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Abolish the Expatriation Tax

Tags Legal SystemTaxes and SpendingInterventionismOther Schools of Thought

03/23/2009Briggs Armstrong

[See also [AuthorName]'s coda to this article: "More on the Expatriation Tax."]

Fire Exit

In the past, the government was forced to show a modicum of restraint with respect to levying taxes for fear that citizens would simply leave the country and move to a more favorable location. In fact, the threat of the citizenry emigrating en masse is arguably one of the most important checks on government power. The American Jobs Creation Act, passed by a Republican House, Senate, and president, effectively removed this fear.

Republican politicians have adopted the role of loyal opposition and are feigning contempt for Obama's proposed tax increases. If they truly wanted to limit Obama's power, they would restore the right of Americans to vote with their feet and their tax dollars. The people's mere ability to leave and take their tax dollars with them would be a major deterrent to tax increases, regardless of the number of people who actually elect to leave.

The American Jobs Creation act of 2004, passed by the Republican-controlled government, amended section 877 of the Internal Revenue Code. Under the new law, any individual who has a net worth of $2 million or an average income-tax liability of $127,000 who renounces his or her citizenship and leaves the country is automatically assumed to have done so for tax avoidance reasons and is subject to some rather unbelievable tax laws.

Any individual who is declared to have expatriated for tax reasons is forced to pay US income taxes on all US based income for 10 years following expatriation, regardless of the country in which the individual resides. Additionally, in the 10 years following expatriation, if a qualifying individual spends 30 days in the United States during any year, he or she is taxed as a US citizen on all income derived from any place in the world. To make matters worse, if an individual happens to die in a year in which he or she spent at least 30 days in the United States, the entire estate is subject to US income tax law.

Consider this scenario. Mr. Smith's net worth (including his house) is $2 million. He decides that he is going to move to Naples, Italy because of an excellent job offer. He officially expatriates on January 1, 2009. During 2009, Mr. Smith spends only 10 days in the United States. He receives income from US sources totaling $80,000 in 2009. Mr. Smith must pay income taxes on that $80,000 but not on any money earned in Naples. However, in 2010, Mr. Smith's mother is very sick and he visits her for a total of 30 days spread throughout the year. Now Mr. Smith is forced to pay US taxes on all the money derived from the United States and from his job in Naples. In 2019, Mr. Smith returns to the United States for heart surgery after having already spent 30 days in the country. Unfortunately, Mr. Smith dies during surgery. Under the current law, Mr. Smith's entire estate from both the United States and the rest of the world is subject to US tax law in 2019.

Many of the people with whom I have discussed this rather dastardly legislation have not found it nearly as appalling as I do. This utterly baffles me. The actions taken by the government in this legislation are merely coercion, extortion, and theft writ large. Consider if private companies were to begin to behave in a similar manner; I doubt that the reaction would be as quiescent.

Consider if customers were to rent a car under the agreement that there would be a fixed charge per day. Each day the individual uses the car, he or she incurs an agreed-upon daily rental fee.

Now suppose that the rental-car company is in a difficult financial position due to the CEO's incompetence and excessive spending. In order to stave off bankruptcy, the CEO decides to raise the daily rental rate for all of the luxury models. After all, since customers who rent luxury models make more money, it is only fair that they pay more. Additionally, the rental-car company decides to institute a new policy that requires all renters to continue to pay the daily rental fee for 10 days after they return their automobiles.

Since renters are effectively forced to continue to rent from the company, the CEO is now free to raise rates with impunity. The fear of losing existing customers is destroyed. The existing customer base is now essentially captive. Word would soon spread that people who rent luxury cars from this company would be trapped indefinitely. This would encourage new customers who desire to rent luxury cars to go to the company's competitors.

With the rental-car company's competitors getting all the new luxury-model customers, its revenues would grow far slower than its peers'. This would lead to an endless spiral of increasing rates on customers of different levels until all of the company's renters are paying far more than customers of other companies and are receiving far less in return.

If Americans are unwilling to tolerate this type of behavior from corporations, why are we so willing to tolerate it from our government?

Over the last eight years, the Republican Party has lost the public's confidence and faith. They now have an opportunity to regain a shred of credibility and attempt to restore their image as something more than a self-interested political machine, willing to do anything to obtain and maintain their power. If Republicans truly have any genuine desire to limit the administration's power in any way whatsoever, they will promptly demand the repeal of the American Jobs Creation Act.

The oft-used cliché in response to harsh criticisms of the country or its government is "If you don't like it, you can leave." Republicans made it much more difficult for disgruntled citizens to follow this advice; it is time to repeal this profligate legislation.


Briggs Armstrong

Briggs Armstrong holds a degree in accounting from Auburn University.