Cross posted from RenounceUScitizenship.

Introduction:

In other countries this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal but it is the same thing: Cash to politicians in return for favorable treatment from the government.

The U.S. tax system is not simply corrupt, it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored funders through the tax code without anyone realizing it.

Fareed Zakaria – America Needs a two page tax code

Unfairness to the general public:

There are those who believe that Mitt Romney has a number of “carried interests’ and takes advantage of the unfairness because:

US tax code very unfair – 1 of 2 – Allow for #carriedinterests to be taxed as capital gains when they are really income motherjones.com/kevin-drum/201…

— U.S. Citizen Abroad (@USCitizenAbroad) July 13, 2012

Unfair to U.S. citizens abroad:

On the other hand, if  you are a poor U.S. citizen abroad you will be destroyed by the unfairness of your non-U.S. mutual fund being subject to the PFIC provisions because:

US tax code is very unfair – 2 of 2 – taxes sale of a non-U.S. mutual fund as income, when it is really capital gain isaacbrocksociety.ca/2012/06/12/how…

— U.S. Citizen Abroad (@USCitizenAbroad) July 13, 2012

I guess the U.S. tax code is simply unfair!

But, why is it unfair? What is going on here? In March of 2012, Fareed Zakaria, did an interesting analysis on CNN called:

America needs a two page tax code. I highly recommend it.

Mr. Zakaria notes that:

We’re going to hear a lot of polarized rhetoric over the next few months. The Republicans and Democrats will seem to disagree about everything. But there is one huge and important area where there is a possibility – a possibility – of bipartisan action and that’s tax reform.

Most Americans – Republicans and Democrats – dislike the tax code. They’re right to do so. America has what is arguably the world’s most complex tax code. The federal code plus IRS rulings is now 70,000 pages long. The code itself is 16,000 pages. The statist French, for example, have a tax code of only 1,909 pages – only 12% as long as ours. And then there are countries like Russia, the Czech Republic, Estonia that have innovated and moved to a flat tax, with considerable success.

You have to understand, complexity equals corruption.

When John McCain was still a raging reformer, he used to point out that the tax code was the foundation for the corruption of American politics. Special interests pay politicians vast amounts of cash for their campaigns and in return they get favorable exemptions, credits or loopholes in the tax code.

In other countries this sort of bribery takes place underneath bridges and with cash in brown envelopes. In America it is institutionalized and legal but it is the same thing: Cash to politicians in return for favorable treatment from the government.

The U.S. tax system is not simply corrupt, it is corrupt in a deceptive manner that has degraded the entire system of American government. Congress is able to funnel vast sums of money in perpetuity to its favored funders through the tax code without anyone realizing it.

The examples given in this post are examples of extreme unfairness. How can it be that a “carried interest”, is taxed as a capital gain? How can it be that investing in a Franklin Templeton mutual fund in Canada, is taxed in such a punative way (think PFIC), when to invest in the same fund in the U.S is not?

The Price of Unfairness – The marketplace of democracy

It is obvious that the difference in tax treatment is unrelated to the differences in the substance in the investment. The difference in treatment is  the result of other considerations.

I suspect that the perverse tax treatment – the “PFICization” of foreign mutual funds – is the result of lobbying from the U.S. mutual fund industry (and to apply this to U.S. citizens living outside the U.S. is absurd). What about the “carried interest” issue? Could lobbying be a factor here? I suspect that it is.

(For the record, I don’t believe that Mr. Romney is doing anything wrong and I believe that he is doing a lot right. Obviously, every person should organize his affairs to pay the least tax legally allowable. All of Mr. Romney’s has been lawfully earned. Those who are upset by this should aim their guns at the legislative process (or corruption) that allows this.)

We know the price of favored treatment – but what about the cost? Hurting the country to help yourself!

As Mr. Zakaria notes, favored treatment in the tax code comes at a price for those seeking the favored treatment. The cost is borne by the country as a whole. This is one more example of a situation where it helps an individual Congressman to hurt the United States as a whole.

In the mean time, I highly recommend Fareed  Zakaria’s commentary on the U.S. tax code.

Oh and a final thought – What about U.S. citizens abroad?

Because U.S. citizens abroad are not an influential voting block – it is harder for them to “buy” the kind of tax treatment they are owed. Conversely, because they are not a strong voting blog they are an easy group to scapegoat. As ACA has pointed out: U.S. citizens abroad are suffered from 50 years of abuse!

As Victoria points out in her recent post, there are good reasons for U.S. citizens abroad to vote.