/thoughts and comment …
1. Do you see similarities between the proposed wealth tax and the tax regime that is imposed on Americans abroad?
2. Do you see how FATCA and citizenship-based taxation provide the support and foundation for a wealth tax?
3. Do you believe that a proposed wealth tax would make it more likely that the United States will retain citizenship-based taxation?
4. Note that the Holding bill is NOT a move away from citizenship-based taxation. While retaining citizenship-based taxation it removes foreign INCOME from the U.S. tax base.
On to the post …
The Isaac Brock Society has been a leader in providing education about the U.S. policy of citizenship-based taxation, FATCA (information exchange in general) and offshore accounts (to the extent that the United States regards the local day-to-day financial accounts of Americans abroad as offshore relative to the United States). The purpose of this post is to suggest how these three things have become relevant to U.S. tax policy in general and the U.S. election in particular. You may know that Massachusetts Senator Elizabeth Warren is proposing a wealth tax. As a result, it is likely that a wealth tax will receive significant discussion (at least among the Democrats). Interestingly, President Trump (before he became President) had flirted with the idea of a wealth tax (although I suspect that he would not support a wealth tax in his current role as President).
Why Americans abroad are uniquely positioned to contribute to the debate on a wealth tax
Individuals who are tax residents of other countries and are subject to U.S. worldwide taxation are living the confiscatory effects of U.S. tax policy. They are already subject to taxes that are not income taxes but are in reality wealth taxes. A few examples include: phantom capital gains taxes, Transition tax, GILTI, etc. The cost of filing returns and information reporting is also a wealth tax. In addition, they are already subject to the kind of information reporting that would be required to make a wealth tax work.
What is a wealth tax and how is it different from an income tax?
Income tax: An income tax generally is taxation based on the receipt of income. Most of the time a tax is imposed on the actual receipt of income. But, the United States seems to be moving in the direction of creating fictitious income events. Examples of fictitious income include the U.S. Section 877A Expatiation tax and any form of Subpart F income (including the Transition Tax, GILTI and traditional Subpart F attribution). A tax that is not based on an actual income realization event is (I would argue) a disguised wealth tax.
Wealth Tax: A wealth tax is a tax based on the value of assets. No actual income realization event is required. There are many different kinds of wealth taxes. On the most basic level, your annual property tax bill is a wealth tax. Estate and inheritances taxes are arguably wealth taxes (although a death is required to trigger them). Many countries have many different kinds of wealth taxes.
Why “U.S. Persons Abroad” are likely to understand a wealth tax much better than Homelanders
Consider the following …
A modern wealth tax can overcome these three weaknesses. First, offshore tax evasion can
be fought more effectively today than in the past, thanks to recent breakthrough in cross-border
information exchange, and wealth taxes could be applied to expatriates (for at least some years),
mitigating concerns about tax competition. The United States, moreoever, has a citizenshipbased tax system, making it much less vulnerable than other countries to mobility threats.
Second, a comprehensive wealth tax base with a high exemption threshold and no preferential
treatment for any asset classes can dramatically reduce avoidance possibilities. Third, leveraging
modern information technology, it is possible for tax authorities to collect data on the marketvalue of most forms of household wealth and use this information to pre-populate wealth tax
returns, reducing evasion possibilities to a minimum. We also discuss how missing market values
could be obtained by creating markets. In brief, the specific way in which wealth was taxed in a
number of European countries is not the only possible way and it is possible to do much better …
Note that the three excerpts that are bolded, play a significant role in the day-to-day lives of Americans abroad. They are subject to citizenship-based taxation, information is disclosed through FATCA, FBAR, etc. From a U.S. perspective their lives are “offshore”.
What is the Elizabeth Warren Wealth Tax Proposal?
Elizabeth Warren’s proposed wealth tax on the most well-off Americans is very popular. But her fellow Democratic politicians have largely seemed to remain cool to her idea.
Opinion via @MichaelRStrain https://t.co/9YK1me7SPo
— Bloomberg Tax (@tax) September 6, 2019
Without getting into the details (which are sure to evolve), the Warren proposal would impose a tax on the value of assets above a threshold amount (currently I believe 50 million U.S. dollars). This will be sold as a tax that impacts only the very rich (do you remember the Section 877A Exit Tax was referred to as the billionaire’s tax?). It may start out impacting only the (so-called) very rich but it will quickly (like the Alternative Minimum Tax) work it’s way down to the the middle class.
