# The myth of zero double taxation



## Immigpat

In previous posts it has been claimed that the highest amount of income tax you can ever pay is the higher of the US or the other country's rate. 

IMHO, this is WRONG! Tax treaty or not. It ignores the fact that incomes are not taxed in the same way in all countries. It's a myth spread most likely by people who have lived all their lives in one country or one type of country and don't realize that there are different types of taxation.

Consider a country (call it ABC) that taxes income at a mere 10%, but has a sales tax or VAT of 30%, with much higher sales tax, maybe even 100%, for items considered luxury items (e.g., car, laptop, geyser, even microwave, fridge). Unlike the US, this country expects to get most money through this sales tax (not income tax) and also tries through these means to reduce wasteful consumption and mostly tax wealthy individuals.

If the US taxes income at 25% and I live in ABC, then I have to pay 10% to ABC, PLUS an extra 15% to US, PLUS the huge sales tax in ABC. A US citizen living in ABC can't claim the sales tax and will be (perhaps subtly) double taxed. 

This is just a simple example. There are many others involving savings funds, retirement savings, savings for medical care, sales of inherited lands, and so on. Admittedly, some of these will affect mostly recent immigrants, but they are still issues.

There are MANY ways in which people are being double taxed.


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## Bevdeforges

You're probably preaching to the choir here. 

Even if you limit your discussion to strictly "income" taxes (i.e. those which can be credited against your US liability) you can wind up being double taxed - especially if you don't know or understand the peculiarities of both tax systems you're dealing with.

You may be interested in contributing your thoughts to this: The United States Senate Committee on Finance: Newsroom - Chairman's News No guarantees they will be able to make any meaningful changes to the US tax code, but who knows, they might get lucky.
Cheers,
Bev


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## BBCWatcher

OK, what's the scenario when you pay more income tax than the higher of the U.S. or foreign rate on a particular dollar of income?

There are also excise taxes, import duties, payroll taxes, wealth taxes, property taxes, resource extraction taxes, "user fees" and fines, business taxes, road taxes, ticket taxes, tourist taxes, estate taxes, gift taxes, inheritance taxes, telecommunication taxes, stamp duties, transfer/transaction taxes, and abrupt benefit losses to pick some other examples of taxes. There is no tax system in the world that considers total tax burden, even within its own borders. Yet the income tax is uniquely heavily criticized. I think I know why.

By the way, a strict RBT regime _encourages_ high rates of VAT to recover revenue losses from income tax avoidance. The U.S. does not have any federal VAT, GST, or sales tax, and state sales taxes are lower and in several cases (Oregon, New Hampshire, Delaware, etc.) zero.


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## JungleJim

BBCWatcher said:


> OK, what's the scenario when you pay more income tax than the higher of the U.S. or foreign rate on a particular dollar of income?


There are many scenarios: As mentioned previously, I am in Australia, Australian Citizen and unfortunately still a U.S. citizen from birth. I have a company which pays 30% tax in Australia. Then posts dividends. Those dividends are considered pre-taxed by Australia Tax Office. I pay myself $35,000 "Fully Franked Dividend" in Australia. No Australia tax is due, because I fall under the tax threshold of the next tax bracket. The U.S. taxes that as income, because they don't recognise franked dividends. I have to pay tax to U.S. that isn't any of their right to.... Which is my complaint in my other thread http://www.expatforum.com/expats/ex...d-renounce-citizenship-lawyer-accountant.html

Additionally, I pay tax to the U.S. on my superannuation account profits. The U.S. does not recognise ANY Australian retirement plan, and my SMSF earns $60,000 per year on $800,000 in assets. My SMSF pays 15% tax, which is the rate the Australian government has set that retirement funds pay tax at. THEN, the U.S. taxes me again, because a) I can't deduct the taxes paid, it is paid by my fund b) The fund profits are counted against me personally as if I made the money each year, so U.S. taxes are due and payable. 

Thirdly, My pension is coming up shortly. U.S. doesn't recognise any Australian pension plan, and that money is not 'earned', so I can't claim "Earned Income credit". It is tax free in Australia, because it was taxed when it was put in, and the gains made over the years were taxed. SO, again I pay tax to the U.S.

I can go on, and on with Capital Gains differences which cause tax to be paid in U.S. and many others... Examples galore. And all seem to apply to me


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## BBCWatcher

OK, but where is any of that inconsistent with my statement? All you've demonstrated is that personal income taxes are not all taxes. True. But Australia "double taxes" (or triple, or quadruple...) income all by itself. Get some wages from work (income tax) then go buy a pack of cigarettes with that after-tax income (excise tax). This is surprising? I'd say no.


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## JungleJim

BBCWatcher said:


> OK, but where is any of that inconsistent with my statement? All you've demonstrated is that personal income taxes are not all taxes. True. But Australia "double taxes" (or triple, or quadruple...) income all by itself. Get some wages from work (income tax) then go buy a pack of cigarettes with that after-tax income (excise tax). This is surprising? I'd say no.


Your quote was "OK, what's the scenario when you pay more income tax than the higher of the U.S. or foreign rate on a particular dollar of income?".

The above examples are all examples where I pay additional tax in the U.S. on top of what is due on my foreign tax bill which is in full tax compliance, with a system balanced to the rates it sees fit. The statement makes no sense if you are implying it is O.K. to add additional unlimited taxes in one country on income that is already taxed in another countries system. We could end up at nearly 50% tax in both countries and end up with zero income after taxes if that were the case. 

I am disregarding excise, GST, and all the other tax on spending and addressing only income tax. If I threw in that it costs over $20 for a pack of cigarettes (I don't smoke), and $50 for a bottle of gin because of silly duties/excise/liquor taxes on top of a national GST of 10% which isn't in place in the U.S., that skews the argument even more. 

My point remains... It isn't fair for the imposition of additional taxes on a U.S. citizen that is a citizen of another country and all assets, income and residence are in that foreign country. The tax system is balanced as Australia sees fit and we comply. The U.S. has no business choosing to tax things that are balanced differently in the U.S. to Australian system and ADD to the tax bill we now pay to two countries ON THE SAME INCOME.


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## Bevdeforges

I'll be the first one to admit that "fair" doesn't count for much of anything when it comes to taxes. The problem with how the US tries to tax its citizens living abroad comes down to impeding them from participating in the culture/society in which they are living. It might be seen differently if another country's taxing system were keeping US residents from establishing IRAs or those living in the US were being penalized by their countries of origin for paying into the Social Security system or something similar. (Hard to come up with examples because the US doesn't do much to encourage savings the way some other countries do.)

I'm all for hunting down folks who are abusing the system, avoiding taxes (overall), laundering money and generally stashing their ill gotten gains in tax havens. But the problem comes with folks living overseas and being unable to participate in perfectly normal types of investments to save for retirement, or for a down payment on a house that are tax-preference items in their country of residence. "Forcing" them into US based tax preference investment schemes means exposure to currency fluctuation and the potential for double taxation by their country of residence on a couple of different bases.

But the real reason for all the hassle here is basically that US lawmakers don't bother to consider that "income" and "income taxes" may work differently elsewhere. They set up the laws and the IRS sets the rules based on how things work in the US, and then leave the overseas residents to try to cram their foreign sources of income into the pigeonholes that fit the US economy. And, if you report something as income that doesn't need to be reported at all (say, "public assistance") no one bothers to note that you may have overpaid your US taxes.
Cheers,
Bev


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## Immigpat

Thanks, Bev! This exactly captures the point I was trying to make above. I will indeed contribute my thoughts on these lines to the Senate Committee and hope that others will too.


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## BBCWatcher

JungleJim said:


> The above examples are all examples where I pay additional tax in the U.S. on top of what is due on my foreign tax bill which is in full tax compliance, with a system balanced to the rates it sees fit.


I don't see how what you're describing is inconsistent with what I wrote. It's entirely consistent.

Consider each dollar individually. What I wrote is that, for each and every dollar, the highest rate you can ever pay in income tax is the higher of the U.S. or Australian rate. True! You apparently have some "bucket" of dollars that attracts zero Australian income tax. The U.S. has a higher rate on that particular bucket, evidently, so that's the rate you pay on those dollars. If Australia changed its mind tomorrow and raised its income tax rate on those dollars from 0% to 5% then the U.S. rate you pay would ratchet right down, dollar for dollar, through operation of the Foreign Tax Credit.



> The statement makes no sense if you are implying it is O.K. to add additional unlimited taxes in one country on income that is already taxed in another countries system. We could end up at nearly 50% tax in both countries and end up with zero income after taxes if that were the case.


First of all, unlimited is mathematically impossible (or at least highly impractical). The highest income tax rate mathematically achievable is 100%. Neither Australia nor the United States have any 100% income tax rates.

Australia's highest income tax rate is 45% on taxable income above A$180,000. The highest income tax rate in the United States (on certain income, inclusive of the Medicare surtax) is 43.4%. That rate applies to taxable net interest/non-qualified dividend income (only) above $464,851 (Married Filing Jointly). For all other income the highest rate is 39.6% (same threshold).

Consequently Australia sets your highest possible rate on any dollar of income: 45%. Your net effective income tax rate will always be lower than 45%, for most people a lot lower. If your taxable income zooms into the millions then into the billions and beyond, your net effective income tax rate will approach but never quite reach 45%, thanks to Australia again not the U.S.



> My point remains... It isn't fair for the imposition of additional taxes on a U.S. citizen that is a citizen of another country and all assets, income and residence are in that foreign country.


It is entirely fair if you believe that tax systems must respect (or at least consider) the lifecycle and intergenerational aspects of citizen relationships with their governments. I explained that argument carefully -- the "venture capitalist" argument, fundamentally -- and you did not argue with it. (As far as I can tell, you ignored it.) To repeat it, briefly: America invested in you (and me) -- certainly a lot in my case -- and America has a mild CBT that, for about 6% of us (more or less the most financially successful among us, especially in foreign tax-adjusted terms), collects _a bit_ of revenue on non-U.S. source income. (In my case it's probably about 5%. Singapore is a fairly low tax jurisdiction, unlike Australia. In Dubai, for example, it might be more than 5%.) Is that "fair" as a tax principle? Of course it is! At least as reasonable as requiring people to make their mortgage payments after they've borrowed to buy a house. Lifecycle effects are very real and very reasonable to consider when designing a tax system. But if you disagree with that principle, that governments shouldn't be entitled to collect _even a bit_ of revenue from their most financially successful citizens after that government has lavished them with services, even after giving the tax code's biggest exclusion and full credit for foreign income taxes, that same government has an exit door available.

By the way, the fact you've been gone for 30 years is not actually supporting your argument. The implication is that you haven't owed (or at least haven't paid) U.S. tax for the vast majority of those years, but only recently you're starting to owe a bit of U.S. income tax on highly Australian tax-favored income above U.S. exclusions, deductions, and credits. In other words, after many years of being a net consumer of U.S. government services -- a big drain on U.S. public services (as practically all children are) -- you've only recently started to send a few dollars back in, almost 3 decades later. And you haven't even been charged interest on that late reimbursement. (Some of your fellow Americans might even whisper that you've been a "freeloader," though I wouldn't.) On top of all that, you can collect U.S. Social Security retirement benefits, most likely actuarily way beyond what you contributed (because that's how that system works, skewed toward generous benefits for those modestly vested). Is all that "fair"? It sounds like a _great_ deal to me! But OK, if you disagree, pay the $2350 fee and get out. That's a great deal, too!

Yes, I'm playing devil's advocate to some degree here, but, honestly, these are not strong arguments I'm reading. They're ridiculously easy to tear to shreds, and they would be in the U.S. Congress. If you want a different tax system then you're going to need much better arguments and seriously step up your game.


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## JungleJim

Sorry BBCWatcher, but I disagree on the accuracy and assertions of many statements you have made here. I respect your opinion and I will not debate the matter further as it is distracting to the core conversation and assertion made by the thread starter if I continue this discussion.


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## maz57

BBCWatcher said:


> OK, what's the scenario when you pay more income tax than the higher of the U.S. or foreign rate on a particular dollar of income?
> 
> There are also excise taxes, import duties, payroll taxes, wealth taxes, property taxes, resource extraction taxes, "user fees" and fines, business taxes, road taxes, ticket taxes, tourist taxes, estate taxes, gift taxes, inheritance taxes, telecommunication taxes, stamp duties, transfer/transaction taxes, and abrupt benefit losses to pick some other examples of taxes. There is no tax system in the world that considers total tax burden, even within its own borders. Yet the income tax is uniquely heavily criticized. I think I know why.
> 
> By the way, a strict RBT regime _encourages_ high rates of VAT to recover revenue losses from income tax avoidance. The U.S. does not have any federal VAT, GST, or sales tax, and state sales taxes are lower and in several cases (Oregon, New Hampshire, Delaware, etc.) zero.


