Inequality and the narrowing tax base: Too reliant on the few http://t.co/ik4nlmoneO – In US: 40% pay no income tax – 1% pay 46% of all tax
— U.S. Citizen Abroad (@USCitizenAbroad) September 23, 2014
The above tweet references an article in The Economist magazine (which is British).
This is a great article. I strongly recommend you add some comments.
The article begins with:
“I LIKE to pay taxes,” said Oliver Wendell Holmes. “With them I buy civilisation.” Most people recognise that taxes pay for public services, but few are as keen to stump up for them as Justice Holmes was. High income taxes tend to discourage effort and entrepreneurship, while encouraging all manner of activity to avoid them. That is why a basic principle of good tax policy has long been to charge a low rate over a broad base.
It is a target which many countries miss, and the gap is growing. Income taxes—one of the main sources of tax revenue across the rich world—are increasingly paid by a small minority of the most affluent. In Britain, employment has risen by 1.3m in the past five years, but the number of taxpayers has fallen by 2.2m. More than 40% of American households pay no income tax. In contrast, the most highly paid 1% of workers in Britain pay 28% of all income tax, while in America it is 46%. In 1979 those shares were 11% and 18% respectively. Corporate income taxes show the same concentration. In Britain just 830 firms pay almost half of all corporation tax. Five American industries account for 81% of the country’s corporate tax revenue, but just a third of its companies.
It’s worth noting that Canada has an exit tax too, it just has a reasonable place at which one severs his Canadian tax liability.
Since this seems to be a misconception, I summarized the Canadian approach to nonresidents today, look here:
I think people lose sight of this, most of the problems aren’t FATCA, or the exit-tax, or even the (completely ridiculous) renunciation fee. It is the insane approach to the treatment of nonresidents in the US.
@BillT: “…most of the problems aren’t … the exit-tax…”
But with at least two caveats.
One, the ridiculous instant income tax on your entire retirement savings on the day you depart. That’s a guaranteed much higher tax than if you withdraw gradually over retirement as designed. It’s also, potentially, a full-on double tax for countries whose US tax treaty says that pensions are taxable only to your country of residence and only withdrawn. And it’s a tax treaty override, to boot.
And two, future gifts to US citizens are taxable to the recipient at the top estate tax rate, so 40%. That’s on the giver’s post-tax money, so again a double tax. And it covers earnings that might be made long after renouncing.
Canada’s exit tax does neither of these. So yeah, much better than the US’s really crappy implementation. But then, what should one expect from the US congress?
I’ve always advocated bring in a federal VAT. My estimation if the US brought in a modest 5% federal VAT, it could eliminate a substantial amount of the Federal Budget deficit.
Yes you’re risking VAT creep by it increasing over the years as in other countries, but the US has to balance the books.
You could convert to Roth over a few years before you leave. Roth is untouched since there is no tax to pay. I plan to do this anyway once I retire to take advantage of low tax rates over many years.
You can do the same with built up capital gains. Why pay a one of tax unavailable to offset other countries taxes when you can just do some partial sale of your investments. Once you’re gains drop below $700k you can stop.
Good suggestion on the Roth. Unfortunately conversion was never an option for me — earnings ‘too high’. By the time the limit was removed in 2010, I was long gone. Could be helpful for others, though it still brings with it the possibility of much higher overall tax if done all at once rather than over a number of years. And congress could well bring back the income limits at the (ill considered) stroke of a pen.
Roth is only a solution for US retirement accounts, though. The ‘exit tax’ covers all retirement savings — with the caveat that it’s ‘only’ on contributions made while you were a US person, making it perhaps a lesser issue for green carders but a potential massive problem for accidental citizens. Anything in a Canadian, UK, etc retirement plan is at risk. If the plan has no early withdrawal feature — UK ones don’t — you have to find the money to pay the exit tax out of other funds, and then still face the problem of double-tax to your home country on withdrawals. Outrageous, hugely costly, and potentially retirement-destroying.
@Watcher – Check out the UK pension reforms. You don’t have to put the funds straight into an annuity anymore with certain terms and conditions.
George Osbourne announced the reforms in the last Budget.
@Watcher I do want to be clear, I’m not sticking up for the US system at all, but… They do provide a higher bar before you need to pay the exit tax ($2M) and a floor, which for a lot of people would offset the all at once aspect. An exit tax is actually a reasonable thing to do at the point where you sever taxation of someone, as Canada does, the US is just applying it at the wrong time,.
Remember you can do basis isolation by pulling an IRA into a 401k sometimes. You can pull money out of a 401k into a Roth (after tax contributions) and IRA (pretax and gains to after tax and pre-tax). Various tricks can let you get a lot of money into Roth if you made any after tax contribs. I use this all year long to shift $~30k to roth from taxable accounts.
Lookup this pretax first rule.
