Every quarter the United States government publishes a list of individuals who have chosen to renounce their US citizenship.
The latest list came out yesterday, and 1,376 people are on it.
That might sound like a small number, but the total for 2017 is projected to be more than 20% higher than 2016… and 2016 was 26% higher than the total number from 2015.
In fact the number of Americans renouncing their citizenship has been rising dramatically for years.
The primary driver behind this is taxes, plain and simple.
The Land of the Free is one of the ONLY countries on the planet that taxes its citizens on their worldwide income, EVEN IF they don’t live in the United States.
You could be an ‘accidental’ US citizen, i.e. one of your parents is American, but you live your entire life overseas. It’s possible that you’ve never set foot on US soil or even speak English.
And yet Uncle Sam will still demand his fair share of your worldwide income. Plus interest and penalties.
Beyond that, the cost and hassle of maintaining tax compliance has grown worse ever since the US government passed the Foreign Account Tax Compliance Act (FATCA) back in 2010.
I’ve written about this a number of times, calling FATCA quite literally the worst piece of legislation in US history.
The idea behind FATCA was to uncover any hidden money that Americans might be hiding overseas… so the law included countless rules that were thrust upon foreign businesses, banks, and governments.
It was the height of arrogance– the US government extending its jurisdiction to the entire world and commanding everyone to follow its laws.
Imagine if the government of Saudi Arabia decreed that US grocery store chains were forbidden to sell pork products to any Muslim in the United States… and then forced those US businesses to report back to Riyadh on what every single customer (Muslim or not) was purchasing in the checkout line.
Crazy, right? But that’s basically what FATCA does.
Every bank in the world, regardless of whether or not they have US customers, has had to enter into an information sharing agreement with the Internal Revenue Service.
This has become absurdly expensive.
In 2014, the Telegraph (British newspaper) estimated that the cost of implementing FATCA compliance in the UK would cost 500 pounds PER FAMILY.
In other words, British families are paying 500 pounds so that the IRS can sniff out US tax dodgers.
The Swiss-American Chamber of Commerce estimated that the worldwide cost of complying with FATCA would be between $1 to $2 trillion. And many other organizations echoed this analysis.
Yet the US government’s best estimates on the amount of tax revenue generated by FATCA are less than $20 billion.
Think about that– $1 to $2 trillion in costs, $20 billion in benefit. It’s genius!
On top of that, FATCA has created a culture where banks around the world are terrified to do business in the US, and US banks are terrified to do business overseas. It’s amazingly short-sighted.
Most of all, though, FATCA created debilitating rules for certain taxpayers living abroad, to the point that many of them were driven to renounce their US citizenship.
When you go to renounce your citizenship at a US embassy overseas, State Department officials are required to debrief you and conduct an exit interview to find out WHY.
If there’s even a hint that you’re doing it for tax reasons, they can throw all sorts of penalties at you, including barring you from entry to the United States forever.
So naturally nobody ever says “taxes”. Or “FATCA”.
People give all sorts of reasons– I even knew a guy once who told the consulate that his wife (a foreigner) threatened to divorce him if he didn’t renounce his US citizenship.
But the government’s own data is very clear: post-FATCA, renunciations soared. And they continue to climb.
Sadly, a repeal of FATCA is conspicuously missing from the proposed ‘comprehensive tax reform’ that was announced this week.
I honestly have a difficult time even calling it comprehensive tax reform.
All they’re really doing with this tax plan is changing some rates, throwing out a few deductions, and (hopefully) making things a bit simpler. But it’s hardly anything revolutionary.
Real, true, honest to goodness COMPREHENSIVE reform would entail throwing out the tax code entirely.
The current tax code as it exists was written more than three decades ago… in a world dominated by the cold war and heavy industry.
The Internet didn’t exist. Globalization on this scale didn’t exist. Most of today’s biggest industries didn’t exist. And neither did most of the largest companies in the world that exist today.
This proposed plan still essentially jams a 21st century world into a 20th century tax code. It just doesn’t fit.
Real reform would be throwing out the ENTIRE tax code and starting from scratch… beginning with a clear determination of strategy and what they need to accomplish with the tax code.
And if they needed some inspiration or advice, there’s no shortage of countries that have smart tax codes and just happen to be awash with cash: Estonia, Singapore, Hong Kong, etc.
So this is shaping up to be a pretty big missed opportunity to create a sensible, 21st century tax code that no longer forces thousands of Americans to renounce their citizenship in droves.
Fortunately there are still sound alternatives.
Anyone even thinking about renunciation ought to seriously consider Puerto Rico.
Puerto Rico has one of the most attractive tax incentive programs in the world; as an investor, you can generate unlimited income (subject to a few simple rules) and pay ZERO tax, either to Puerto Rico or to the IRS.
And as a business owner you can cut your effective tax rate to just 4%.
(Plus you don’t even need to live in Puerto Rico full time to qualify.)
That deal is hard to beat. And it’s a much less dramatic step than renunciation.