It isn't double taxation but the US CBT system quite remorselessly taxes income that has been left untaxed by your country of residence for something which that government decided should be encouraged. Like say, for example, saving for your retirement or for your kids education. Why the US insists on intentionally harming the financial prospects of its expats is a mystery to me. (Well not really; you are being punished for leaving the US.)

Canada made the choice to bring in the GST about 25 years ago. Several hidden manufacturer taxes that hurt the competitiveness of businesses were eliminated at the same time. Over time both personal and corporate tax rates could be gradually lowered as the finances of the country improved. I don't like paying the GST but I also realize it is the price of having lower income tax rates. (Not to mention a decent health care system.)

By the way, I have personal knowledge of the tax regimes of both Washington State and Oregon. Oregon has no state sales tax but a nasty state income tax. Washington has a reasonable sales tax rate (about 9%-it varies slightly because there is also a local government component) but no income tax. Where would you rather live?


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## BBCWatcher

maz57 said:


> It isn't double taxation but the US CBT system quite remorselessly taxes income that has been left untaxed by your country of residence for something which that government decided should be encouraged.


We have a very different definition of "remorselessly" -- but more importantly Congress wouldn't take that characterization seriously -- given U.S. exclusions, deductions, and credits, including some refundable credits and (notably) what seems to be the biggest exclusion in America's tax code, by far: the Foreign Earned Income Exclusion (and Foreign Housing Exclusion). (OK, the Expatriation Tax exclusion is even bigger. )

Find me a sympathetic, non-high income person to make these political arguments, please. Preferably more than a dozen. This reminds me of the brick wall Republicans have run into trying to find Obamacare "horror stories." They've fallen apart like tissue paper in the rain. High income people complaining about income taxes is not actually news. They have for over 150 years.



> I don't like paying the GST but I also realize it is the price of having lower income tax rates.


And what a terrible price. GST curbs consumer demand, something Canada and the world need more of right now, not less. (At least it's not as bad as European VAT rates.) It's also a regressive tax versus the progressive income tax. It whacks poor people more than the rich, both coming and going.

Not fabulous.  Not even politically defensible in the New Gilded Age with record high levels of income inequality.


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## maz57

BBCWatcher said:


> And what a terrible price. GST curbs consumer demand, something Canada and the world need more of right now, not less. (At least it's not as bad as European VAT rates.) It's also a regressive tax versus the progressive income tax. It whacks poor people more than the rich, both coming and going.


Well that's total bunk. The last thing Canada (and many other countries) needs is more consumption and more consumer debt. What is needed is saving and prudent investment that creates future wealth. 

Canada addresses the impact of the GST on low income folks by exempting the essentials of life from the tax. Things like basic food, kids clothing, safety equipment, and books are not taxed. Things like junk food, tobacco, luxury yachts, expensive restaurant meals, and fancy cars get hit; i.e. the affluent pay, the poor get a break. This list of exempted items is by no means complete but you get the idea. There is also a GST rebate built into the income tax system to compensate low income people. 

By the way, considering that whatever is taxed is discouraged, why on earth would you want to discourage people from earning income? Once again you are arguing that the US way is the only way. I and many others around the world disagree wholeheartedly. There is no way I would ever want to live in the US again. I'm happy (and lucky) to live in a country that actually cares about its citizens.


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## Immigpat

It seems to me that much of the argument here is about semantics. I'm willing to concede that some of what has been discussed is not strictly "double taxation", although it may be indirectly. 

Anyhow, the point is simply this:

A: Different countries impose taxes and provide services to their Residents in different ways. (Please let's not argue the merits of different systems; that's a separate issue)

B: It makes no sense for the US to tax a Resident of another country as if he or she were a Resident of the US. (Why? Because he or she is not!)

I think this is generally understood worldwide (except in the US), which is why no country (other than the US) taxes its non-resident citizens on external income. 

I hope this principal argument is not lost in a debate about semantics and I also hope that we can convince the authorities in the US of our concerns regarding its current unfair policy.


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## BBCWatcher

maz57 said:


> Well that's total bunk. The last thing Canada (and many other countries) needs is more consumption and more consumer debt. What is needed is saving and prudent investment that creates future wealth.


No, you're just dead wrong on the facts.

First of all a 0% GST would not only raise consumption but it would also raise savings, other things being equal. (Most of the consumer savings would end up being spent but not all. If it's not spent, it's saved.) It would also raise incomes and employment, and obviously all that's pro-savings if that's what you believe in. It's even pro-income for high income people! (One of the maddening things about tax fanatics. They end up shooting themselves in the foot. Promoting general prosperity is good for rich people, too!) Second, looking at the Canadian benchmark 10 year government bond rate, it's yielding a nominal 1.37% (as I write this), and the yield has been falling steadily. In other words, the financial markets are _screaming_, in the clearest language possible, at the top of their lungs, that Canada (and the entire developed world, at least) is oversupplied and _awash_ in savings. There are German savers right now willing to hand over their money to the German government for 5 years and pay the German government to hold their money, that's how ridiculous it's become.



> Canada addresses the impact of the GST on low income folks by exempting the essentials of life from the tax.


Yes it does. Imperfectly. It's still a regressive tax and far less progressive than a progressive income tax.



> By the way, considering that whatever is taxed is discouraged, why on earth would you want to discourage people from earning income?


I don't, but all taxes discourage certain behaviors _to some degree_. It turns out that anybody serious who's looked at this has figured out that high income people don't change their behavior much at all with progressive income taxes over rather broad ranges.

Japan just ran this GST experiment, by the way, with predictable effects. Their system is very similar to Canada's. Japan raised the tax from 5% to 8%. Consumer demand was crushed, and it sent the Japanese economy back into recession.



> Once again you are arguing that the US way is the only way.


No, not at all. The challenge is on you, not me. Find more sympathetic representatives to illustrate why the U.S. mild CBT system is _unreasonable_. I've been the first to argue that lots of tax systems are _reasonable_. Trading a progressive income tax for a regressive GST is _reasonable_ if you believe in whacking the poor (or at least whacking those with less than high incomes with a slightly softer stick), and some people do believe in that. Many of them are high income people, as it happens. 

By the way, Canada's official unemployment rate is currently 6.8%, and it increased last month. The U.S. rate is currently 5.5%, with a downward trend. Also, the U.S. mild CBT is so awful, so evil, that among the 10 richest people in the world in the latest report 7 are Americans. Maybe, just maybe, U.S. policy isn't so awful as thought around here, even for rich people.


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## BBCWatcher

maz57 said:


> By the way, I have personal knowledge of the tax regimes of both Washington State and Oregon. Oregon has no state sales tax but a nasty state income tax. Washington has a reasonable sales tax rate (about 9%-it varies slightly because there is also a local government component) but no income tax. Where would you rather live?


You and I have a different definition of "nasty" when it comes to a _top marginal_ income tax rate of 9.9%, nicely reduced for those who itemize deductions on their federal tax return (which is most people reaching that top tax bracket in Oregon).

But you've just inadvertently made a great argument in favor of a mild CBT regime, to cut down on tax avoidance and evasion. Individuals, particularly high income individuals, will engage in various forms of unproductive rent seeking including tax avoidance (and even illegal tax evasion). They do so near the Oregon/Washington border as an example. Washingtonians frequently shop in Oregon and illegally evade Washington's use tax. A mild CBT (equivalent) would cut down on that behavior, and taxes would be more fairly collected on both sides of the border, at lower rates in fact due to the reduction in avoidance and evasion.

As for where I'd rather live, I don't know. Both states seem perfectly lovely. I'm not a tax fanatic that only or even primarily decides where to live based on the rate published in a tax table, and nobody (sane) should be. If I were a tax fanatic, maybe I'd be living in Dubai. I don't.

I know it's crazy, but some people have a life and life considerations beyond taxes.  According to global surveys, the Danes are allegedly the happiest people in the world (or frequently rank near the top). Denmark is also among the countries collecting the highest percentage of GDP in tax revenues. (These are Danes in Denmark that are surveyed, by the way. It's not about strict RBT v. mild CBT.) Singaporeans are supposedly miserable (so one survey suggested), and they have a rather low rate of taxation, especially by developed economy standards. There is also _extreme_ wealth inequality in Singapore.


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## Immigpat

BBCWatcher said:


> Also, the U.S. mild CBT is so awful, so evil, that among the 10 richest people in the world in the latest report 7 are Americans. Maybe, just maybe, U.S. policy isn't so awful as thought around here, even for rich people.


The reasons for this have more to do with other parts of US policy that encourage innovation, investment, venture capitalism, and so on. Also history. Nothing to do with CBT. This sort of argument is irrelevant to the main point that different countries impose taxes and provide services to their Residents in different ways and that it makes no sense for the US to tax a Resident of another country as if he or she were a Resident of the US.


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## BBCWatcher

Immigpat said:


> Nothing to do with CBT.


How do you know that?

There's a reasonable, logical argument that the United States has been able to enjoy the fruits of innovative individuals -- individuals the United States has fostered through provision of public services, such as public education -- precisely because it's comparatively financially more sensible to stay in (or affiliated with) the United States than to run off to Singapore, for example. This is the venture capitalist argument I described. Venture capital -- the whole system -- only works well when the venture capitalists can enjoy a small share of the yield from their investments.

At the very least the mild CBT hasn't done any apparent harm to the U.S. macroeconomy. It has some high income people complaining, but what else is new?

Earl Tupper, the inventor of Tupperware, renounced U.S. citizenship in the mid-20th century. There was no Expiration Tax. He settled in Panama and...he was never heard from again, and he never invented anything else in his life. Meanwhile, everything he invented (plastic bowls) accrued to the benefit of the U.S. economy.

Like I said, find me a dozen or more sympathetic individuals who can make this case. Where are they? They ain't Earl Tupper.


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## BBCWatcher

maz57 said:


> By the way, considering that whatever is taxed is discouraged, why on earth would you want to discourage people from earning income?


Now let me agree with you, Maz57 -- though you're not going to like the outcome. 

A tax discourages the underlying behavior. A tax increase further discourages the underlying behavior. How much depends on something called elasticities. Some taxes (and tax increases/decreases) result in big behavioral changes (high tax avoidance reactions), and others don't.

OK, so what does a mild CBT do? To Immigpat's point, here's what it does: at the margins, it discourages wealthy and high-income people from moving themselves and their wealth from the United States to tax havens. And Maz57, I agree with you: mild CBT is effective.

From the U.S. government's point of view, is that a bad thing? It sounds like a _perfectly sensible_, rational thing to do in the U.S. national interest, including in terms of all the innovation Immigpat described. The U.S. wants Elon Musk and wants to _encourage him to stay_ (and/or discourage him from leaving), basically. You also said you like savings, Maz57. A little thumb on the scales in favor of retaining talent and capital inside the United States seems like outstanding, award-winning public policy, even in your terms.

Conversely, if the U.S. were to replace its mild CBT with a strict RBT, as I mentioned previously, "Gas up the Gulfstream, Dear! Pack the stock and bond certificates, we're heading to St. Kitts! (But don't forget our U.S. passports, Dear. We'll need those in case there's a revolution so the U.S. military can rescue us.)" Does anybody seriously dispute my characterization of what the reaction would be among America's well-to-do? Is that perfectly predictable reaction in the U.S. national interest?


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## Bevdeforges

I think we're skipping over the real purpose of taxes here: to provide revenue to the government to maintain both itself and its public services. The whole thing about "encouraging" or "discouraging" certain behaviors is only a side-effect that can be used to nudge the populace to shift their behavior in some way that benefits the government and the society as a whole. (Like putting money aside for retirement or avoiding sugar or tobacco to reduce overall health care costs.)

Some governments use income taxes to raise the bulk of the revenues they need, others use a VAT and most use some combination of the two (not to mention a whole range of other taxes on residents). But the point of the exercise is to provide the funding for the government to function. That begs the question of CBT, if only to ask just what US government services overseas residents are consuming - other than renewing their passports every 10 years.

As far as having to convince Congress of anything, hell, most of them aren't convinced of global climate change, evolution, or the basic rights of anyone not of their religious persuasion. 
Cheers,
Bev


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## BBCWatcher

Bevdeforges said:


> That begs the question of CBT, if only to ask just what US government services overseas residents are consuming - other than renewing their passports every 10 years.


They consumed. *Lifecycle*. _Every_ government on the planet understands lifecycle effects, even the ones without mild CBT regimes.

Is this really so hard to grasp? It isn't for Congress.


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## shidareume

New poster here. Been reading BBCWatcher's arguments in favor of CBT with interest. Hoping to bounce some opposing ideas off him, if he doesn't mind.



BBCWatcher said:


> They consumed. *Lifecycle*. _Every_ government on the planet understands lifecycle effects, even the ones without mild CBT regimes.
> 
> Is this really so hard to grasp? It isn't for Congress.


