National ID

The Real Reasons Americans Give Up Their US Citizenship

The year is 1633, and a respected old man finds himself on trial for his life. His crime? Writing a book, the product of more than 20 years of research and study.

What is so heinous about this book that its author faces death? Merely that, in it, Galileo Galilei claims the Earth revolves around the sun.

Today, we know this to be true, a scientific fact.

But here in the 17th century, “everyone” knows that the sun and stars revolve around the Earth. This doctrine is so deeply entrenched that anyone who challenges it literally risks their life.

It is the era of the Inquisition, and in the eyes of the Catholic Church, Galileo’s claims are heresy – with the maximum punishment of “excommunication” (which at this time means being burned at the stake). Understandably, Galileo backs down and is instead sentenced to house arrest.

Skip ahead to 1799. “Bloodletting” is a common treatment for ailments of all sorts. Have a fever? Hire a physician to suck out a predetermined amount of blood from your body. Live leeches are often used for this purpose.

That’s what George Washington, America’s first president, does when he becomes ill. Doctors remove nearly half his blood volume, and he actually dies as a consequence of this accepted medical “treatment.”

Today – fortunately – disagreeing with popular myths usually won’t result in death at the hands of either the Inquisition or a well-meaning doctor. But that doesn’t mean these misconceptions are any less pervasive.

In a recent article, I dealt with one such myth: that offshore tax evasion costs the US Treasury $150 billion or more annually.

That’s not just a myth – it’s a whopping lie. And it’s not the only accepted “wisdom” relating to the offshore world that turns out to not be true.

Here’s another whopper: “People who ‘expatriate’ (i.e., give up their US citizenship and passport) are rich tax evaders who want to thumb their noses at Uncle Sam.”

I’m sure you’ve heard that one before. The 2012 controversy over the expatriation of Facebook co-founder Eduardo Saverin is a perfect example.

Bloomberg, for instance, claimed that he saved at least $67 million in federal income taxes by ditching his US citizenship. Just about every media source in the country picked up that figure.

But it’s not true… a myth just as false as the one about the sun revolving around the Earth. When Saverin expatriated, he had to pay an “exit tax” on the increase in value of his Facebook stock. Virtually every dollar of gain was subject to the exit tax. I estimate he paid an exit tax of more than $350 million just on the value of these shares.

Does that sound like a savings of $67 million? It doesn’t to me, either.

It's true the future appreciation of his Facebook shares after expatriation wasn't subject to US tax, as Bloomberg stated. But it could be subject to tax in another country, and it's even possible that Saverin could be forced to pay tax twice on the same gains, since the US exit tax isn't coordinated with the tax laws in other countries.

Unfortunately, lies have consequences. Saverin, portrayed by the media as a rich jetsetter living tax-free and flying private jets around the world with a leggy Hollywood blonde on his arm, became an irresistible populist target.

In 2012, and again in 2013, Senators Charles Schumer (D-NY) and Bob Casey (D-PA) introduced legislation that would retroactively punish wealthy expatriates like Saverin. Under their most recent proposal, expatriates with a net worth exceeding $2 million, or with an average income tax liability exceeding $155,000 for the five years preceding expatriation, would be presumed to have given up US citizenship for tax avoidance purposes. If they couldn't prove otherwise to the IRS, they would be permanently barred from ever coming back to the US – even as visitors.

Such “covered” expatriates would also face a 30% percent tax on future gains from US investments, no matter where they live. In contrast, all other non-US citizens who invest in the US enjoy substantial tax advantages.

And get this… both the tax and re-entry provisions are retroactive for anyone who expatriated during the 10-year period prior to the time the law comes into effect.

I’m not aware of any effort by Schumer or Casey to introduce similar legislation in 2014. But, of course, we still have nine months to go.

The anger and perhaps envy that Messrs. Schumer and Casey feel toward expatriates are, shall we say, somewhat misplaced. And that’s putting it mildly.

The fact is, for every rich and photogenic expatriate like Eduardo Saverin, there are dozens of Americans who don’t fit his profile. My own experience with expatriated clients backs this up. So do stories I read from groups like American Citizens Abroad, which works with the more than 7 million US citizens now living overseas. Here are some examples from my files:

  • One client who had lived in Switzerland for more than 40 years gave up her US citizenship only after all of the banks she dealt with there closed her accounts. They didn't want to deal with all the reporting requirements the US requires if they accept US account-holders. It's easier just to fire their American customers.
  • Another client living abroad was told that she couldn’t sign up for health insurance, because she was a US citizen.
  • Another client was forced to sell his interest in a foreign business, because his non-US partners didn’t want its financial details released to the IRS.
  • A US citizen living in Canada discovered to her horror that a tax-deferred account she had set up for a disabled family member wasn’t tax-deferred for US tax purposes. She expatriated only after receiving a bill for thousands of dollars from the IRS for income that, under Canadian law, was tax deferred. (Not to mention Canada is hardly a “tax haven.”)

Do these folks sound like tax evaders to me? Well, they do to “homelanders” and their congressional representatives.

Also, don’t forget that the United States is one of only a handful of countries that tax citizens or permanent residents wherever they reside. (The other countries are Antigua and Barbuda, Eritrea, and, in some circumstances, Hungary.)

Expatriates don't get a lot of sympathy on Capitol Hill – or on Main Street America. If you expatriate, you won’t bleed to death, and despite mainstream American attitudes, you probably won’t get burned at the stake. But there are significant consequences – even if the rationale upon which they are based is as misguided as assuming that the sun and stars revolve around the Earth.

Mark Nestmann

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