_____________________________________________________________________________________________
In order to understand the confiscatory effects of a tax imposed on wealth without a correlative income event, consider the following:
A two percent tax on wealth would (at a tax rate of 50%) require a 4% return to break event. There would NOT be a return in either income or asset value every year. Yet, there would be a wealth tax every year. A wealth tax is guaranteed to simply confiscate wealth!
________________________________________________________________________________
Long time Brocker Tim Smyth added a post to the American Expatriates Facebook group where you will find interesting thoughts/comments on Senator Warren’s proposed wealth tax.
https://www.facebook.com/groups/AmericanExpatriates/permalink/1337912283041507/
The comments reveal a hostility to her wealth tax. But, most interestingly, it’s clear that Americans abroad (because they have been exposed to Citizenship-based taxation and FATCA) have a heightened understanding of what this proposal means! Samples of the comments include:
Unreal. It talks about CBT like it’s a great weapon in hands of the gov against such things as “mobility threats”.
Excerpts: “The United States, moreoever, has a citizenshipbased tax system, making it much less vulnerable than other countries to ‘mobility threats’. Second, a comprehensive wealth tax base with a high exemption threshold and no preferential treatment for any asset classes can dramatically reduce avoidance possibilities”….. “Warren’s proposal would introduce an exit tax of 40% of net worth which would greatly reduce incentives to expatriate for tax reasons.”……
‘Building on the existing exit tax, Sen. Warren’s proposal would introduce an exit tax of 40% of net worth which would greatly reduce incentives to expatriate for tax reasons.’ What have some of us been saying? Get out before it gets worse?
“The exit tax, formally known as the expatriation tax, is essentially a tax on all unrealized capital gains upon expatriation. It applies to high income (incomes over $160,000) or high wealth (wealth above $2 million) expatriates”
WRONG: the income does not matter, it’s the tax liability that needs to be > 160k for x number of years
Quote: “The
rich can evade the wealth tax by putting their wealth in offshore tax havens (e.g., Switzerland)
which do not share information with foreign tax authorities. ”
WRONG: Go and try to hide your assets in Switzerland. First it is not legal, 2nd these days are loooong gone.
This doc is full of approximations proving the self centering view of the authors. They are still propagating the dogma of people living abroad = tax cheats.
What is the “doc” to which the comments refer?
The “doc” is a paper that appeared on the Brookings Institution site where it is described as:
SUMMARY
Emmanuel Saez and Gabriel Zucman present the key elements needed to successfully implement a progressive wealth tax in the United States. They estimate the wealth tax base is between 9 and 13 trillion dollars for a wealth tax applied to the 0.1% richest families, depending on the wealth measurement used. Using a new model of wealth taxation of billionaires to illustrate the long-run effects of wealth taxation on top fortunes, they find that a moderate wealth tax in place since 1982, with a 3% marginal tax rate above $1 billion, would have reduced the total share of wealth owned in 2018 by the 400 richest Americans from about 3.5% to about 2%. A more radical wealth tax, with a 10% marginal tax rate above $1 billion, would have reduced this share further to about 1%.
CITATION
Saez, Emmanuel, and Gabriel Zucman. 2019. “Progressive wealth taxation” BPEA Conference Draft, Fall.
You can download the paper from their site. I have saved you the trouble by uploading it into this post:
For those who think that the United States has historically had a narrow tax base and low income tax rates, think again. The first paragraph of the paper includes a bit of U.S. Tax History as follows:
Income and wealth inequality have increased dramatically in the United States over the last
decades (Piketty and Saez, 2003; Saez and Zucman, 2016; Piketty, Saez, and Zucman, 2018).
A long-standing concern with wealth concentration is its effect on democratic institutions and
policy-making.1 The view that excessive wealth concentration corrodes the social contract
has deep roots in America—a country founded in part in reaction against the highly unequal,
aristocratic Europe of the 18th century. Before 1776, the northern American colonies already
taxed wealth including financial assets and other personal property, instead of land only as in
England (Saez and Zucman, 2019, Chapter 2). Sharply progressive taxation in the 20th century
was an American invention: the United States was the first country in 1917—four years after
the creation of the income tax—to impose top marginal tax rates as high as 67 percent on the
highest incomes. It was also the first country, starting in the 1930s, to impose high top tax rates
(of 70% or more) on wealth at death. No European country ever imposed similarly high top
inheritance tax rates (Plagge, Scheve, and Stasavage, 2011, p. 14). To be sure, policies such as
antitrust, lobbying regulation, or campaign finance can also curb the power of extreme wealth;
but historically these policies have tended to come (and go) together with progressive taxation
(Piketty, 2019).