That is not the legal justification for CBT. The one time extraterritorial CBT went to the Supreme Court (Cook v. Tait), it was upheld on a benefits basis (emphasis added):

"In other words, the principle was declared that *the government, by its very nature, benefits the citizen and his property wherever found*, and therefore has the power to make the benefit complete. Or, to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country, and the tax be legal, the government having power to impose the tax."

While one could conceivably stretch the interpretation of this decision to cover a life-cycle argument, the plain meaning seems to refer to a present, on-going benefits rationale.

If you want to argue that some kind of individualized, life-cycle accounts ledger should be kept for each person with respect to every country they ever have contact with, such a system should not try to be mapped onto citizenship, which provides a very poor match. For example, someone with citizenship A, but growing up in country B, should really owe a life-cycle debt to Country B, not A. But I would argue that even a fairly-accounted life-cycle system would merely serve to reduce freedom of movement -- which is perhaps why it was a favored argument of the old Soviet-block countries, but was never the stated policy in the Free World.

Also, the US of all countries would lose out if strict life-cycle accounting were practiced, since it takes in many more immigrants than it sends out as emigrants. I doubt that is a road that Congress would find profitable to head down.


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## BBCWatcher

Yes, the U.S. Supreme Court made particular arguments, and in my view they decided that case correctly, as the law and facts required.

But the arguments in favor of mild CBT are much wider, broader, and deeper than those the U.S. Supreme Court probed in its decision. As I assume(d) everyone is aware, U.S. courts are not authoring comprehensive moral and ethical justifications when they hand down opinions. They consider the cases presented and, typically, take the shortest paths to reach consensus decisions.

Lifecycle effects are _highly correlated_ with citizenship in a _jure soli_ citizenship country with severely limited _jure sanguinis_ citizenship transmission. Thanks to the Fourteenth Amendment the United States has probably the world's simplest, most universal _jure soli_ citizenship regime. There are no U.S. Constitutional rights to _jure sanguinis_ citizenship, and Congress has strictly limited _jure sanguinis_ transmission to only one generation, and then only with strict caveats requiring minimum U.S. residence terms (or the functional equivalent, such as overseas U.S. military service).

But, as I've repeatedly stated, I am not at all opposed to those who don't like the package deal that is U.S. citizenship -- with its unique package of rights, privileges, and obligations -- who renounce that citizenship under what I view as currently broadly reasonable terms. Mild CBT is not an inescapable prison sentence. It's just part of the package. As a couple thousand ex-Americans per year know full well. Sovereigns have agency, too.


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## shidareume

Ok, but Congress has not made lifecycle arguments in favor of CBT either, as far as I know. You're actually the first person I've seen this argument from. I've heard benefits arguments (paying for the Right of Return, principally), and generalized proof-of-loyalty justifications.

Can you elaborate on how you think lifecycle taxation should work, and why CBT makes a reasonable proxy for it? Is the idea of lifecycle taxation the principal argument for CBT in your mind, or do you think there are others as well, and if so, what are they?


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## BBCWatcher

Congress makes lifecycle arguments all the time. They're implicit in _everything_ about tax systems, even in RBT regimes. As a notable example, babies don't pop out of the womb and immediately join the 25% income tax bracket. 

Let's consider Australia as an example. Australia has "superannuation" funds. What are those? Australian tax-advantaged accounts. What do they do? Provide *lifecycle-oriented* tax benefits to encourage Australians to save for retirement.

No tax system on the planet is designed as an annual "residency fee" system, even the RBT ones. This isn't like a condo fee.

It's such basic stuff that maybe Congress doesn't _articulate it_ very often, but apparently it's also so basic that it needs explaining here. I'm glad to oblige. Demographics matter, and they matter to tax systems. Infants, children, teenagers, young adults, older adults, the elderly, and the dead are all very different in the nature of their financial relationships with their governments. Infants _can't_ pay a lot of taxes, and older adults in their prime working years _can_. All tax systems respect that basic reality, some more than others.

Is this controversial? I really don't think so. There's nothing whatsoever "magical" about _annual_ income tax reporting. The income tax system could function equally well if the cycle were, say, based on the length of Venus's year. Or Mars's. Nobody's relationship with his/her government begins or ends on December 31 -- unless renunciation happens to occur on that date. Or birth, or death. It's just a reporting interval, and an arbitrary one based on the path the Earth takes around the Sun.

Lifetimes, well, those are much more important.


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## shidareume

Ok, so let me repeat: how do you think lifecycle taxation *should* work, and why is extraterritorial CBT a reasonable proxy for it?

Let's take a simple case: A citizen of Country A, who is born, raised and educated in Country B, spends adult working life in Country C, and retires to Country D. To which country(ies) should that person be paying lifetime taxes to satisfy their lifecycle obligations?


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## Bevdeforges

> There are no U.S. Constitutional rights to jure sanguinis citizenship, and Congress has strictly limited jure sanguinis transmission to only one generation, and then only with strict caveats requiring minimum U.S. residence terms (or the functional equivalent, such as overseas U.S. military service).


Actually, there are ways for grandparents to pass their US nationality on to their grandchildren when the children aren't able to do so. (I happened to have been active in a couple of expat groups founded by the woman who pushed for this particular exception - and was one of the first people to make use of it once it was enacted.)

At the time, Congress passed the legislation in response to a particular lobbying effort by overseas Americans, with no regard whatsoever to the tax impact. (Sometime in the mid-1970's, I think it was.) For details, you can check a book called The Unknown Ambassadors by Phyllis Michaux. I admire Phyllis greatly for her drive, but I'm not at all sure she had any idea the "mess" she was creating for some folks considered citizens under the change in the rules. 
Cheers,
Bev


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## shidareume

BBCWatcher said:


> Yes, the U.S. Supreme Court made particular arguments, and in my view they decided that case correctly, as the law and facts required.
> 
> But the arguments in favor of mild CBT are much wider, broader, and deeper than those the U.S. Supreme Court probed in its decision. As I assume(d) everyone is aware, U.S. courts are not authoring comprehensive moral and ethical justifications when they hand down opinions. They consider the cases presented and, typically, take the shortest paths to reach consensus decisions.
> 
> Lifecycle effects are _highly correlated_ with citizenship in a _jure soli_ citizenship country with severely limited _jure sanguinis_ citizenship transmission. Thanks to the Fourteenth Amendment the United States has probably the world's simplest, most universal _jure soli_ citizenship regime. There are no U.S. Constitutional rights to _jure sanguinis_ citizenship, and Congress has strictly limited _jure sanguinis_ transmission to only one generation, and then only with strict caveats requiring minimum U.S. residence terms (or the functional equivalent, such as overseas U.S. military service).
> 
> But, as I've repeatedly stated, I am not at all opposed to those who don't like the package deal that is U.S. citizenship -- with its unique package of rights, privileges, and obligations -- who renounce that citizenship under what I view as currently broadly reasonable terms. Mild CBT is not an inescapable prison sentence. It's just part of the package. As a couple thousand ex-Americans per year know full well. Sovereigns have agency, too.


Ah, I think you added text while I was composing my first reply, so I just noticed the second two paragraphs now. (Either that, or I was being even more unobservant than usual.)

So you correlate CBT to lifecycle effects by assuming most people are citizens by jure soli. Are the jure sanguinis cases not worthy of consideration as well? How is it fair to them?

But, let me take argument with your phrase, "mild CBT." Here are a couple un-mild features of the present system:

1) FBAR and FATCA fines which are completely unrelated to actual tax owed and are very large. As a basic principle, if no tax would have been owed, there should be no fines for getting the paperwork wrong. FBAR and FATCA fines violate this fairness principle in a big way. (And I know FBAR is technically an anti-money-laundering measure, not a tax-related one, but same principle: if no money-laundering occurred, then paperwork failures should have zero penalty.)

2) PFIC rules. The taxation on these can easily lead to double-taxation (through time-shifting), or worse. This combined with the fact that the US has blocked almost all access to US-based investment vehicles to US citizens abroad makes retirement planning almost impossible for lower- and middle-class US citizens abroad who cannot afford knowledgeable accountants to do the paperwork for them.

3) US-dollar basis for all calculations. So the amount of gain or loss will always be different in reportable US-dollar and real on-the-ground terms. And the paperwork is extra complicated.

4) In general, the complexity of having to keep records and accounts in a second currency (US dollar), and the refusal of the IRS to answer questions related to overseas taxpayers' filing requirements.


To you, it all seems to be about money, so as long as it is only a few percent, then you call it "mild." For those of us who see unmanageable complexity and the threat of devastating fines even when no tax is owed, it is not mild.

But fine, you say, just leave if it is too much to keep up with. And that is in fact what many people are doing. The question I have is, does the US really want to be tellling people this? Is this in the US's best interest to be creating this kind of situation? I don't see the positives in it for them. I just see a lot of ill will being unnecessarily created.


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## BBCWatcher

shidareume said:


> Are the jure sanguinis cases not worthy of consideration as well? How is it fair to them?


Perfectly fair, in my view. _Jure sanguinis_ Americans living overseas -- which they have to be, at least to start, otherwise they wouldn't be _jure sanguinis_ -- have no particular U.S. obligations throughout their childhoods overseas, absent a far-fetched Justin Bieber-like scenario. (And that's a bad example anyway. Much of Bieber's income was/is U.S. source, and he's taxed at Canadian rates anyway. Moreover, U.S. citizenship would be a significant asset to that sort of career.) One could also argue that intergenerational effects are reasonable to consider within a tax system to a limited degree, and one generation is limited.

It's fair to point out their parents can pretty routinely collect $1,000 per child per year in free money from the IRS. Not always, but it's pretty commonly available at low to moderate incomes. That's not a bad deal at all.

Upon reaching age 18 that young American (often $17,000 richer, plus interest) can renounce U.S. citizenship with no Expatriation Tax whatsoever as long as that young American meets a not onerous U.S. absence requirement (i.e. has not substantially availed him/herself of one of the primary privileges/rights of U.S. citizenship). Though the number of 18 year olds who'd even come close to the Expatriation Tax is vanishingly small anyway, but among that extremely small cohort there's a 6 month window to renounce and escape the Expatriation Tax completely.

There is a $2350 fee for that 18 year old to renounce. We could quibble about that, though there was that $17K available more than occasionally.

Many, many countries take the same fundamental approach: upon reaching the legal age of majority, there's a window to decide. In fact, the President Obama had that same choice and did not avail himself of his right to Kenyan citizenship and its package of rights, privileges, and obligations. (Yes, it comes with some obligations, too.) Japan's window is from age 20 to 22, to pick another example.



> 1) FBAR and FATCA fines which are completely unrelated to actual tax owed and are very large. As a basic principle, if no tax would have been owed, there should be no fines for getting the paperwork wrong.


That doesn't make any sense. There are plenty of citizenships in the world that come with non-tax obligations with stiff penalties for non-compliance. Compulsory military service is the classic, major category of such alternative obligations. There are 40-odd countries with such military obligations at last report. (Lithuania just reintroduced compulsory military service.) In a few cases (Singapore, for example) military service obligations even extend to certain non-citizens.

Moreover, you've mischaracterized FBAR and FATCA penalties anyway. If you file FinCEN Form 114 but unintentionally misstate one or more particular facts, there's not actually any penalty. The law requires _intentional_ misrepresentation or failure to file before penalties apply. Check me on that, but I'm pretty sure I'm correct. FATCA penalties are within the general IRS domain and much the same. You don't get penalized for "getting the paperwork wrong." You get penalized for _lying_ (with lesser penalties for non-filing, particularly willful).

That said, there are some countries that have penalties for "getting the paperwork wrong," even unintentionally, even extra-territorially. For example, get your draft registration wrong, even unintentionally, and at least a few countries will get upset about that. Singapore would be one of them.

....But if you don't like your U.S. obligations, on the very day of your 18th birthday you can renounce U.S. citizenship if you choose.

U.S. citizens also can be prosecuted for bribery committed anywhere in the world (i.e. violations of the Foreign Corrupt Practices Act). They are prosecutable for raping children anywhere in the world. If you're suggesting or implying as a principle that the U.S. (and other governments for that matter) shouldn't be able to prosecute in such instances, I'm going to disagree with you.



> 2) PFIC rules.


We might agree with each other that PFIC-related rules in the tax code ought to be revised.

But let's consider the history there first, because the history is important. The only reason PFIC-related rules exist is because the Mitt Romneys of the world (and his antecedents) engaged in aggressive tax avoidance through PFICs. They figured out legal (or near-legal) ways to lie about asset valuations, fundamentally. Congress clamped down on those tax dodges, hard. Rightly so. But that had the side effect of making tax compliance fairly complicated -- not necessarily _onerous_, not even very often ("mark to market" has its advantages, too) -- for "mere mortal" Americans who have the misfortunate to save in a foreign mutual fund, for example, perhaps through a foreign tax-advantaged retirement savings account.

