Friday, May 18, 2012

Senators preparing a new shot in the war against expats

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Photo by Patty Vicknair
Cross-posted at the Daily Kos.

Imagine, if you will, the following situation.

A young man, born in South America, moves to the US as a child, acquires US citizenship, invests in a successful company, and later moves to Asia. After living in Asia for several years, this successful young man invests in a number of business opportunities in the US, South America, and Asia. Despite being foreign-born, because he acquired US citizenship, he's required to file his tax returns every year and dutifully does so. Then Form 8938 came into effect and he has a problem. Now he's required to report on his foreign financial assets and businesses outside the US aren't happy about this. Foreign businesses are already avoiding the US due to the PATRIOT act, but now they're not happy about having American partners with invasive tax filing requirements due to the new form 8938.

Thus, our young man has a problem. He can lose potential business deals due to foreign companies with no presence in the US not wanting their financial details reported to the US, or the young man can decide to retain his original citizenship and give up his US citizenship and continue his business without any problems.

And that's exactly what Eduardo Saverin did in September of 2011. A Brazilian who's lived in Singapore for the last several years, Eduardo Saverin decided that due to his US citizenship being a tremendous obstacle to what he can do with his money. With Americans abroad being denied bank accountsbrokerage accounts, and being denied business opportunities, it seems perfectly reasonable that a Brazilian living in Singapore might want to give up his US citizenship. Unfortunately, Eduardo Saverin is one of the founders of Facebook and is expected to save many millions of dollars by giving up his US citizenship prior to Facebook's IPO (your author has read estimates of anywhere from $35 to $100 million in tax savings).

That's why US senator's Schumer and Casey want to tax him anyway. And bar him from returning to the US.
[Expats] who avoid paying their taxes by renouncing citizenship will be permanently denied re-entry into the U.S. ... Called the “Ex-Patriot” act (short for “Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy”, according to ABC News), the act proposes to re-impose a mandatory 30 percent tax on the capital gains of anyone who renounces citizenship — even if they are no longer resident in the U.S.
This is rather interesting. While I haven't read the text of the bill (I can't find it), it appears from this brief summary that an "accidental American", such as, for example, Boris Johnson, a prominent British politician and the mayor of London, could easily be barred from entering the US if someone decides that he gave up his citizenship to avoid paying US taxes.

This hearkens back to the famous "Reed Amendment" which attempted to group tax dodgers in the same class as polygamists and international child abductors: people who are barred from entering the US. The Reed Amendment has never been enforced because of the ludicrousness of it. Two people, in exactly the same situation, decide to exchange their US citizenship for another citizenship. One is allowed to visit the US and the other is barred from ever entering the US merely because someone decides that the latter is a tax dodger? The Brazilian Saverin has already stated quite clearly that he's giving up his temporarily acquired US citizenship because of business restrictions. How do we read his mind and prove that he's also dodging taxes?

Many Americans have a knee-jerk reaction to people giving up US citizenship (but they don't give a damn about people giving up the citizenship of other countries as exemplified by their proud declarations of being of "British", "German", etc. descent). Frankly, I have no idea what Saverin did wrong. He's Brazilian and he's lived in Asia for years. When Form 8938 started curtailing his business and financial interests, it makes perfect sense for him to decide to remain Brazilian but give up his US citizenship (I have no issue with patriotism, but jingoism fills me with disgust).

While I have very mixed feelings about the Economist magazine, I feel the Economist hit they hit the nail on the head regarding Saverin:
Wait a second! Did Eduardo Saverin plunder us? Are we now a desolate husk of a country, sucked dry by Eduardo Saverin's rapine? Well, no. Facebook created wealth. Mr Saverin is leaving having deployed his capital in a manner that made America better off than it was when he arrived. But will he escape without rendering unto Caesar what is Caesar's? Well, no.
In this case, the Economist appears to get some details wrong, but in short, since Saverin is worth considerably more than $2,000,000US, he's considered a "covered expatriate" and must pay an "exit tax" as if he sold everything he owns. He's already facing at least three hundred million dollars in taxes on his estimated $2 billion net worth and he knows that. If this was just done for taxes, Saverin would have saved money by not giving up his US citizenship.

In a country where most US businesses avoid paying any federal income tax, does it seem a bit strange to go after one man? Senator Charles Schumer, one of the men incensed at Saverin's behavior, has long fought hard to limit taxes on the enormous profits made by hedge fund managers. Of course, even though he hit political pressure and backtracked slightly, there's a reason that those in the securities and investment industries are still his top campaign contributors: Schumer takes care of the rich and they take care of him.

Senator Robert Casey, meanwhile, has been repeated introducing bills to suspend taxes on the chemical industry:
Why do we have two Senators fighting hard to cut taxes on very successful businesses and try to punish expats on a one-time alleged tax dodge? Currently, with around 1700 Americans giving up citizenship last year, when you look at the US population of 309 million people, we have only 0.0006% of Americans giving up their citizenship. Given that the vast majority of us are middle class (my research shows that most expats tend to be teachers, accountants, waiters, social workers, and so on), we have a tiny, tiny, tiny fraction of wealthy Americans giving up their citizenship. We're talking about a handful of people that Schumer and Casey's bill is designed to target, but as with most "let's punish the expats" laws, they're hurting innocent people who can't afford to pay the exorbitant costs being foisted on expats. I'm not sure how hurting innocent Americans to punish a handful of wealthy people adds up, but ...

Bullshit. I know exactly why it adds up. I hear it all the time. One expat who lives in France mentioned how one American screamed at her for being a traitor for living in France with her French husband. Just hit Google and search for traitor expat (minus "julian" to avoid the Julian Assange links) to get an idea of how we're viewed.

Right now, the US in a serious recession and some suggest it could become a new Depression. Others argue that we're already entering a Depression (like how I contrasted Fox News and Krugman there?). What better way to distract the voters than to punish the much-loathed and politically impotent expatriate community?

The "Ex-Patriot" act will raise little revenue, will discourage the wealthy from adopting US citizenship, but will resonate with voters who want to lash out at someone.
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