Although I recommend that you read the paper, we can think Wall Street Journal Tax reporter Richard Rubin for providing (from his perspective) a Twitter summary.
A Twitter summary thread of the article by Wall Street Journal Tax Journalist Richard Rubin
Today's tax policy reading is the new Saez-Zucman paper on wealth taxes. A few things jumped out at me: https://t.co/axpkfZEaZj
— Richard Rubin (@RichardRubinDC) September 5, 2019
To read the thread, click on the link here.
Your comments would be appreciated
1. Do you see similarities between the proposed wealth tax and the tax regime that is imposed on Americans abroad?
2. Do you see how FATCA and citizenship-based taxation provide the support and foundation for a wealth tax?
3. Do you believe that a proposed wealth tax would make it more likely that the United States will retain citizenship-based taxation?
4. Note that the Holding bill is NOT a move away from citizenship-based taxation. While retaining citizenship-based taxation it removes foreign INCOME from the U.S. tax base.
Expatriate Americans who live in countries with a wealth tax such as Switzerland would have to pay double tax with no credit. (Rev.Rul. 70-464 already excludes the credit against federal income tax).
Look to the left. Look to the right. One more reason why, what you see is the last generation of expatriate Americans.
I am going to add some more comments later this afternoon but there are also some additional things to keep in mind.
1. Canada interestingly enough has already gone down the road even further to wealth taxation especially via the means of “deemed disposition” when no “actual” realization event occurs both upon becoming a non resident and upon death.
2. Constitutionally the government of Canada stands upon much stronger ground than the US does in imposing such taxes via section 91(3) of the BNA Act which allows Parliament to raise money by any means or method while the US Congress is restricted by the 16th amendment to the US Constitution.
https://laws-lois.justice.gc.ca/eng/Const//page-4.html#docCont
For an extra credit question can anyone explain what might be the Constitutional issues with individual provinces imposing a “departure” tax upon residents moving to different provinces. Actually the ability of provinces to impose taxes on real property is already well proven constitutionally not just because individual municipalities i.e. Toronto are creations of the province i.e. Ontario but provinces such as Ontario already impose real property tax in areas of the province that are not part of any municipality(most often in far northern Ontario).
https://www.fin.gov.on.ca/en/consultations/landtaxreform/
@Tim
Yes, this is one of a series of fictitious tax events – but at least it is fictitious income tax. I.e. a deemed capital gain (a capital gain being income). The U.S. Exit Tax is of course similar in concept and goes further in terms of the range of things subject to fictitious income tax events. But, I do agree that all of these things are taxation based on no receipt of income.
With respect to your final question assume you are referring to Charter Section 6 the Mobility Rights Section of the Charter which guarantees a move from one province to another . I believe that the European Union prevents Exit/Departure taxes when an individual moves from one EU member state to another..
One may hope that the U.S. Bankers Association would ride to the rescue and resist all the extra FATCA type compliance on U.S. financial institutions.
One may imagine extra and excessive compliance/compliance expense on everyone, even if they would not owe a wealth tax. It would have to go beyond existing rules for USP overseas. All nonfinancial assets would need to be tracked and valued each year. = lots more compliance for USP overseas, lots more threat of penalties to produce compliance, and more possibility of currency shifts creating phantom wealth.
Maybe extra threat of penalties for nonreporting of U.S. resident U.S. assets may wake them up, to the excessive and costly compliance of it all.
Here is how it could be diverted: put only on the value of share ownership in public/private companies. If it is supposed to be a Google tax then only apply to Google caliber company ownership. All the focus is on the wealth being accumulated in public companies, so why not focus there (and spare the rest of us)?
We may see by this the DNA of the Democrat party inclined toward tax and compliance, and may appreciate that the Republican Party is less inclined to regulation/taxation.
I lived under a wealth tax regime in the Netherlands on top of the other high taxes they have…. it is one brutal hombre. I felt violated. The Dutch complained mightily because it hit anyone with “wealth” above 25K euros. I learned through buying a gift for someone the rich had ways to get around from being soaked. They invested in gold and silver coins and not in small numbers, but in large amounts. With precious metal coins there was no tax.
