In case you hadn’t already figured it out, this is the shape of things to come for U.S. Persons abroad: relentless bipartisan attacks on the Foreign Earned Income Exclusion in the name of “simplifying the tax code” and “cutting subsidies to favoured groups”, because the “non-partisan” Joint Committee on Taxation (which is composed entirely of Homelanders) classifies it as a “tax expenditure”. The latest effort in this direction: Dennis Ross (R-FL)’s HR 6474, which purports to implement the recommendations of the Simpson-Bowles Commission regarding territorial taxation. It contains provisions to phase out 20% of the FEIE every year until it is fully eliminated in 2017:
SEC. 271. FIVE-YEAR PHASEOUT OF CERTAIN TAX EXPENDITURES.
(a) In General- Effective for taxable years beginning after December 31, 2012, the amount allowable as a credit, exclusion from gross income, exemption from taxation, or deduction for the taxable year under the tax provisions specified in subsection (c) (determined without regard to this section) shall be reduced by the applicable percentage of the amount so allowable …
(c) Specified Provisions-For purposes of this section, the tax provisions specified in this subsection are as follows:
(1) Section 911 of the Internal Revenue Code of 1986 (relating to citizens or residents of the United States living abroad).
Boom! Right there on top in pole position, the very first “tax expenditure” they propose to cut. That in itself should tell you volumes about Congress’ attitude towards U.S. Persons abroad.
Ross’ bill also proposes lowering the personal income tax rate to 10% for incomes under US$100,000 and 20% for incomes above that level, and the capital gains tax rate to 0% for capital gains under $1,000,000. At first glance, this would seem to be a significant benefit to U.S. Persons abroad as well as Homelanders (if those reduced rates prove to be realistic — which, given the U.S.’ massive budget deficits, they do not appear to be). There’s “only” two problems.
First, Ross’ bill does not eliminate any of the ridiculous red tape that U.S. Persons abroad are expected to file with regards to “foreign” bank accounts, “foreign grantor trusts” (also known as our retirement plans, educational and medical savings plans), and “passive foreign investment corporations” (mutual funds, index funds, corporations owning a rental property to provide for limited liability in case of a tenant lawsuit). This means the continuation of $3,000 tax return preparation costs for middle-class Americans who exercise their human right to leave their country of origin — made even more complicated by the elimination of the FEIE. Instead of the comparatively-simple Form 2555, U.S. Persons abroad will have to wrestle with multiple copies of Form 1116 (one for each category of income, each bringing with it the struggle to figure out which tax paid in which local tax years corresponds to which U.S. tax year).
And of course, the IRS would reserve the ability to levy five and six-digit fines against people with three digit tax deficiencies, or use the threat of those fines to herd Canadian grandmothers into the OVDP where they can “volunteer” to be fined a mere 27.5% of their assets. In otherwords, Homelanders who fall behind on their taxes get a tax rate of some small multiple of 10%; we U.S. Persons abroad get a tax rate of 10,000%. How do you like that tax cut?
Second, in addition to the paperwork, Ross’ bill retains all of the “Internal” Revenue Code’s punitive booby traps on income from CFCs or PFICs, which result in capital gains being treated like ordinary income or even worse. Phil Hodgen outlines the godawful mess that is PFIC taxation. Other, more obscure provisions — like 26 USC § 1248 relating to treatment of income from the sale of stock in a CFC — remain lying in wait like snakes in the underbrush to bite ordinary Americans abroad selling small businesses. Homelander corporations, well advised by expensive international tax lawyers the rest of us cannot afford, will effortlessly find their way around these punitive taxes — meaning in reality they apply only to us little folk.
Now, here comes the “territorial” part of Ross’ bill: it uses the taxes and penalties raised from U.S. Persons abroad to cut taxes on Homeland corporations, allowing them to repatriate their foreign profits with a waiver of 85% of the U.S. tax that would be due,
SEC. 206. RENEWED TEMPORARY DIVIDENDS RECEIVED DEDUCTION.
(a) Election- Subsection (f) of section 965 of the Internal Revenue Code of 1986 (relating to election) is amended to read as follows:
(f) Election- The taxpayer may elect to apply this section to–
(1) the taxpayer’s last taxable year which begins before the date of the enactment of this subsection, or
(2) the taxpayer’s first taxable year which begins during the 1-year period beginning on such date.
Such election may be made for a taxable year only if made on or before the due date (including extensions) for filing the return of tax for such taxable year.
Naturally, if you’re a U.S. Person abroad, you don’t get to treat any of your “foreign” profits this way. Remember kiddies, corporations are people too — except when it’s more convenient not to be — and U.S. Persons abroad are Americans who should be proud of their full membership in the Greatest Country On Earth™ — except when it comes time to distributing the tax goodies, which are reserved solely for Homelanders.
(Technically speaking, there does exist something called a “Section 962 election” allowing an individual to choose that his or her “foreign” dividends be taxed at corporate rates. It’s so obscure and rarely-used that it doesn’t even have its own tax form, but has to be taken by attaching a free-form letter to your tax return and writing “Section 962 Election” in the appropriate parts of your 1040. However, Section 962 as written would not seem to allow individuals to opt into the benefits of Section 965’s “dividends received deduction”, and Ross’ bill doesn’t touch Section 962 at all.)
Jobs for Homelanders, not for you
Even better, in the usual display of social engineering and economic nationalism for which the “Internal” Revenue Code is famous, the benefits of this tax cut will be denied to U.S. corporations which do not maintain their “U.S. employment levels”. How exactly is “U.S. employment level” defined? Why, the number of Homelanders you employ! It doesn’t count if you employ some of those traitors living the high life in Paris and Tokyo to help you balance out America’s ridiculous trade deficit:
(4) REDUCTION IN BENEFITS FOR FAILURE TO MAINTAIN EMPLOYMENT LEVELS-
(A) IN GENERAL- If, during the period consisting of the calendar month in which the taxpayer first receives a distribution described in subsection (a)(1) and the succeeding 23 calendar months, the taxpayer does not maintain an average employment level at least equal to the taxpayer’s prior average employment, an additional amount equal to $25,000 multiplied by the number of employees by which the taxpayer’s average employment level during such period falls below the prior average employment (but not exceeding the aggregate amount allowed as a deduction pursuant to subsection (a)(1)) shall be taken into income by the taxpayer during the taxable year that includes the final day of such period.
(B) AVERAGE EMPLOYMENT LEVEL For purposes of this paragraph, the taxpayer’s average employment level for a period shall be the average number of full-time United States employees of the taxpayer, measured at the end of each month during the period.
(D) FULL-TIME UNITED STATES EMPLOYEE- For purposes of this paragraph–
(i) IN GENERAL- The term ‘full-time United States employee’ means an individual who provides services in the United States as a full-time employee, based on the employer’s standards and practices; except that regardless of the employer’s classification of the employee, an employee whose normal schedule is 40 hours or more per week is considered a full-time employee.
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.