Monday, September 20, 2010

The Growing Issue of Expatriation and Why it Matters

Expatriation has gotten a lot of press this year and for good reasons. According to the United States Department of Treasury, in the quarter ending December 31, 2009, 502 United States Citizens gave up their citizenship. Based on data provided by the DOT, that is more expatriations in a single quarter than the previous seven combined. Is this the beginning of a trend? Are Americans with wealth and mobility leaving? It appears that the answer is a disturbing, yes.

Many Americans are driven to the subject of expatriation because of taxes. In some cases expatriation makes sense. You are an American living and working overseas and you have decided to stay in your host country. Because US taxes apply to your income irrespective of where it is generated, it makes sense not to subject your pay check to duel taxation, thus you expatriate and live happily ever after. Another category of expats has traditionally been the billion dollar club who choose a tax home with less tax rules, and let’s face it, less taxes on their income. But for the most part, the number of annual expatriations was pretty small and interest in the subject was also small.

2009 and 2010 data from the Federal Register, DOT, and news articles provides evidence that thoughts on expatriation are changing. After conducting an Internet search of “expatriation and tax,” I was surprised by the volume of information there is on how to expatriate and the number of businesses that provide a service offering on expatriation. This begs the question, what do Americans think of their citizenship and has American citizenship become a burden, rather than an asset, in a dynamic global economy?

It is pretty clear that more taxes are on the way. Passage of health reform, financial industry reform, and another government funded jobs creation bill are indicators that the government will need additional revenue to achieve these goals. Even with the Bush-era tax cuts expiring, the tax revenues received from the 4-5% increase will probably not be enough to cover the costs. In short, the government is going to have to consider higher taxes and these taxes will be aimed at the “rich.” More and more I am seeing in the press, on social network sites, on tv news shows, and talking among peers that there is a strong belief among certain sectors that American tax policy needs to become a “soak the rich” policy. The theory is that the rich are unfairly sitting on their wealth in the form of investments and savings and therefore should face higher tax rates to forcibly remove wealth from them and place that money back into society.

So who are these rich Americans we are supposed to soak? Well if you are collecting taxes, the rich are those who earn over $250,000.00 a year. When the Bush tax cuts expire, tax on this income group will return to 39.6% of their income. In the opinion of some, this is still not enough and this group needs to be taxed more. But income earners in this range are neither deaf nor blind and they are asking the question, what is my incentive to staying in America or remaining an American at all? If the article in today’s Los Angeles Times is any evidence, some are considering leaving and it’s not just the billionaires. The LA Times today reported on an editorial in the Wall Street Journal written by Newport Beach resident Glen Esnard. In his editorial, Mr. Esnard stated the following, “My family isn't wealthy. I have no funded retirement plan save Social Security, if it is there when I need it. I have no guarantee of permanent health care. I am paying off school loans for our three children. A meaningful number of my friends have lost their jobs, and all who are still employed, including my family, have taken significant pay reductions. . . . This is a classless recession, at least in my experience. It is hitting everyone.

Yet those of us who make $250,000 or more are vilified and held accountable for solving our government's penchant for spending more than it takes in so that politicians can buy votes. We already pay more in taxes than 98% of the population, particularly the nearly 50% of eligible voters who pay no federal income tax. The President wants us to pay more, and he frames it in a way that casts us as not yet carrying our fair share of the burden.”

While Mr. Esnard’s arguments are not new to the tax debate, it is his next statement that really caught my attention because of its blunt and unmistakable meaning.

Apparently our president thinks that living in America is so wonderful that we will never leave, despite being directly attacked and held responsible for the political class's inability to constrain its desire to buy votes with our money. He should think again.”

Mr. Esnard’s comments should not be lumped in with Hollywood types who like to threaten to leave if candidate X wins this election. I say this because Esnards of this world are not upset at a political party on social or moral issues, but they are tired of the entire process, both political parties and their collective ineptitude. The Esnards of the world will not only be leaving the United States physically, they will be leaving as both a citizen and a tax payer. What’s important to take from this is that the Esndards are not billionaires, multimillionaires, and in some cases not even millionaires. They upper middle class Americans who are beginning to wonder how the US is going to pay off its sizable debt and more importantly, who is going to do it. For some the long term calculus is simple, I’m out of here and best of luck with your trillion plus debt. So this begs with question, what does the American government do when the citizens it intends to soak move to less taxed shores? Perhaps 1933 will shed some light on this on this question.

In 1933 President Roosevelt issued Executive Order 6102. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Under the Trading With the Enemy Act of October 6, 1917, as amended on March 9, 1933, violation of the order was punishable by fine up to $10,000 ($167,700 if adjusted for inflation as of 2010) or up to ten years in prison, or both. Some people fear that there are enough similarities between our current economic situation and 1933 to justify fear about asset confiscation, i.e. a weak dollar and strong gold value.

Had I not read title V of the recently passed HIRE Act of 2010, I would say that confiscation folks are being rash. But come January 1, 2011 the HIRE Act will make it far more difficult for Americans to legally place assets under the control of foreign banks, holding companies, etc that have no obligation to obey any order from the US government to turn over assets that are being held legally. In addition, Congress has decided to hold a September 23rd hearing on gold selling companies and if they should be regulated. Such an act, irrespective of its intent, only adds fuel to the fire.

So putting this all together, what are Americans who make $250,000.00 per year supposed to think? It seems to me that some Americans are simply saying it might be easier to pull the plug than fight the good fight in a bloated system of bureaucrats and politicians. If American citizenship has become that devalued, then Congress has bigger issues to be concerned about than gold and the value of the dollar.

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