In some cases -- Canada, to pick a notable example -- the U.S. has done a lot of PFIC-related repair work, some recent, primarily via tax treaties. That's progress. But you'll get no argument from me that tax filing ought to be simpler for all Americans. However, that PFIC history will need to be respected in order to avoid re-opening that particular problem. I think it can be while making things simpler.



> 3) US-dollar basis for all calculations. So the amount of gain or loss will always be different in reportable US-dollar and real on-the-ground terms. And the paperwork is extra complicated.


OK, but what else should it be? Congress has to pick some currency, and U.S. dollars seems like a reasonable choice for the U.S. Congress.

And why would the gain or loss "always be different"? The IRS is so generous it lets you choose any reasonably defensible exchange rate, including (would you believe) the actual one. (Or you can use the IRS's published rate if you prefer, and you might.)

If you're arguing that the Six Percent Club (and other Americans with overseas income) take(s) on a bit of foreign exchange risk in translation to their U.S. tax liabilities, that's true, but they have some solutions. For example, if they don't like currency risk they can immediately make estimated tax payments (or at least currency conversions). If someone sells 10 million Singapore dollars worth of stock (with 5 million in capital gains), there's nothing preventing that person from immediately sending a 1040-ES slip with a payment to the IRS, at that instant. There's nothing preventing more than 4 estimated tax payments -- you can make as many as you like, and the IRS will dutifully process all your payments. So if you want to lock in a particular exchange rate that day, even without using fancy currency hedging/options, you can do that, no problem.

But there is quite a bit of wiggle room in what the IRS already allows. Keep in mind also the IRS doesn't collect the upside when the dollar falls in value during the tax year (or falls between "normal" estimated tax payments). The Six Percent Club and other Americans with overseas income keep all the upside.



> ....and the refusal of the IRS to answer questions related to overseas taxpayers' filing requirements.


The IRS refuses to answer many/most questions _domestically_, so what else is new? If you're arguing that the IRS ought to be better funded, sign me up to that campaign! I'm all for that. What the Republicans in Congress did to the IRS this past budget cycle (and prior) is criminal.



> To you, it all seems to be about money, so as long as it is only a few percent, then you call it "mild." For those of us who see unmanageable complexity and the threat of devastating fines even when no tax is owed, it is not mild.


No, it's not only about the money. Far from it.

But let's be fair here. On the tax filing side, the 94% Club faces zero penalties. No U.S. tax legally owed, no IRS-related penalties. That's as generous as any country can be, and few countries are actually that generous. The United Kingdom, as reported in this forum, as an example, is most certainly not.

I think we've already covered that FBAR and FATCA fines, much less devastating fines, don't exist for anyone making a good faith effort to comply. But if you think they do, go find that dozen or more sympathetic victims of those devastating fines who've had to pay because they made unintentional errors on their FinCEN Form 114s even while not legally owing any U.S. tax. They'd make fantastic witnesses at a Congressional hearing!

Where are those people? I would assert they don't actually exist. And I have the evidence to back up my assertion. The fact is the U.S. Department of Justice only very recently won its very first criminal prosecution for a "naked" FinCEN Form 114 violation. In that case the DOJ had to prove that the target willfully lied -- the same legal standard as perjury -- and in that case they did. It was the first time in history somebody had been successfully prosecuted exclusively for a FinCEN Form 114 violation.

There are many risks in life, but prosecution for making an inadvertent mistake on your FinCEN Form 114 isn't actually one of those risks.


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## maz57

The entire unholy combination of FBAR, FATCA, CBT, PFIC, etc, etc, is a modern day version of the Vietnam era "America; love it or leave it". 

For some reason the US is obsessed with punishment. Who knows, perhaps this is a vestige of the Puritanical beliefs held by many of the original colonists. No other civilized country has CBT like the US has CBT, mild or otherwise. In BBC's view the US has got it right and every other country in the world has got it wrong, yet every morning the sun continues to rise right on schedule. The governments of those other countries have not only not crumbled, many do a far better job of looking after their young, their old, and their vulnerable than the US does.

I'll be an American until the day I die but I'm thankful to no longer be a US citizen. I decided I just didn't want any more punishment.


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## BBCWatcher

maz57 said:


> No other civilized country has CBT like the US has CBT, mild or otherwise.


You've just deeply offended the Hungarians. 



> In BBC's view the US has got it right and every other country in the world has got it wrong....


No, and if you review what I wrote I most explicitly didn't write that. Don't misrepresent or mischaracterize my views. I'm making the argument (_partially_ as a "devil's advocate") that the U.S. doesn't have it "wrong" in terms of core tax system principles. I clearly and carefully didn't go beyond that. In fact, I wrote rather the opposite, that there are many _reasonable_ tax systems, and a mild CBT is _among_ those that are _reasonable_. If other countries want to structure their tax systems differently, I generally have no objection.

_Obviously_, self-evidently it's reasonable. The world's #1 economy has had a CBT -- usually a less mild one -- for over a century and a half (with a few decades interruption early on). And that country is doing better than it ever has, overall, if you care to look at the data.

If a mild CBT is harmful somehow in terms of societal outcomes and national success it sure doesn't seem to be all that harmful.



> The governments of those other countries have not only not crumbled, many do a far better job of looking after their young, their old, and their vulnerable than the US does.


And many do not. Though I'd point out the U.S. has been posting some impressive numbers lately, like its unemployment rate, nicely falling crime rate, and rate of elder poverty (which has been going up significantly elsewhere, particularly in Europe), as examples.

However, the burden is on you on this one. If mild CBT is so terrible, then where's the evidence in the U.S. macroeconomic data?



> I'll be an American until the day I die but I'm thankful to no longer be a US citizen....


Then you'll be a North American until the day you die (if you wish), and that's perfectly fine with no objection whatsoever from me.


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## maz57

BBCWatcher said:


> However, the burden is on you on this one. If mild CBT is so terrible, then where's the evidence in the U.S. macroeconomic data?


I never said that. CBT seems to work fine for US government revenue and the US economy, at least so far. (The longer term effects of FATCA and its unintended consequences won't be known for many years.) 

But US CBT is unquestionably bad for US expats, and this stubborn adherence to CBT (combined with FATCA) is turning US expats into collateral damage. Congress knows about it and doesn't seem to care. The question is whether the harm being inflicted on those expats is worth the revenue collected and the ill will generated. So far I haven't seen much discussion of that in the halls of Washington. 

My point is that forgoing that particular source of revenue doesn't seem to prevent lots of other countries from doing a pretty good job of serving their citizens. Some do worse, but it isn't because they don't have CBT.


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## shidareume

BBCWatcher said:


> Perfectly fair, in my view. _Jure sanguinis_ Americans living overseas -- which they have to be, at least to start, otherwise they wouldn't be _jure sanguinis_ -- have no particular U.S. obligations throughout their childhoods overseas, absent a far-fetched Justin Bieber-like scenario.
> [...]
> Many, many countries take the same fundamental approach: upon reaching the legal age of majority, there's a window to decide. In fact, the President Obama had that same choice and did not avail himself of his right to Kenyan citizenship and its package of rights, privileges, and obligations. (Yes, it comes with some obligations, too.) Japan's window is from age 20 to 22, to pick another example.
> [...]
> ....But if you don't like your U.S. obligations, on the very day of your 18th birthday you can renounce U.S. citizenship if you choose.


I don't know anything about Justin Bieber (I've heard the name, but don't know anything about his situation or citizenship), but your argument seems not to be so much that taxing citizens who have never been resident is justified by lifecycle arguments, but rather that it is easy to leave the system, so no harm, no foul. Is that right, or have I missed your point? If so, my question is, wouldn't a system that was fair in the first place be more, uh, fair?



> U.S. citizens also can be prosecuted for bribery committed anywhere in the world (i.e. violations of the Foreign Corrupt Practices Act). They are prosecutable for raping children anywhere in the world. If you're suggesting or implying as a principle that the U.S. (and other governments for that matter) shouldn't be able to prosecute in such instances, I'm going to disagree with you.


I'm going to have to think about that one. Extraterritoriality is a double-edge sword. Yes, it can let a government go after bad people outside its jurisdiction, but it also puts good people at jeopardy from bad laws coming at them from outside their jurisdiction. And there is a bigger question about the proper way to handle conflicts with local laws (good or bad).



> We might agree with each other that PFIC-related rules in the tax code ought to be revised.


Ok, good!



> But let's consider the history there first


All laws have some history behind them. That does not excuse the mess facing those who have to try to comply with them in the present.



> In some cases -- Canada, to pick a notable example -- the U.S. has done a lot of PFIC-related repair work, some recent, primarily via tax treaties. That's progress. But you'll get no argument from me that tax filing ought to be simpler for all Americans. However, that PFIC history will need to be respected in order to avoid re-opening that particular problem. I think it can be while making things simpler.


Well good, since we have common ground here, how do you think the PFIC laws could be changed to make them less burdensome on the average American abroad, without allowing the Mitt Romneys to run wild?



> OK, but what else should it be? Congress has to pick some currency, and U.S. dollars seems like a reasonable choice for the U.S. Congress.


One's local currency, of course. Corporations are allowed to do this. Why not real people?



> And why would the gain or loss "always be different"? The IRS is so generous it lets you choose any reasonably defensible exchange rate, including (would you believe) the actual one. (Or you can use the IRS's published rate if you prefer, and you might.)


It doesn't matter which particular exchange rate is used -- as long as it is a floating one, there will always be this problem.



> If you're arguing that the Six Percent Club (and other Americans with overseas income) take(s) on a bit of foreign exchange risk in translation to their U.S. tax liabilities, that's true, but they have some solutions. For example, if they don't like currency risk they can immediately make estimated tax payments (or at least currency conversions). If someone sells 10 million Singapore dollars worth of stock (with 5 million in capital gains), there's nothing preventing that person from immediately sending a 1040-ES slip with a payment to the IRS, at that instant. There's nothing preventing more than 4 estimated tax payments -- you can make as many as you like, and the IRS will dutifully process all your payments. So if you want to lock in a particular exchange rate that day, even without using fancy currency hedging/options, you can do that, no problem.


No, I'm not talking about the 6% club, and I don't even want to know what a 1040-ES is. Or perhaps I do think about those temporarily in the 6% club, due to the sale of a home or something like that.

But even for the 94% club, this is all excess complication. Even if no taxes are due, gain/loss calculations have to be made to show that no taxes are due.



> But there is quite a bit of wiggle room in what the IRS already allows. Keep in mind also the IRS doesn't collect the upside when the dollar falls in value during the tax year (or falls between "normal" estimated tax payments). The Six Percent Club and other Americans with overseas income keep all the upside.


I don't actually understand what you are saying here, to be honest. Can you clarify?



> The IRS refuses to answer many/most questions _domestically_, so what else is new? If you're arguing that the IRS ought to be better funded, sign me up to that campaign! I'm all for that. What the Republicans in Congress did to the IRS this past budget cycle (and prior) is criminal.


No, the IRS specifically refuses to answer questions about PFICs, what accounts need to be reported on form 8938, etc. I know, I've called their question lines, and they explicitly told me they were not allowed to answer those questions. So I have rules I am required to follow, but I'm not allowed to be told what those rules are. Nice system.

And don't try to tell me that all this crap falling on our heads is the fault of one party or another. It is purely bipartisan from what I have seen.



> No, it's not only about the money. Far from it.
> 
> But let's be fair here. On the tax filing side, the 94% Club faces zero penalties.
> [...]
> I think we've already covered that FBAR and FATCA fines, much less devastating fines, don't exist for anyone making a good faith effort to comply.


I don't think this is true, at least on paper. You may say "oh, they would never enforce that, or interpret an unknowing or senile failure to file the form as willful," but I don't trust that. The trend is towards automated penalty letters from the IRS -- guilty until proven innocent. And the trend is towards enforcing more obscure rules that never used to be enforced.



> But if you think they do, go find that dozen or more sympathetic victims of those devastating fines who've had to pay because they made unintentional errors on their FinCEN Form 114s even while not legally owing any U.S. tax. They'd make fantastic witnesses at a Congressional hearing!
> 
> Where are those people? I would assert they don't actually exist.


There have been a whole bunch of stories like that, people who had no idea they were even supposed to file FBAR forms, or even file taxes, who got whacked with completely disproportionate penalties. I hope such people will contribute their stories to Congress. (Again.)


----------



## maz57

I took the dog for a walk and thought a bit about our discussion; one thing stuck in my mind. You described the US as having "mild" CBT, BBC. Which country is it that has "severe" CBT? I don't think it is Eritrea because they charge a simple 2% without all the life control and complicated reporting.


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## BBCWatcher

maz57 said:


> But US CBT is unquestionably bad for US expats....


Progressive income taxes (with few or no loopholes) are "unquestionably bad" for people with high incomes. Tax compliance complexity is "unquestionably bad" for all people who cannot afford the services of talented tax professionals (including conservatively tens of millions of U.S. residents). Estate taxes are "unquestionably bad" for wealthy dead people. Sales taxes and VATs are "unquestionably bad" for poor and middle class consumers. Cigarette taxes are "unquestionably bad" for cigarette smokers. Import duties on Canadian maple syrup are "unquestionably bad" for Canadian maple syrup lovers.