Right, but if you hold UK pension funds and renounce US citizenship you may face a direct US ‘exit tax’ on those funds. And if you’re under 55 years of age you have no way to access them. In either case it’s likely genuine double-tax, since the UK is not bound by the treaty to give tax credits for the exit tax paid by UK residents and accidental US citizens who renounce.
Sure, but only now the income limits no longer apply. I left while they were still in place, and retained my 401k. Perhaps I could move my 401k to an IRA even at this stage, but with little real gain since it would be US taxable as it goes along, so better just to leave it alone. I have no post-tax contribs in there; it’s all pure pre-tax. I have already exited, and did so (deliberately) before the US passed the exit tax law, so I don’t have to worry about that. I’m covered under the old pre-HEART rules. It’s no picnic, but at least its only pointless paperwork hassle for a few years, and no actual tax expense.
Noted. I don’t disagree. Exit taxes in general seem like a dubious idea if you’re a country trying to attract well qualified immigrants. But if you must have one then Canada’s is head and shoulders above the US’s version, because Canada applies relatively sensible rules at an appropriate time to appropriate people. The US applies indefensible (and tax-treaty breaking) rules at an inappropriate time to utterly inappropriate people.
Complete inequality. I am the 1% and worked hard all my life to be the 1%. Uncle Sam sits out with his hand out to take more than I give my kids every year, plus what I have to pay the countries I actually live and work in. Basically, I can’t get ahead anymore – and when I am forced to renounce, then Uncle will want to take what I want to leave to my US citizen kids (and has already been taxed). So lucky to have been born in the USA (not).
IRS loses $21B in fraudulent tax refunds, but collects only $800M per year with FATCA.
It doesn’t make sense.
Paying taxes to buy civilization is good as long as everybody pays, but in te U.S. over 50% of those who file a tax return pays no income taxes. They only file to get a rebate they didn’t earn, but they call it the earned income tax credit.(How Orwellian) Get it—a refund of $3,000 without ever sending anything in to the treasury
The USG has a big problem with refund fraud. In the 60 Minutes show, the guy who claimed he’s filed thousands of fake tax returns said the SSN and DOBs were obtained from medical professionals for example. He’d go in offer $1000 for couple hundred SSNs and DOBs and Bob’s your Uncle, an IRS tax refund.
What chance do ex-pats have against this theft that is rampant in the US?
Answer: Not much.
I’d argue that rampant tax-fraud in the US would be yet another a good argument for ending CBT. The money they stand to make from non-residents is small, but the processing costs and enforcement costs are large. Let them focus their effort at home, where the people who should be paying taxes actually live.
I wonder if immigrants to the US and Americans living abroad are familiar with WEP (Windfall Elimination Provision). Lets say you worked for sometime in a foreign country. You have a foreign SS type pension based on that work. US SS has a tax bracket payout schedule (90%, 32%, 15%). 30 years of SS payments are divided into months and a chunk of it is paid out at 90%. The next chunk 32% etc.
If you have 20 years of SS contributions and a foreign pension the first payout bracket is reduced to 40%. If you just didn’t work anywhere that bracket isn’t reduced.
Luckily the 90% bracket doesn’t cover that much. Currently the first $816. So presumably you could lose a maximum of $408 per month.
The whole tax code is now tilted to take from the rich.
So, Wilton, what you’re saying is that they’re giving “money away for free” in the States? Whereas my wife up here works for a retail company and they squirrel away 19% withholding on her income as taxes so what little she gets back as refund is technically her own money she worked for. And the 50% of people in the States that file a return get $3000 bucks back for essentially not paying a single DIME in taxes. You mean the IRS is giving them FREE money???!!!!
Yes. It’s called the earned income tax credit (EITC). It’s refundable which means you can get the credit even if you owe no taxes. Something like 20-30% of the American population files a tax return to get money back they never paid. The IRS is a revenue source.
Maybe you start to see why I am so much against welfare in the US.
I got a letter from the IRS last night. Apparently they think I’m entitled to $1000 per dependent child, as a child tax credit, they sent me a form to fill out. This is insane. I paid no taxes last year in the US, I didn’t live there, and they want to send me money. Maybe they’re more incompetent than evil… Or maybe they’re both.
You need to earn more. They phase out all that stuff at higher incomes.
Sit down before reading the next sentence.
You’re allowed to file a tax return even if your an illegal alien so that you can claim the dependent child credit for your American born children. This is the source of massive fraud and they send our huge sums of money each year for this.
Yeah, so in the past they govt had some things like the Earned Income Tax credit, and I was eligible because my income on p2 of my 1040 looked low after I filled out me foreign earned income exclusion form. So, based on my AGI, I looked like working poor (due to excluding some of my income and all of my wife’s). So, for 2 years I was sent the Making Work Work (or whatever they called it) tax credit – Note this was a Bush stimulus program. So, there was a US economic stimulus program that sent me a check in Canada to spend on Chinese made goods. The reason I didn’t fill out the child tax credit was that I assumed I made too much, looks like this one doesn’t work that way but maybe when I look more carefully I’ll find otherwise.