The problem we have in the US is Warren, Trump, Bernie, et.al., know the American are very ignorant. They know if they can identify a villain and identify “them” as the source of their frustrations, that will resonant well with their base. Then again, this is nothing new and is well rehearsed. It gets the votes.
Expats fully understand the system is corrupt to the core, where pay-to-play is what gets you a seat. Money talks.
These are some comments I made on Facebook.
Where I think the issue with Warren is at the moment is she will quite violently divide American expats especially in France. The fact her top economic advisers are French is NOT a coincidence. There is a segment of the expat community and just French people in general who really love Warren and will walk on water for her. People like Arun Kapil and Art Goldhammer for example.
The more dangerous thing which goes well beyond FATCA into the bigger realm of French-US relations is this idea by some like Kapil and Goldhammer who are unhappy with Macron and how the last French election turned out is somehow electing Warren in the US will overturn and overthrow Macron in France. You also hear fainter echoes by some left wing Canadians who don’t like Justin Trudeau and want someone more “left-wing.” Warren people like Zucman and Piketty have quite specifically called for French people in the midst of the Yellow Vest protests unhappy with Macron to support Warren in her quest to be US President.
In terms of the Trudeau/Canadian/Warren element here is nifty political guide of where different politicians lineup with each other. Yes I know their are some Philpott and Wilson-Reybould fangirls hear who won’t like me associating Warren with these two Canadians but if you think about below is basically true. Importantly there is a group mostly women but some men who dislike Trump in both Canada and France but hate the slickness and expensive tastes of Trudeau and Macron(I think Macron is much more substantive than JT but whatever) and gravitate towards towards Warren, JWR, and Philpott who are all fawned upon in much of the media.
Trump = Boris Johnson
Elizabeth Warren = Jane Philpott & Jody-Wilson-Reybould
Emmanuel Macron -Justin Trudeau
Bridgette Macron(his wife) – Chrystia Freeland – Delphine O- Sophie In’t Veld
Bernie Sanders- Jeremy Corbyn
Did everybody see this?
https://www.wsj.com/articles/irs-gives-tax-break-to-some-american-expatriates-11567797689
“The basic plan is to levy a 2 percent tax on fortunes worth more than $50 million, and a 3 percent tax on fortunes worth more than $1 billion. According to the post, Saez estimates this tax would hit approximately 75,000 families and raise $2.75 trillion over a 10-year period.” https://www.vox.com/policy-and-politics/2019/1/24/18196275/elizabeth-warren-wealth-tax
The Warren proposal, which in my view is unlikely ever to get traction, presumably would consist of brackets, or at least “notch credit”, to avoid perversely imposing the higher tax on the lower asset brackets. The Brookings paper discusses some of the practicalities and anomalies, and points out that eight European countries abandoned wealth taxation. https://www.brookings.edu/wp-content/uploads/2019/09/Saez-Zucman_conference-draft.pdf?fbclid=IwAR1tu_uoNpRXbvke6v59X5BKU2ixQ6_rNn8cmFTTU5i66lEy8RvGPV7Z2F0 In an era of low and zero interest rates, wealth taxation can be confiscatory. Here are some links relating to Swiss cantonal wealth taxes
https://www.swissinfo.ch/eng/taxation_swiss-solutions-to-wealth-tax-conundrums/44764552 (The highest marginal rate, 0.80%, is levied by Basel Land
https://www.swissinfo.ch/eng/taxation_swiss-solutions-to-wealth-tax-conundrums/44764552 (FT article)
It’s hard to imagine that any of the “75,000 families” mentioned are readers of Isaac Brock. And it is likely that many have engaged in creative tax planning such as dynasty trusts, family limited partnerships and other arrangements that will escape wealth tax just as they escape all or much of estate taxation and the highest rates of income tax.
I would suggest that engaging in single-issue voting and panicked commenting over a proposed, but unlikely, wealth tax diverts attention from the real issues that Americans, including expatriates face: the increasing regressiveness of U.S. taxes and the lack of interest (or lack of success) of foreign countries in renegotiating their tax treaties with the U.S. to protect, among other things, pensions from double taxation and PFIC imposition. The U.K.-U.S. treaty is a better model, and clearly the U.S. Treasury in not totally opposed to the principle. The Senate’s refusal to take up ratification of the 2004 SS Totalization Agreement with Mexico does suggest a problem somewhere, on some issues, but that may be related to the practical issue of cost: having to actually pay Mexican returnees the pensions for which they accrued FICA and SET credits https://www.ssa.gov/international/Agreement_Texts/mexico.html
The WSJ article as linked by Zla’od is paywalled. Anyone care to paraphrase?