Of course taxes are "unquestionably bad" for the people they tax. Compulsory military service is "unquestionably bad" for draftees, too.

What else is new? That's not actually an argument for anything. As I've written before, _everybody_ complains about taxes, especially wealthy and high income people. That's not special. It's perfectly predictable and boring, and Congress mostly tunes it out. And I can't blame them.


----------



## BBCWatcher

maz57 said:


> You described the US as having "mild" CBT, BBC.


The United States had a less mild CBT regime in the past, particularly in the period between World War II and the Tax Reform Act of 1986. That's when Earl Tupper renounced his U.S. citizenship, if you'd like a name.


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## BBCWatcher

shidareume said:


> ....but your argument seems not to be so much that taxing citizens who have never been resident is justified by lifecycle arguments, but rather that it is easy to leave the system, so no harm, no foul. Is that right, or have I missed your point? If so, my question is, wouldn't a system that was fair in the first place be more, uh, fair?


"What's the alternative?"

Children don't have agency. Governments thus have to make default assumptions with respect to children. As one example, governments have to exercise some oversight over the care of children, just in case their parents do something really stupid (or disappear). U.S. citizenship is ordinarily an extremely valuable package of rights, privileges, and obligations. It is _reasonable_ to make a default assumption that (qualified) children automatically, legally receive that particular package at birth. When they do have agency (age 18, or in a few cases earlier) they can then deviate from that default assumption if they choose.

I get the sense in this forum that occasionally we drift into some weird libertarian-esque/John Galt-ish anti-tax philosophies, maybe with a dash of Wesley Snipes's advisors tossed in.  Well, here's one of the many ways reality intrudes. As I wrote before, children don't pop out of the womb into the 25% tax bracket. 

There are many reasonable approaches governments can take concerning the citizenship rights of children, and in my view the U.S. approach -- the same basic approach many (if not most) other governments take -- is thoroughly reasonable.



> Extraterritoriality is a double-edge sword.


Yes it is! Isn't the world a complex, wonderful place?  So are tax systems, and there are many wonderful variations. The world isn't actually black and white, neatly separated into "CBT" and "RBT," for example. Japan really does have (less mild) CBT elements in its tax code (as I'm acutely aware), and the U.S. really does have a mild CBT -- that's an entirely fair characterization.



> All laws have some history behind them. That does not excuse the mess facing those who have to try to comply with them in the present.


It can if they were even messier in the past. Perfection, sadly, is not actually attainable on Planet Earth. Governments can only do the best possible, and often the best isn't perfect.

I'm not saying the current PFIC-related rules are the best possible -- I think they can be better -- but I don't think perfect is going to be possible in this particular area of the tax code, unfortunately.



> ....how do you think the PFIC laws could be changed to make them less burdensome on the average American abroad, without allowing the Mitt Romneys to run wild?


As an operating principle, if the valuations are rock solid and fair then that should work. For example, Congress and the IRS could start with considering whether government-issued (or at least tightly government-supervised) account statements in tax treaty foreign countries should be trusted as to valuations -- essentially, extending what was partially done in Canada more completely in Canada and also to the other treaty countries. Congress and the IRS would have to investigate such an idea fully, but that sort of thing would be a good start.



> One's local currency, of course. Corporations are allowed to do this. Why not real people?


People are allowed to do the same thing as corporations here. I don't understand what distinction you're trying to draw here. Corporations pay their U.S. tax bills exclusively in U.S. dollars, just like people.



> It doesn't matter which particular exchange rate is used -- as long as it is a floating one, there will always be this problem.


Yes, but unless the world adopts a single global currency -- bad idea -- it will remain an unsolved problem. It also happens to be a small, manageable problem. And it's also a problem not unique to the Six Percent Club.



> But even for the 94% club, this is all excess complication. Even if no taxes are due, gain/loss calculations have to be made to show that no taxes are due.


Not if Congress adopts some of my ideas. I cannot quite make tax filing dead simple for the whole 94% Club, but I think I can make it far simpler for about 80% of that 94% Club.

But there will still be occasions when people are going to have to convert currencies. Sorry about that. I think in the year 2015 we've figured out division and multiplication by now, so I'm not too worked up about that particular aspect of tax filing. It's not contributing much of the complexity -- certainly not for the 94% Club.



> No, the IRS specifically refuses to answer questions about PFICs, what accounts need to be reported on form 8938, etc.


Yes, I'm aware of that. The IRS also refuses to answer myriad tax questions unique to U.S. residents.



> And don't try to tell me that all this crap falling on our heads is the fault of one party or another. It is purely bipartisan from what I have seen.


In this case, no it's not. The Democratic Party supports increasing funding to the IRS, and the Republican Party supports cutting the IRS's funding. On this issue, there is a stark policy difference between the parties and their members.

As I've wrote several times, I believe in agency. Let's clearly recognize the U.S. political parties' agencies. If you don't, then the lines of responsibility are blurred or lost, and nothing is fixed.



> There have been a whole bunch of stories like that, people who had no idea they were even supposed to file FBAR forms, or even file taxes, who got whacked with completely disproportionate penalties. I hope such people will contribute their stories to Congress. (Again.)


Who are these people? Where are they?

I see a lot of people _panicking_ in this forum because they _became aware_ they're supposed to be filing FinCEN Form 114 (in particular). There are also press reports of a cohort of very wealthy Americans who had undeclared Swiss bank accounts who've been sent letters of inquiry. These are not, however, individuals who've been getting dinged for inadvertent failure to file FBARs. These are individuals getting dinged because they haven't paid U.S. tax legally owed -- that's the original sin. (And many of them promptly paid the taxes they illegally evaded, with interest and penalties. Thank you, Mr. Birkenfeld.) The FBARs are, at most, the cherry on top of that 6 scoop sundae.

Raise your hand if anybody here has been fined or otherwise penalized solely for a FinCEN Form 114 violation -- non-filing, late filing, or inaccurate filing. Anybody?

That said, I do recommend that people file their FinCEN Form 114s, among other things. There are theoretically possible penalties if you don't satisfy that particular financial reporting obligation, so I think it's a great idea to take the few minutes once a year to get that form e-filed. But if you view this particular obligation as burdensome, toss it into your calculus for whether you wish to renounce.

I do think IRS Form 8938 and FinCEN Form 114 are unnecessarily duplicative, and I'm fairly optimistic Congress will agree and will consolidate those two similar reporting obligations. It's in everyone's mutual interest to do so, and I don't know anybody who opposes that idea.


----------



## Bevdeforges

shidareume, don't waste your breath, er, "pixels", arguing the point with BBC. He is a huge fan of CBT and just about everything in the current tax code - or so it seems. He is also part of the "6%" of US overseas taxpayers who actually has to pay taxes when submitting their returns. And by his own accounts, he's more or less happy to pay it.

Frankly, given the plans of the IRS to withdraw all their overseas personnel by the end of the year, I tend to think they aren't nearly as concerned about shaking down every overseas taxpayer for every cent they can wring out of them as they'd like to have you believe. They simply don't have the manpower to control things that closely these days and there are lots of tax evaders back on their home turf they have yet to discover or deal with. (And they don't have to pay large travel bills for their agents to audit.)
Cheers,
Bev


----------



## shidareume

BBCWatcher said:


> "What's the alternative?"
> 
> Children don't have agency. Governments thus have to make default assumptions with respect to children. As one example, governments have to exercise some oversight over the care of children, just in case their parents do something really stupid (or disappear). U.S. citizenship is ordinarily an extremely valuable package of rights, privileges, and obligations. It is _reasonable_ to make a default assumption that (qualified) children automatically, legally receive that particular package at birth. When they do have agency (age 18, or in a few cases earlier) they can then deviate from that default assumption if they choose.


This is getting vague, so let me once again predicate a simple, clear situation: A citizen of Country A, who was born, raised and educated in Country B, spent adult working career in Country C, and is now retired in Country D. What fraction of current income taxes should that person still owe each country for their lifecycle obligations? 25/25/25/25? 10/20/30/40? 100/100/100/100? Something else? What is your answer?



> I get the sense in this forum that occasionally we drift into some weird libertarian-esque/John Galt-ish anti-tax philosophies, maybe with a dash of Wesley Snipes's advisors tossed in.  Well, here's one of the many ways reality intrudes. As I wrote before, children don't pop out of the womb into the 25% tax bracket.


I may be new around here, but I certainly am not anti-tax. I am quite happy to pay taxes to Japan, where I live, no complaints at all. (And parenthetically, the Japanese tax authorities are an absolute joy to work with compared to the IRS. They even answer actual questions!) I'm a 94%er, but I probably would not even mind tossing a few yen back at The Old Country for nostalgia's sake, if only they didn't insist on making the process so incredibly baroque and fraught with peril, and on trying to micromanage my affairs from afar.



> Japan really does have (less mild) CBT elements in its tax code (as I'm acutely aware)


Are you talking about the inheritance tax, which requires 5 years of non-residence to be free of? I presume somebody in your family is Japanese, then, if this is an issue of acute awareness for you. I also presume you will be proudly happy to pay this tax, should it come to that, since you're such a firm believer in CBT. Can't think of a better opportunity to repay someone's lifecycle obligations than an inheritance tax -- the ultimate Exit Tax.



> I'm not saying the current PFIC-related rules are the best possible -- I think they can be better -- but I don't think perfect is going to be possible in this particular area of the tax code, unfortunately.
> 
> As an operating principle, if the valuations are rock solid and fair then that should work. For example, Congress and the IRS could start with considering whether government-issued (or at least tightly government-supervised) account statements in tax treaty foreign countries should be trusted as to valuations -- essentially, extending what was partially done in Canada more completely in Canada and also to the other treaty countries. Congress and the IRS would have to investigate such an idea fully, but that sort of thing would be a good start.


Valuations are not the problem with PFIC treatment -- you use the published market value for a mutual fund. The problem is in the hairy accounting required in the default case, and the lack of coordination of mark-to-market treatment (if you are lucky enough to know to declare that in time) on the US side with the timing of taxable events on the local side.



> People are allowed to do the same thing as corporations here. I don't understand what distinction you're trying to draw here. Corporations pay their U.S. tax bills exclusively in U.S. dollars, just like people.


Corporations are allowed to use a local currency basis for calculating gains and losses (functional currency). Individuals are not. So individuals can have situations where a gain in one currency is a loss in the other, which destroys the ability to use an FTC.



> Yes, but unless the world adopts a single global currency -- bad idea -- it will remain an unsolved problem. It also happens to be a small, manageable problem. And it's also a problem not unique to the Six Percent Club.


No, it is a perfectly solved problem, for corporations. They just need to allow individuals to select their local currency as their functional currency as well. And yes, I agree this is not just a 6% club problem.



> Yes, I'm aware of that. The IRS also refuses to answer myriad tax questions unique to U.S. residents.


But they don't face the penalties we face for getting it wrong.

Re: excessive filing penalties for benign actors:


> Who are these people? Where are they?


See the Taxpayer Advocate's Annual Reports from the past few years, especially the sections on the various flavors of Overseas Disclosure Program and the like.


----------



## shidareume

Hi Bev,



Bevdeforges said:


> shidareume, don't waste your breath, er, "pixels", arguing the point with BBC. He is a huge fan of CBT and just about everything in the current tax code - or so it seems. He is also part of the "6%" of US overseas taxpayers who actually has to pay taxes when submitting their returns. And by his own accounts, he's more or less happy to pay it.


I don't expect to convince him, or him me. But it is not very interesting to argue with someone one agrees with, and I hope to at least learn something.



> Frankly, given the plans of the IRS to withdraw all their overseas personnel by the end of the year, I tend to think they aren't nearly as concerned about shaking down every overseas taxpayer for every cent they can wring out of them as they'd like to have you believe. They simply don't have the manpower to control things that closely these days and there are lots of tax evaders back on their home turf they have yet to discover or deal with. (And they don't have to pay large travel bills for their agents to audit.)
> Cheers,
> Bev


I understand that approach, but I tend to feel more comfortable, less exposed, following the rules. Which is why bad rules drive me nuts. Plus, you never know when they will find a way to crack down in the future, such as via computerized matching.


----------



## BBCWatcher

Bevdeforges said:


> He is a huge fan of CBT and just about everything in the current tax code - or so it seems.


Whatever gave you that impression? I think a mild CBT is entirely defensible and reasonable on principles, but "fan" is at least a bit extreme. I certainly don't like everything in the tax code and have pointed out several things I'd change if I were Congress and the President wrapped up into one for a day.



> He is also part of the "6%" of US overseas taxpayers who actually has to pay taxes when submitting their returns. And by his own accounts, he's more or less happy to pay it.


