Expat homeowners will see some benefit; expats with other local assets won’t
A couple of weeks ago, Timothy Walberg (R-MI) introduced H.R. 6225, a short series of tax code amendments to “provide for economic growth and personal financial liberty”. Its full text is finally available. Right before the summer recess, Congresscritters introduce all sorts of tax legislation for the purpose of grandstanding and campaigning rather than actual lawmaking. Walberg’s bill is more of the same, but at least it contains the kernel of a nice idea: indexing individual taxpayers’ basis in certain assets to the cost-of-living adjustment.
The significance of Walberg’s plan is that when people sell their assets and pay capital gains tax, they’d only be paying tax on the amount that actually reflects an increase in the value of the asset, as opposed to the decrease in the value of the U.S. dollar — unless that asset is an ETF, a mutual fund, or a business you formed in the country where you actually live, in which case you’re clearly an Evil Tax-Evading Traitor who doesn’t deserve the benefits of “personal financial liberty”.
The relevant part of Walberg’s plan reads:
(2) Stock in certain foreign corporations included
For purposes of this section
(A) IN GENERAL—The term ‘indexed asset’ includes common stock in a foreign corporation which is regularly traded on an established securities market.
(B) EXCEPTION—Subparagraph (A) shall not apply to
(i) stock of a foreign investment company,
(ii) stock in a passive foreign investment company (as defined in section 1296),
(iii) stock in a foreign corporation held by a United States person who meets the requirements of section 1248(a)(2), and
(iv) stock in a foreign personal holding company.
In otherwords, if you are a U.S. Person abroad who invests where you actually live as opposed to a foreign country like the U.S., the benefits of Walberg’s inflation-indexing would be limited to your house and your stocks. Granted, this would already be a welcome bit of relief to U.S. Persons in Canada or Switzerland who can’t move house because they’d have to pay capital gains tax on inflation-driven U.S. currency depreciation, in addition to the actual rise in the value of the house.
But notice what’s explicitly excluded from the benefits of Walberg’s plan. Exchange-traded fund on your local stock exchange? Sorry, “passive foreign investment company”. Local REITs? Sorry, “foreign investment company”. A small business you built with your own sweat and tears (of course using infrastructure paid for — and workers educated by — the country in which you actually live)? Sorry, not “regularly traded on an established securities market”. I’m only surprised he didn’t explicitly try to exclude foreign real estate as well.
(For those of you who are wondering, 26 USC § 1248(a)(2) referred to in clause (iii) above is yet another tiresome anti-expat provision which denies even the normal capital gains treatment — let alone indexed treatment — to certain owners of “foreign” corporations, and instead forces them to treat capital gains from the sale of a “foreign” corporation as if they were dividends. It’s an extension to the Subpart F tax regime that was obviously aimed at rich homelanders with international investments, but utterly missed its target and instead inflicted a bunch of collateral damage on U.S. Persons abroad.)
It’s also highly doubtful that Walberg’s plan would affect the treatment of capital gains under the § 877A expatriation tax. Of course, if you did have any assets that would benefit from Walberg’s plan, you could probably just sell them right before giving up U.S. citizenship, and buy them back afterwards. However, as detailed above, many of your assets may not be “indexed assets” — unless, ironically, you exactly match the NBC Nightly News stereotype of renunciants as people who actually make all their money in U.S. assets and then “flee” to the Cayman Islands.
My heavily-biased conclusions
The above was merely a factual analysis of the scope of this proposed tax reform. Now here’s my political rant. Walberg’s plan is yet another example of a phenomenon which U.S. Persons abroad need to understand: Republicans do not give a fig about you. They are just as bad as the Democrats. They may want to cut taxes and paperwork, but they emphatically do not want to cut your taxes or your paperwork. They do not care that the U.S. is the only country on earth that imposes citizenship-based taxation, because they do not know or care about other countries anyway. Even when they propose a tax cut, they make sure the benefits are available to Homelanders only, just like “despicable” hypocrite John Duncan (R-TN) did with his “Bring Jobs Back Home” bill.
Similarly, don’t be fooled into thinking that recent calls for “territorial taxation” are intended to benefit you. They are intended to benefit U.S. corporations. It is perfectly possible to write the tax code in such a way that there’d be a territorial system for corporations but a worldwide citizenship-based taxation system for individuals. They’d have to eliminate a few strange tax breaks that no one cares about, like the Section 962 election, but it’s easily doable. Have no doubt: the Republicans would happily trade away the interests of expats — un-American traitors who mysteriously refuse to live in the Greatest Country on Earth™ — for something that actually benefits their base, like a “repatriation holiday” for corporations or another couple of points shaved off the estate tax rate.
Incidentally, Walberg just won the Republican primary in his district. He defeated challengers including Dan Davis, whose platform called for an 11% flat tax and total reform of the IRS. In his bid for a third term this November, he will face off against trial lawyer Kurt Haskell. Do I have any voting advice for U.S. Persons abroad who are registered in his district? I could say “hold your nose and vote for Walberg instead of letting another one of Carl Levin‘s buddies get a seat in Congress”. But I think it makes much more sense to encourage you to vote with your feet and with your passport.
An amazing piece of work. May I ask what would ensure that PFIC rules and Form 8621 would not apply to non-resident US persons? Perhaps it it is imherent in the bill, but for many of us, this rule intended for corporations and the super-rich has cost us dearly and made it impossible to invest in retirement funds equivalent to IRA funds in our country of residence while at the same time we ineligible for IRA savings in the US. It is important for our financial planning that foreign mutual funds and retirement plan are not seen as PFICs for non-resident US persons.
*Just Me, a separate post as well as a separate web site for the impressive effort would be better. If I have time, maybe I’ll play around with a web site and see if I can come up with something, unless someone else has a better idea.
*It sounds like an effort to brighten up the slave quarters with some new curtains and perhaps a new coat of paint. What we really need is an emancipation proclamation to remove the bonds of citizenship-based servitude.
^^ haha, too funny Roger. Sometimes I really feel that Americans dislike other Americans abroad. Maybe the politicians think that we are on some adventure while they are sitting in traffic on the Beltway.
I said it somewhere else on here, but I would like to see an American-resident invest in a foreign mutual fund. It’s most likely impossible nowadays. Whereas here, it’s pretty simple; you just pay 15% capital gains tax when you decide to repatriate the money. Nobody is treated like a criminal. I personally haven’t done it because the bank fees are high and there are many decent non-financial investments here. (Plus, I’m just a small fry; I don’t have money to toss around.)
@Just Me, You’re welcome.
@Lisa, In the case of PFIC, the law mentions only “United States persons”. Many sections of the Internal Revenue Code use this term. The definition of “United States person” is in section 7701, paragraph (a)(30). I did the trick by changing “citizen or resident” into “resident”, and later applying the definition of residents to any individual, not only foreigners as it is currently done. You can see the relevant changes on page 16 of my draft (see “Definitions”). If I did this draft right, it completely cuts the ties between citizenship and taxation, and frees nonresident US citizens from any reporting requirement.
@swisspinoy, There is a separate post here: http://isaacbrocksociety.ca/2012/07/23/shadow-raider-is-rewriting-the-united-state-internal-revenue-code/. I just added a comment here too for more visibility. I don’t think I have permission to add new posts.
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Since the topic is inflation in the headline, I thought you might get a kick out of this… Just for you Eric, and Petros if you are reading! 🙂
Hyperinflation in Hell: An Economics Comedy Routine
Re: “Hyperinflation in Hell” — I liked it too. Still ROTFLMAO. 🙂