Details and commentary here:
http://www.citizenshipsolutions.ca/2019/09/06/irs-provides-limited-tax-relief-for-certain-individuals-renounceding-after-march-18-2010/
As well, a Brock post to read and contemplate this new IRS announcement.
http://isaacbrocksociety.ca/2019/09/07/is-the-irs-enticing-a-sub-group-of-deemed-and-former-us-citizens-to-enter-the-system-including-unstated-potential-consequences/
Following.
https://www.law360.com/tax-authority/articles/1197912/fatca-information-exchange-could-aid-wealth-tax-enforcement
@andy05. “I would suggest that engaging in single-issue voting and panicked commenting over a proposed, but unlikely, wealth tax diverts attention from the real issues that Americans, including expatriates face”
Perhaps. But stranger things have happened. Who can swear there won’t be a wild blue wave in 2020, sweeping the Warren-Booker ticket to power along with 55 seats in the Senate and a House majority? Our collective experience with FATCA and such here does indeed probably make single-issue voters of many people. That said, even a single-issue voter would be hard-pressed to know who to vote for (both parties included) in this case.
1. Do you see similarities between the proposed wealth tax and the tax regime that is imposed on Americans abroad? You’re forced to value your wealth, a difficult, risky, costly and time-consuming endeavour. Not everyone can imitate Trump and wildly vary estimates of wealth depending on whether he needed a loan or was busy avoiding taxes.
2. Do you see how FATCA and citizenship-based taxation provide the support and foundation for a wealth tax? Absolutely. FATCA makes it practically impossible to have (even legitimate) accounts abroad, and if you do, their value is declared.
3. Do you believe that a proposed wealth tax would make it more likely that the United States will retain citizenship-based taxation? Hmmm, hadn’t thought of that. Well of course, because even if you move away, you can’t avoid the tax (and of course the only reason people move away is tax avoidance).
I think the wealth tax is unlikely to get through the Senate, even with a Democratic majority, but based on engaging with Warren supporters on Twitter and reading her recent comments supporting citizenship-based taxation (she said she does not support revenue-neutral RBT), I think we’d likely see very unfavorable tax changes at the regulatory level and increased enforcement of the existing crazy rules under a Warren administration. These people want the US to control everything and regard anything foreign as an act of betrayal.
@MN
The critical concern for the vast majority of US persons outside the US would be enforcement, not changes to the tax laws or policies themselves. For US tax obligations to become enforceable – currently they are not, with rare exceptions – the US government would need to renegotiate tax treaties and depend on the cooperation of other governments. Yes, it happened with FATCA, but that was only data; collecting actual money from a country’s own residents and citizens is a different matter. It’s not impossible, but it’s a tall order.
Only data? You mean the gold of the 21st Century …
As you point out, anything is possible.
The only thing that will assist ALL (compliant or noncompliant) people targeted by these laws is – well, getting rid of the laws.
The general problem of the laws is not going to go away with noncompliance.
Laws that have been ignored or not understood have laid dormant for years and years and then become a problem.
Some examples include:
– FBAR
– PFIC
– Citizenship-based taxation
Sure you can say – well everybody could have ignored those laws. But, it would have been a lot easier if these laws did not exist in the first place.
Indeed, it would be ideal if those laws did not exist.
Failing that, FBAR, PFIC, CBT etc. only become problems for those who enter the US tax system. FATCA, in Canada at least, only impacts those who disclose their US status to financial institutions. US persons need this information to protect themselves.
More to the original point, people shouldn’t act like the sky is falling every time they hear the name Elizabeth Warren. The US can raise tax bills all it wants but if it can’t forcibly collect, then it can be ignored.
I’m not the slightest bit hopeful those laws will go away anytime in the foreseeable future. Why? Because anyone who argues in favor of changing them will immediately be labeled by their opponents as soft on tax cheats and condoning tax evasion. Common sense and logic have nothing to do with it.
Its rare a US politician would be willing to put themselves in that position just to make life easier for a relative handful of expats who count for nothing at election time. All downside with no upside.
I don’t believe that Warren’s wealth tax will ever come to pass, but if somehow it did, my prediction is that astounding amounts of wealth will vanish into thin air in a very short period of time.