Who's happy to pay taxes? I'm not. That'd be weird.

I'm also not happy to pay for ice cream, socks, and Internet service. I am happy that ice cream, socks, and Internet service are available -- and that various government services are available.

I can, however, keep my disappointment in paying taxes separate from understanding and appreciating how governments might reasonably design and enforce their tax systems. I'm selfish, as most people are, but I also _realize_ I'm selfish.


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## shidareume

Perhaps the real disagreement is on what constitutes "mild."

For example, why do you say Japan has less mild elements of CBT in its tax code than the US does?
I don't see it that way at all.


----------



## BBCWatcher

shidareume said:


> This is getting vague, so let me once again predicate a simple, clear situation: A citizen of Country A, who was born, raised and educated in Country B, spent adult working career in Country C, and is now retired in Country D. What fraction of current income taxes should that person still owe each country for their lifecycle obligations? 25/25/25/25? 10/20/30/40? 100/100/100/100? Something else? What is your answer?


Just about whatever the reasonably democratically representative government decides should be the tax obligations of citizens of Country A provided that citizenship in Country A is reasonably voluntarily retained and can be terminated at low cost, and as long as that tax system tries to follow coherent core principles reasonably well. One of the important core principles, in my view, is strong correlation with ability to pay.

If you're asking whether a tax system with a whopping 6% incidence on its overseas resident citizens (skewed to its wealthiest and highest income members) and a termination fee no greater than $2350 at age 18 is consistent with what I just wrote, I'd say yes, probably.

Does that mean that I would find a variety of democratically decided tax systems reasonable? Yes it does. As I've said repeatedly, I believe in agency for democratic sovereigns and individuals alike.



> Are you talking about the inheritance tax, which requires 5 years of non-residence to be free of? I also presume you will be proudly happy to pay this tax, should it come to that, since you're such a firm believer in CBT.


This is so weird. Virtually nobody is happy to pay tax, myself included. But I can also grasp the concept that democratic societies might organize themselves in ways that require its members to do things they aren't necessarily always happy to do. Like fight and die in wars, if push comes to shove. (Let's hope not.)

I'm not happy to change diapers, but I do it. I'd really like to receive a big income without working, but I work.



> Corporations are allowed to use a local currency basis for calculating gains and losses (functional currency). Individuals are not. So individuals can have situations where a gain in one currency is a loss in the other, which destroys the ability to use an FTC.


I'm completely missing your point here. I buy something for 68 pounds and sell it for 72 pounds. Gain is 4. That gain then gets translated to U.S. dollars when realized. Same for corporations, same for individuals.

You're talking about long-term gains that cross tax years? OK. I suppose I'd be in favor of allowing individuals to pick their gain calculation method -- end gain translated to dollars, or dollar gain calculated. As long as they pick one calculation method for everything within a tax year and stick to it. It's a tax code detail that's mildly interesting, I suppose, but nothing something I lose sleep over.



> But they don't face the penalties we face for getting it wrong.


What? Nobody resident in the United States faces IRS penalties. That's big news.  Where can I get that deal?

In fact U.S. residents are audited at greater rates than U.S. citizens living overseas according to the available data.



> See the Taxpayer Advocate's Annual Reports from the past few years, especially the sections on the various flavors of Overseas Disclosure Program and the like.


Yes, those are for individuals who legally owe U.S. tax and haven't paid it. I would hope we can agree a tax system ought to be able to enforce tax collections. I'm asking where are the people getting prosecuted for unintentional FinCEN Form 114 infractions unaccompanied with illegal tax evasion? I've never heard of any such individuals, but if you find some, they'd be great Congressional hearing witnesses!


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## shidareume

BBCWatcher said:


> Just about whatever the reasonably democratically representative government decides should be the tax obligations of citizens of Country A provided that citizenship in Country A is reasonably voluntarily retained and can be terminated at low cost, and as long as that tax system tries to follow coherent core principles reasonably well.


Bear with me while I pursue this point. I have heard you say that Country A has a right to lifetime taxation, but not Countries B, C or D. Do you think Countries B, C and D also have rights to demand lifetime taxation for lifecycle reasons, even if the person in question never acquires their citizenships?




> This is so weird. Virtually nobody is happy to pay tax, myself included. But I can also grasp the concept that democratic societies might organize themselves in ways that require its members to do things they aren't necessarily always happy to do. Like fight and die in wars, if push comes to shove. (Let's hope not.)
> 
> I'm not happy to change diapers, but I do it. I'd really like to receive a big income without working, but I work.


Fine. But why do you consider Japan's CBT (on inheritance taxes, for 5 years only, with one-time paperwork and no restrictions on how one can conduct one's affairs abroad in the meantime) less mild than the US's CBT (on all income, forever, with complex yearly paperwork and lots of restrictions on how one can conduct one's affairs in one's own home locale)?



> You're talking about long-term gains that cross tax years? OK. I suppose I'd be in favor of allowing individuals to pick their gain calculation method -- end gain translated to dollars, or dollar gain calculated. As long as they pick one calculation method for everything within a tax year and stick to it. It's a tax code detail that's mildly interesting, I suppose, but nothing something I lose sleep over.


Yes, that is what I am talking about. And it can be a huge deal for the individual. But I'm glad we can agree on a possible solution for the individual.



> What? Nobody resident in the United States faces IRS penalties. That's big news.  Where can I get that deal?


Move to the United States. 

Seriously, though, people living in the US generally don't face the possibility of FBAR or FATCA penalties, because their local accounts are not designated as "foreign."



> In fact U.S. residents are audited at greater rates than U.S. citizens living overseas according to the available data.


Where have you seen this?



> I'm asking where are the people getting prosecuted for unintentional FinCEN Form 114 infractions unaccompanied with illegal tax evasion? I've never heard of any such individuals, but if you find some, they'd be great Congressional hearing witnesses!


Again, read the Taxpayer Advocate's Annual Reports. Those are the people she is talking about.


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## maz57

BBCWatcher said:


> I'm asking where are the people getting prosecuted for unintentional FinCEN Form 114 infractions unaccompanied with illegal tax evasion? I've never heard of any such individuals, but if you find some, they'd be great Congressional hearing witnesses!


You asked and I answered, but I'll answer again. A number of Canadians were herded into OVDI back when this whole US tax jihad was coming to the boil. They were people who, if they had filed three back years in a simple quiet disclosure (Streamlined hadn't yet been invented) would have owed little to no tax and no FBAR fines.

The treatment they received at the hands of the IRS was criminal; the IRS took them to the cleaners with 27.5% penalties and seriously impaired (or destroyed) their retirement savings. These people were clearly not criminal tax evaders. Their only "crime" was living their lives in Canada and being unaware of US tax filing obligations. The IRS hit them for both interest and penalties (if they owed tax) and straight up FBAR fines no matter what the tax situation was. The only ones that escaped were the ones who opted out of OVDI when they realized just how badly the IRS was screwing them. And the only way they managed that was to hire a knowledgeable (and expensive) lawyer who knew how to deal with the IRS. The right thing for the IRS to do once it became apparent what the real situation was would have been to itself offer to opt them out, accept some back filings, and call it a day. Instead the IRS was smacking its lips and bragging about all the loot they were collecting.

The Taxpayer Advocate outlined these abuses in her annual reports to Congress; Congress ignored her reports (if any of them read the reports at all). 

This IRS OVDI abuse is in large part the reason for the large amount of resistance (and bitterness) here in Canada to US CBT, the IRS, and now FATCA. The later Streamlined program is now used by Canadians more for renouncing their US citizenship and exiting the US tax system forever than for its intended purpose which is supposed to be an easy path back to compliance for benign actors.

There were never any prosecutions; just a massive injustice perpetrated under the guise of "going after and punishing tax evaders using offshore accounts".


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## jbr439

BBCWatcher said:


> ....
> I'm completely missing your point here. I buy something for 68 pounds and sell it for 72 pounds. Gain is 4. That gain then gets translated to U.S. dollars when realized. Same for corporations, same for individuals.
> 
> You're talking about long-term gains that cross tax years? OK. I suppose I'd be in favor of allowing individuals to pick their gain calculation method -- end gain translated to dollars, or dollar gain calculated. As long as they pick one calculation method for everything within a tax year and stick to it. It's a tax code detail that's mildly interesting, I suppose, but nothing something I lose sleep over.
> ...


Due to exchange rate changes over the years, it's possible for a break-even or even a loss in local currency to turn into a gain for US tax purposes - buy asset when Canadian dollar is weak, sell asset when Canadian dollar is strong. And when we're talking about buying a home in, say, Toronto or Vancouver, the numbers become quite large and the possibility of significant "phantom" gains all too real. Also, the Canadian dollar exchange rate can vary significantly over a span of years, often unpredictably - from a low of 1 CAD buys $0.65 USD a number of years ago to a high of 1 CAD buying >1 USD a few years ago. This leaves the homeowner at the mercy of exchange rates, which is a ludicrous situation as it's totally outside of his control. All of this makes it way beyond mildly interesting in my books.

The simple solution would be that same currency transactions can have the tax calculated on '(sale price in LC minus purchase price in LC) times exchange rate at time of sale' [LC = local currency]. This would eliminate phantom gains and go some way in bringing sanity to a tax system that thinks a Canadian domiciled S&P500 mutual fund or ETF is a PFIC.


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## BBCWatcher

shidareume said:


> Bear with me while I pursue this point. I have heard you say that Country A has a right to lifetime taxation, but not Countries B, C or D. Do you think Countries B, C and D also have rights to demand lifetime taxation for lifecycle reasons, even if the person in question never acquires their citizenships?


I didn't write that. If I write that Country A can do something, one cannot conclude that I wrote that Country B cannot do something. That's a mere logical fallacy, not anything I wrote.

"Right to demand...." Look, any country can _demand_ anything. The United Kingdom, for example, demands that people around the world obey its strict libel laws, with rather a lot of success in those demands. Singapore demanded (successfully) that the New York Times retract and apologize for a statement about its leader. North Korea demands that Hollywood not make films lampooning their leader, and Hollywood is complying.

Are you asking whether I agree with every government demand, that every demand is "fair" and "just"? Of course not. But you asked me about "Country A" and a particular generalized tax regime that applies to its citizens, and whether that could be reasonable. Of course it could (and most probably is).

OK, so now you're asking about Country B (or whatever). Let's pick a specific example that I've already cited. Singapore requires young male sons of both its citizens and its non-citizen permanent residents to serve in its military, no matter where they reside. So that's a specific, extraterritorial obligation (that I'd certainly consider more onerous than taxes, and I'm very surprised more people don't) imposed on non-citizens affiliated with Singapore. Do I agree with that policy?

I don't agree with compulsory military service in general when there is no pressing national emergency. However, with that disagreement aside, yes, I think Singapore's approach is _reasonable_ because PR status is voluntarily obtained and can be voluntarily terminated. It's an analog to citizenship with a particular, somewhat different package of rights, privileges, and obligations. Do I believe sovereigns can have package deals? Absolutely, I've written that many times. But I also believe individuals should have the right to accept that package and to terminate that package, both under _reasonable_ terms. In the case of Singapore their PRs appear to have such rights. I'm less sure its citizens do -- that's debatable.



> But why do you consider Japan's CBT...less mild than the US's CBT...?


(Chuckle.) All taxes are situational. If the former bites you in the ass more than the latter, it's less mild. 

I'd most probably prefer getting bitten by a house cat once per year than getting bitten by a lion once. 



> Seriously, though, people living in the US generally don't face the possibility of FBAR or FATCA penalties, because their local accounts are not designated as "foreign."


Most U.S. residents. (Mitt Romney is one of the exceptions.) But most U.S. citizens are not living outside the United States, so we're already weird. 



> Again, read the Taxpayer Advocate's Annual Reports. Those are the people she is talking about.


Different people, it sure seems to me. I asked about inadvertent, uncompounded FinCEN Form 114 violators. If you've got U.S. tax legally owed but unpaid, yes, you're going to get FinCEN Form 114 violations thrown on top of that mess, no question about it. But I've yet to hear of anyone prosecuted for a FinCEN Form 114 violation that was inadvertent who didn't also have other tax problems.

If there are people who took a bad deal when a better one was available, I'm not sure we can blame the tax code for that. Unfortunately that happens too frequently, in every country. See my previous comments about increasing the IRS's budget, and also see my previous comments about governments having an important role in protecting children and, I would add, the elderly, and other vulnerable cohorts.

