“A territorial tax system – what is that?”
So inquired a White House reporter of Treasury Secretary Steve Mnuchin as he outlined President Trump’s tax reform proposal.
The question itself, and the baffled tone in which it was delivered, reveals much about why Americans who rely on news media for analysis of economic matters, and tax policy in particular, remain so benighted.
In particular, American citizens, their families, business associates, and various other “U.S. persons” seem blithely unaware of the power claimed over them by the Internal Revenue Service.
To wit, if you are an American, or married to one, or in certain sorts of business with one, the IRS demands that you file and pay taxes to the IRS every year, even if you have never set foot in the United States.
This is almost never discussed in the mainstream media, presumably because politicians, journalists, and various financial talking heads simply do not understand the issue. In a country where a majority of citizens do not hold passports, perhaps this is to be expected.
But the fact remains that Americans who move abroad, whether they are leaving in a huff because their preferred candidate lost an election or simply emigrating for work or family, must still file and pay U.S. income taxes as though they had never left.
Specifically, the IRS requires a complete U.S. federal tax filing, along with a copy of the tax return filed in the country of residence so the two can be compared. If it is found that the filer would have paid more in tax under the American system, the taxpayer is expected to send the difference to the U.S. Treasury – again, even if that person has never been to the United States.
Beyond the self-evident taxation without representation inherent in such a regime, the crushing complexity of the U.S. tax code makes compliance difficult and expensive.
It is not uncommon for Americans abroad to send a few pages and a check to the tax authority of the country in which they reside and then have to spend thousands of dollars to process and send a 50-page return back to the United States, even if they owe nothing further.
This is applicable to more than 7 million Americans who live in other countries, along with their spouses and various other associates and relations. These people are acutely aware of the injustice and inconvenience of this system.
And yet you can read financial newspapers and watch business programs until your eyes fall out and hear nary a word about it.
The flummoxed query posed to Mnuchin pertained to Trump’s plan to reform the corporate tax system, such that American companies doing business abroad will be taxed only on their U.S. operations. This would be a worthwhile change and, pace the intrepid reporter who seemed buffaloed by the concept, would bring the United States in line with almost every other nation in the world.
But, as usual, there has been no discussion of whether the individual American abroad will be liberated from the worldwide clutches of the IRS. It is all well and good to offer relief to corporations – indeed, for at least the past three presidential cycles, Republican candidates have phonetically repeated that $1 trillion will be “repatriated” by such a reform – but what about an employee of one of those companies stationed overseas? Or, for that matter, what about someone who has nothing to do with America or its corporations, with the exception of having been born there, or having a spouse or parent who was?
Currently, the only escape for Americans living abroad is to renounce their citizenship, and even that requires hefty fees and payment of an “exit tax” – essentially a capital gains tax on all assets above a certain threshold. Moreover, the IRS reserves the right to scrutinize former citizens’ taxes for years to come, and those deemed to have renounced for tax reasons are technically prohibited from entering the United States.
A few years ago, the U.S. Treasury Department began publishing quarterly lists of Americans who renounced their citizenship (and every three months brings a new record high number of renunciations), presumably to shame those people.
Rather, the shame is on a government that treats it citizens as property, demanding money from livelihoods and toil that take place in other nations.
No other country in the world subjects its citizens to this sort of worldwide taxation, with the exception of Eritrea. But the United States actually gets away with it.
Combined with other excesses such as FBAR and FATCA – whereby Americans living abroad must annually report the numbers and holdings of all their financial accounts to the IRS – the current regime is indefensible.
At the moment, expatriates of Russia, North Korea, and the People’s Republic of China enjoy greater economic freedom than Americans living abroad. This is one of those appalling, counterintuitive facts where, upon hearing it, one squints and rationalizes and inwardly insists that it must not be true. And yet it is.
As the adage goes, Americans once rioted because the British put a tax on their breakfast drink – and it wasn’t even coffee.
A tax reform worthy of America’s legacy of freedom will liberate its citizens all over the world.
Theo Caldwell is a dual American-Canadian citizen living in Toronto. He has been a member of the New York Stock Exchange, the Chicago Board Options Exchange, the American Stock Exchange, and the Kansas City Board of Trade. Contact him at firstname.lastname@example.org.