Let's rewind here. FinCEN Form 114 _on its own_ isn't a serious legal risk. I hope we can all agree on that. (There are governments that require their citizens -- and even occasionally non-citizens, as with Singapore -- to report various things, and with much greater legal risks for noncompliance.) But yes, of course, if you've got tax problems that "cherry on top" of a FinCEN Form 114 problem certainly won't help. FinCEN Form 114 is very much as the tax prosecution was to Al Capone's penchant to shoot people. It's expressly designed as a trigger to catch liars _who are doing illegal things_, things which most of us (I hope) can agree are very bad things, like human trafficking or financing of terrorism (as notable examples). When somebody is caught for the illegal act, FinCEN 114 then gets dragged on top of it, much like meth lab operators are also prosecuted for not paying their taxes on their meth business. It's a very secondary, "cherry on top" offense to make prosecution and plea bargaining easier for real crimes, not a primary offense.

Again, I'm mystified why more people don't understand how this works -- and why there are so many completely innocent people who go out of their way to act like guilty people, in this respect and in others. I think I've described the situation quite accurately.

Anyway, no, I don't consider FinCEN Form 114 to be either onerous or add any material risk. But, as I wrote, if you disagree, add it to your renunciation calculus. Club membership has a few obligations, but nobody requires you to join (or stay a member of) the club.

There are about 200 such clubs in the world, so it's a competitive market. Most allow you to be a member of more than one club. Some even encourage it. A few let you join their club in about a week with a membership fee, and other require a more extensive period (much like an internship). Shop around if you want a new club. You'll get no objection from me. In fact, it's never been easier to find and join a new club and to avail yourself of that club's privileges. It used to be you had to get on a steamship, and that wasn't fun. (Before that it was even less fun.) Now you can just hop on a jet. The market for citizenships has been as competitive and open as it ever has been. Knock yourself out. If America is "stupid" with its particular club obligations, OK, there are 200+ other clubs. I like my clubs, even considering their obligations, but it's conceivable I could change my mind.

Now who's the libertarian here?


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## shidareume

BBCWatcher said:


> I didn't write that. If I write that Country A can do something, one cannot conclude that I wrote that Country B cannot do something. That's a mere logical fallacy, not anything I wrote.


Sorry, sloppy wording on my part. I did not mean to say that you had denied the rights of Countries B, C and D to impose lifetime taxes for lifecycle reasons, I meant that you had not addressed it.



> Are you asking whether I agree with every government demand, that every demand is "fair" and "just"? Of course not. But you asked me about "Country A" and a particular generalized tax regime that applies to its citizens, and whether that could be reasonable. Of course it could (and most probably is).
> 
> OK, so now you're asking about Country B (or whatever).


I asked about all 4 countries to begin with. What I'm trying to figure out is what you consider reasonable or fair under lifecycle taxation theory.

So, Country B: the person is raised and educated there, but does not become a citizen, and leaves permanently upon reaching adulthood. Country B has thus invested a lot into this person's development. Do you think it would be reasonable and fair for Country B to demand yearly income taxes from that person long after they have ceased residency, in order to recoup that investment?

Country C: Provides the social, economic and legal infrastructure needed for the person to thrive at their career. Again a big investment on the part of Country C. That country also presumably taxes current income while the person is living and working there, though also perhaps offers tax-deferred savings and investment vehicles, to be tapped in retirement (the proceeds of which, however, will all get spent in Country D, though Country C does not know this yet). Do you think Country C has a reasonable and fair claim to yearly income taxes even after the person has left that country permanently, and as a non-citizen? 

Country D: I guess this is simple, the person is living out their retirement there and using local services, so I think we'd all agree Country D has a reasonable claim to tax yearly income.

If you think that all the above countries could make reasonable claims to lifetime taxation based on benefits received, what would be a reasonable way to apportion those claims?

To me, all 4 countries could make a reasonable claim on that person's lifetime earnings under a lifecycle argument. (Actually, Country A would have the weakest claim, because they never actually provided any services. But they did continuously offer a Right of Return, which would be of value to some people even if not exercised.) I would also say that if anyone ever tried to implement this in a truly fair way, it would become a unadministrable bureaucratic nightmare. I would argue that it makes more sense, and better preserves freedom of movement, to base tax liabilities on a Pay It Forward system, which is basically what RBT does. (And I argue that the US would still be a massive net beneficiary under pure Pay It Forward principles.)



> If there are people who took a bad deal when a better one was available, I'm not sure we can blame the tax code for that.


It was the IRS that pushed people into those horrible programs. (And under Democratic Party-controlled government, so as I said, this is a bipartisan problem.)



> Let's rewind here. FinCEN Form 114 _on its own_ isn't a serious legal risk. I hope we can all agree on that. (There are governments that require their citizens -- and even occasionally non-citizens, as with Singapore -- to report various things, and with much greater legal risks for noncompliance.) But yes, of course, if you've got tax problems that "cherry on top" of a FinCEN Form 114 problem certainly won't help. FinCEN Form 114 is very much as the tax prosecution was to Al Capone's penchant to shoot people. It's expressly designed as a trigger to catch liars _who are doing illegal things_, things which most of us (I hope) can agree are very bad things, like human trafficking or financing of terrorism (as notable examples). When somebody is caught for the illegal act, FinCEN 114 then gets dragged on top of it, much like meth lab operators are also prosecuted for not paying their taxes on their meth business. It's a very secondary, "cherry on top" offense to make prosecution and plea bargaining easier for real crimes, not a primary offense.


Look, you cannot provide any kind of guarantee that that is how FinCEN 114 is and always will be used. Prima facie, that is not what is written in the instructions for the form. And again, the Taxpayer Advocate's report discusses people who were slapped with outsized FBAR penalties even with little or no actual tax owed. The people given this treatment were not Al Capones, but they were treated as though they were.



> Again, I'm mystified why more people don't understand how this works


Because that is not how it has been demonstrated to work.



> Anyway, no, I don't consider FinCEN Form 114 to be either onerous or add any material risk. But, as I wrote, if you disagree, add it to your renunciation calculus. Club membership has a few obligations, but nobody requires you to join (or stay a member of) the club.


The question is whether the US would rather lose club members than try to treat them less harshly. In the process turning mini-ambassadors into mini-anti-ambassadors. Is that what Congress wishes for? It had better be, because that is what they are getting.


----------



## BBCWatcher

shidareume said:


> So, Country B: the person is raised and educated there, but does not become a citizen, and leaves permanently upon reaching adulthood. Country B has thus invested a lot into this person's development.


Agreed, as a generalization, yes.



> Do you think it would be reasonable and fair for Country B to demand yearly income taxes from that person long after they have ceased residency, in order to recoup that investment?


Yes, it _could_ be reasonable. My definition of "reasonable" would include, as examples:

1. A Foreign Tax Credit;
2. Continuation of rights and privileges, such as a permanent residence status or citizenship;
3. Ability to withdraw from those rights and privileges under reasonable terms;
4. Automatic sunset proportional to the value of those rights and privileges.

In other words, those are the same principles that apply to Country A.



> Country C: Provides the social, economic and legal infrastructure needed for the person to thrive at their career. Again a big investment on the part of Country C.


Quite possible, agreed.



> That country also presumably taxes current income while the person is living and working there, though also perhaps offers tax-deferred savings and investment vehicles, to be tapped in retirement (the proceeds of which, however, will all get spent in Country D, though Country C does not know this yet). Do you think Country C has a reasonable and fair claim to yearly income taxes even after the person has left that country permanently, and as a non-citizen?


Yes, that _could_ be reasonable, with "reasonable" dependent on inclusion of the same principles above (and perhaps more, but at least those).



> Country D: I guess this is simple, the person is living out their retirement there and using local services, so I think we'd all agree Country D has a reasonable claim to tax yearly income.


We can, but (in my view) the same principles still ought to apply.

In short, individuals ought to be able to have as many "club memberships" as they want, though clubs can each set their own entrance rules (sometimes automatic if "reasonable"). Each of those club memberships comes with rights, privileges, and obligations. Obligations can include "reasonable" taxes, but "reasonable" includes recognition of (and credit for) other clubs' dues. Another part of "reasonable" more generally is strong correlation with ability to pay. Club membership should be something individuals can terminate under reasonable rules of termination, though clubs ought to have the right to make termination an "all or nothing" deal. They can have a couple different levels of club membership if they wish, e.g. PR and citizenship. And the clubs ought to have "reasonable" automatic sunset provisions when members are disconnected, though not triggered if the individual would lose his/her last club membership (statelessness). In the U.S. case, for example, citizenship doesn't go past the first overseas generation and is automatically ended at that point.



> If you think that all the above countries could make reasonable claims to lifetime taxation based on benefits received, what would be a reasonable way to apportion those claims?


Source of income first (e.g. Armenia gets the first crack at taxing Armenian source income), current residence second (with full foreign tax credits), and then (if you even get this far) full foreign tax credits thereafter for other clubs' claims, probably starting from the most recent club if there's a conflict. Yes, that's complicated, stipulated. So is having multiple club memberships, also stipulated.  But you asked a question of reasonableness.



> To me, all 4 countries could make a reasonable claim on that person's lifetime earnings under a lifecycle argument.


Yup. That would be "reasonable." Many things are.

Another thing that would be reasonable would be to have a treaty arrangement of like-minded countries that provide very similar packages of rights, privileges, and obligations, and revenue sharing between them. Then simplified and standardized citizen interactions with governments within the treaty organization. I may have just described the European Union, or at least the emerging EU.



> But they did continuously offer a Right of Return, which would be of value to some people even if not exercised.


Yup. Part of the value of club membership is (are) the option value(s). In the U.S. case one example would be the right of destitute citizens requiring nursing home care to "parachute in" and be taken care of via Medicaid.



> I would also say that if anyone ever tried to implement this in a truly fair way, it would become a unadministrable bureaucratic nightmare.


Bridge already well crossed, even without the U.S. in the picture at all. (Hints: PR statuses, residency "hangovers," definitional disputes of residency, income source disputes....)

See above for a real-world suggestion.

But also see above for a hint at the problem. Let's be blunt: nobody here in this forum would be so worked up about the U.S. mild CBT if it weren't the U.S. That is to say, if it weren't a valuable citizenship. If this were, say, Botswana, and you all were trying to decide whether it was worth renouncing your citizenship in Botswana, most of you wouldn't give it a second thought.

But it's U.S. citizenship, and it's valuable for most, at least on an option basis. Just like other membership clubs, in some sense the U.S. charges accordingly. The price of membership is a bit higher -- though by no means the highest in the world -- in part because its democratically elected government _can_ charge the slightly higher price. Most of the other 200+ citizenships really aren't as valuable and aren't worth paying as much to obtain or to maintain (in cash terms on a ~6% incidence basis). To be blunt.

And maybe, just maybe, membership in that club is so valuable for so many precisely in part because of the way that club has organized its dues structure. For example, that particular club counts Elon Musk as a member, at least as an important guest, and Mr. Musk has lots of reasons to maintain his membership in good standing. A very few of those reasons include tax reasons. The club is very happy to have Mr. Musk as its member.

There's a big "marketplace" of membership clubs, though. Shop around if you wish.



> Look, you cannot provide any kind of guarantee that that is how FinCEN 114 is and always will be used?


Life comes with few guarantees about the future. U.K. citizenship didn't look quite so valuable and was hugely more expensive in 1940, for example. I can't guarantee that the club called U.S. citizenship won't have different rights, privileges, and obligations in the future. In fact, I'm rather sure the composition of that deal will change to some degree, but I'm also sure it will for other citizenships. Nothing unique about that.

However, FinCEN Form 114 and its predecessor have been around for about four decades with no naked prosecutions in sight -- OK, maybe a few people who voluntarily took a bad deal -- so again we're dealing in very low risk realms here, truly. But OK, like I said, if you're paranoid (or at least highly concerned) about FinCEN Form 114 risks, chuck that into your calculus on whether you maintain your club membership.



> The question is whether the US would rather lose club members than try to treat them less harshly.


Hell yes! The United States loses a couple thousand club members per year through renunciation. It would still lose hundreds per year if it had an RBT regime -- the elasticity here is miniscule. (I truly believe many, many people don't renounce U.S. citizenship for tax reasons.) The U.S. loses a heck of a lot more than that through ordinary mortal death, for perspective. There are at least 10 times as many Americans who leave the club each year due to "accidental poisoning," which I guess means swallowing rat poison accidentally or something like that. Not what I would have thought of as the most common way to go, but it's at least 10 times more common than renunciation. Add a zero to the renunciations number and the United States will _still_ not have any concern. Nor should it. Meanwhile, the U.S. is getting up near 1 million new club members per year voluntarily joining as adults. One of them is even a judge on "America's Got Talent."

I'm sorry, I just laugh at such "the club is in trouble!" arguments because they are laughable. Moreover, the U.S. has no further responsibility (like Medicaid) for renunciants and sometimes collects a lot of Expatriation Tax as they head out the door, plus continued taxation on U.S. source income but with 30% withholding usually applied. So even in narrow financial terms the U.S. Treasury might be doing very well here anyway, or at least not terribly badly.

I'm still waiting for Eduardo Saverin to bless Singapore with his next big innovation....   

Heck, Roger Ver alone is far more valuable to the United States as an ex-citizen than he ever was as a citizen. Sorry, Roger, but it's true.


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## BBCWatcher

Let me try changing the subject if I may back to something that might be a _winnable_ argument against "double taxation": capital gains.

In many countries, including in the U.S., capital gains are treated quite oddly in the tax codes. Let's use an example to illustrate the problems. Suppose you buy 100 shares of stock in General Electric at $10 per share. Your cost basis is thus $1000. You hold onto those shares for quite a while. (Let's ignore the dividends for now.) You sell them at $25 each. Your gain is $15 per share or $1500, a nice gain. You then pay a preferential rate of tax on those gains, a rate lower than the rate on earned income. It's lower in two ways. First, it's just a lower rate in a lower bracket, and second that particular income does not attract payroll tax (Social Security and Medicare).

So it's fair to say that the U.S. tax code treats earned income -- income from work -- more harshly than many types of passive income such as capital gains. That is to say the tax code discourages work _relative to_ passive income activities. That's a problem, in my view, in a world with too little employment (still) and too much idle capital, and there are also significant distributional problems. Hedge fund managers, for example, presently organize their affairs so that they're taxed at capital gains rates rather than at ordinary income tax rates, even though just about everybody (except of course hedge fund managers, and their Congressional supporters) agree that's ridiculous. (And actually fund managers can do even better than what I've just described.)

And that's not all. What I didn't tell you is that GE last traded at $10/share in 2009, almost exactly 6 years ago (as I write this). Unlike income from work, which is paid almost immediately, every week or every month, capital gains aren't. That $1500 profit isn't actually $1500, not in real income terms. It's actually more like $1371, after accounting for inflation. That is to say the present tax code tends to encourage passive investors to take more risks -- to invest in more risky ways -- because the capital gains tax does not take into account inflation. You really want to try to beat inflation, a lot, in order to make the capital gains tax "worth it," in some sense. One could argue that encouraging additional risk taking is not a good idea in part because government has repeatedly had to bail out financial institutions (and account holders) that took excessive risks.

Let's turn to those dividends for a moment, though I think it's easier to explain if I talk about an ordinary bank savings account and interest paid on that account. (Dividends are similar.) Let's suppose you deposit $5,000 into a savings account that pays 1% interest. (That'd be pretty good interest these days.) Let's suppose inflation is also running at 1%. When that account grows to $5050 at the end of the year, it has only kept pace with inflation. A year ago you could buy 1000 sacks of potatoes (or whatever), and this year you can still only buy 1000 sacks of potatoes. Your money has tread water.

But that's not what the income tax "thinks." You pay ordinary income tax (but not payroll tax) on that $50 of interest. That doesn't make sense to me either. In that example I think that $50 ought to be tax free. If, on the other hand, you get a 2% dividend from GE, then half of that dividend ought to be tax free and the other half, above inflation, ought to be taxed at ordinary income and payroll tax rates, in my view.

So, to summarize, what I would do, if I were Congress and the President wrapped up into one for a day, is this:

1. Eliminate the rate differences between passive income and earned income (income is income is income);
2. Tax only _real_ income, i.e. after-inflation capital gains (on assets held more than one year);
3. Tax only _real_ interest and dividends, that is the amounts received above the annual inflation rate (CPI)(*);
3. Broaden the payroll tax to all types of real income;
4. Eliminate the payroll tax cap.

Since that combination of tax changes would most likely increase tax revenues, I'd take at least some of the increased revenues and take the following steps (or something quite like it):

1. Increase and broaden the Earned Income Tax Credit (EITC), i.e. make America's 0% and negative income tax brackets even lower (and make it easier to qualify while resident overseas);
2. Reduce the 10% tax bracket to 5%;
3. Increase Social Security benefits;
4. Reduce Medicare enrollment fees;
5. Open more public medical clinics;
6. Reduce the Medicare eligibility age (at least to 60);
7. Reduce the payroll tax rate.

Anybody like this plan, to eliminate a particular "double tax," that of passive income taxes on seignorage?

(*) I realize I just put a double inflation benefit there with dividends and capital gains. That's not quite what I had in mind -- it should be a single inflation adjustment. That's quite possible to do if you don't allow inflation adjustment on the capital gains for any untaxed "inflation dividends," so that's what I had in mind. For example, your gain is $1500 and not inflation-adjusted at all if GE consistently paid at least the rate of inflation in the form of dividends while you held the stock. To the extent dividends fell short of inflation, or weren't paid at all, you can make your inflation adjustment to lower your nominal gain back to the real gain.


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## shidareume

BBCWatcher said:


> In short, individuals ought to be able to have as many "club memberships" as they want, though clubs can each set their own entrance rules (sometimes automatic if "reasonable").


Ok, thanks for the clarifications. I think I see now what you are getting at. In order for it to be reasonable for a country to tax non-residents, those non-residents have to have some kind of right of abode in that country (through citizenship or PR, say). Otherwise, when they leave it is considered like an amicable divorce without alimony. Something like that?



> Another thing that would be reasonable would be to have a treaty arrangement of like-minded countries that provide very similar packages of rights, privileges, and obligations, and revenue sharing between them. Then simplified and standardized citizen interactions with governments within the treaty organization. I may have just described the European Union, or at least the emerging EU.


Or the states in the US.



> But also see above for a hint at the problem. Let's be blunt: nobody here in this forum would be so worked up about the U.S. mild CBT if it weren't the U.S. That is to say, if it weren't a valuable citizenship. If this were, say, Botswana, and you all were trying to decide whether it was worth renouncing your citizenship in Botswana, most of you wouldn't give it a second thought.


I think it is more that people did not realize what kind of relationship the US thinks they have with it. They expect to be treated by the US similar to the way other countries treat their non-resident citizens, which sets them up for shock when the US does not see it that way.


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## shidareume

BBCWatcher said:


> So, to summarize, what I would do, if I were Congress and the President wrapped up into one for a day, is this:
> 
> 1. Eliminate the rate differences between passive income and earned income (income is income is income);
> 2. Tax only _real_ income, i.e. after-inflation capital gains (on assets held more than one year);
> 3. Tax only _real_ interest and dividends, that is the amounts received above the annual inflation rate (CPI)(*);
> 3. Broaden the payroll tax to all types of real income;
> 4. Eliminate the payroll tax cap.
> 
> Since that combination of tax changes would most likely increase tax revenues, I'd take at least some of the increased revenues and take the following steps (or something quite like it):
> 
> 1. Increase and broaden the Earned Income Tax Credit (EITC), i.e. make America's 0% and negative income tax brackets even lower (and make it easier to qualify while resident overseas);
> 2. Reduce the 10% tax bracket to 5%;
> 3. Increase Social Security benefits;
> 4. Reduce Medicare enrollment fees;
> 5. Open more public medical clinics;
> 6. Reduce the Medicare eligibility age (at least to 60);
> 7. Reduce the payroll tax rate.
> 
> Anybody like this plan, to eliminate a particular "double tax," that of passive income taxes on seignorage?


I like some of it, such as treating all income the same, and not having different rates for different kinds of income. Philosophically cleaner, plus less complexity is good.

I don't like the inflation-adjusted calculation (though I am sympathetic to the argument for it in theory), precisely because that would add complexity in practice. Remember, my complaint with the system is not so much the tax rates themselves as it is the complexity of it all. Adding an inflation adjustment on top of the currency adjustment I already have to do is not a win for me. Make my life simpler, not more complicated, please.

Actually, on the subject of investment taxes, I think the US should take the approach Japan has taken. In Japan, we have investment accounts which take care of all of our (Japanese) tax reporting and collection for us, automatically. Basically, you accept some automated withholding at some standardized rate in exchange for not having to fill out tax returns on that income. (But you also have the option to do a tax return if you want to do something tricky, like carry losses over or something.) It is actually a brilliant system, very user-friendly.


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## BBCWatcher

shidareume said:


> I don't like the inflation-adjusted calculation (though I am sympathetic to the argument for it in theory), precisely because that would add complexity in practice.


No, it's the opposite. I've made things simpler. Here's why:

1. For the vast majority of people I've just completely eliminated income tax (and income tax reporting) on ordinary bank interest and most dividends. Anything at or below the CPI wouldn't even generate a 1099 (or would generate a zero 1099). No Schedule B, etc. That includes most U.S. persons living overseas. No more digging through foreign bank statements to figure out whether the interest paid was $3.21 or $3.58 -- it doesn't matter. No tax treaty checking, no foreign tax credit complexity, etc. You just look at the interest rate, compare it to the CPI for that year, and you're (usually) done. That's simple!

2. You don't _have_ to take the after-dividends inflation adjustment on capital gains, but it would be an allowable adjustment when calculating the net gain. (You also don't _have_ to subtract out inflation when reporting interest and dividends.) And it wouldn't be hard to do, really, because you'd just use a deflator (or inflator) from an IRS table. You can still overstate your income if you wish. (In some cases people would do that since the difference could be trivial.)

3. The IRS has required U.S. (and U.S. affiliated) financial institutions to issue capital gains calculation statements for several years now. They can do the work for you to add the inflation adjustment to the 1099.

4. Institutions paying interest and dividends would naturally adjust to pay at or below CPI. Anything else they'd defer to capital gains, if applicable. (Or, in the case of banks, they'd compete to cut fees if there's market pressure to go above the CPI on interest.)

To net it out, accounting for the CPI would simplify tax filing quite a lot for most people most of the time. And that's really about the best you can do short of exempting passive income completely, and I'm not in favor of that.

Note that this particular change to the tax treatment of passive income would likely mean the estate tax has to be made more strict and very hard for wealthy dead people to escape. The $5.43 million (per spouse, 2015) exemption is generous, I think, and a 40% tax rate above that is also about right. (Some in Congress wanted 45%.) The problem is that the estate tax is too easy to dodge. Those loopholes need to be closed, especially if there's going to be a considerable amount of tax free nominal passive income.

With respect to the automatic-ness of Japan, many countries have automatic (or pre-filled) tax filing systems. The IRS has proposed doing the same thing (pre-filling most taxpayers tax forms, letting them review and in most cases just confirm them), but Intuit's lobbyists, allied lobbyists, and their Congressional supporters shot that idea down. It would have made tax filing too easy for too many people, and that would have jeopardized a major fraction of Intuit's TurboTax and related businesses.

Yes, of course, I'd like to see Intuit lose that particular battle, finally.


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## BBCWatcher

By the way, there are occasions when the CPI adjustment would occur with earned income: when it's deferred. A simple example would be a Traditional IRA. When you withdraw from a Traditional IRA the withdrawal is taxed at ordinary income tax rates.

In my view that Traditional IRA withdrawal should be adjusted for CPI first (back to when that particular money was put in) then taxed on the real (not nominal) gross proceeds. All U.S. IRAs have U.S. administrators who can do this math for you and report it, so it doesn't add complexity.

That said, I would completely revamp tax-advantaged savings and get rid of most or all of it. (I just made CPI-or-less passive income tax free, remember. That's an incentive to save, as if we needed that right now.) What I would consider is a tax advantage strictly limited to a regulated defined benefit pension. Yes, I'd rewind the clock to the time before the 401(k) -- the whole IRA 401(k) thing has been a disaster. (Thank goodness for Social Security.) That'd be simpler, too. Tax treaties tend to respect defined benefit pensions -- or at least straightforwardly explain how they're treated -- so that'd help overseas Americans simplify their affairs.

But I haven't thought that one through as much. That's the direction I'm thinking, though. This stuff fits together like a jigsaw puzzle.


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## Immigpat

BBCWatcher said:


> This stuff fits together like a jigsaw puzzle.


And when you're in 2 tax jurisdictions, it fits together like taking random pieces from 2 very different jigsaw puzzles and using them to form 1 clear picture.


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## Bevdeforges

The only problem with trying to index capital gains for inflation is that, in the case of us overseas residents, there is the added potential whammy of exchange fluctuation. So, do you use the CPI in the US, or in the country of residence? The difference can be enormous.

And it's all well and good to get rid of the tax deferred programs in the US, but what about the tax-advantaged programs overseas? Many European countries have no-tax savings accounts - limited to pretty nominal balances - or their own versions of retirement savings that yield tax benefits according to the needs of that particular country. At the moment, most US citizens living abroad are counseled to avoid these kinds of investments, due to the way in which the US attempts to tax them. 
Cheers,
Bev


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## BBCWatcher

It has to be U.S. CPI. While U.S. CPI will differ somewhat from foreign inflation rates, it won't over the long term when exchange rates are also factored in.

As mentioned previously, I don't think I'm opposed to offering taxpayers the choice of converting the gain (calculated in foreign currency) to U.S. dollars, or converting the cost basis and the gross proceeds into the U.S. dollars, then calculating the gain.

As I think I mentioned previously, I'd prefer to have a "Foreign Residence Exclusion" that's a little friendlier to even non-treaty foreign retirement income, even if that means being a little less friendly to foreign earned income.


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