U.S. on Verge of Enacting an “Exit Tax”

Since 1996, there have been at least a dozen efforts by congressional tax-and-spenders to impose an "exit tax" on wealthy Americans who exercise their constitutional right to disconnect from the U.S. tax system through a process called expatriation. I wrote about one of the most recent proposals here. However, President Bush vetoed the legislation containing this provision for other reasons.

In most countries, all that’s necessary to expatriate is to become non-resident. But in the United States, you need to also give up U.S. citizenship, because the U.S. Tax Code imposes tax on U.S. citizens living abroad, even if they’ve never set foot in the United States. Since the United States taxes its citizens and not just its permanent residents, the only way for a U.S. citizen to eliminate U.S. tax liability is to acquire legal residence and citizenship in another country and subsequently give up U.S. citizenship.

Expatriation is politically unpopular. The vision of a pale ex-U.S. citizen-billionaire basking on a beach in a tax haven is too much for many less affluent citizens to bear. As a result, anti-expatriation rules penalizing U.S. citizens who are deemed to have given up their citizenship for tax avoidance reasons have been in effect for decades. First imposed in the 1960s, the rules were tightened in 1996 and again in 2004.

Now, Congress is again on the verge of passing an outrageous law that would impose the first-ever exit tax on former U.S. citizens or long-term residents (persons who have resided in the United States for eight years or more of the previous 15 years). On October 10, the House of Representatives passed the Tax Collection Responsibility Act of 2007 (H.R. 3056). If passed by the Senate, and signed by President Bush, this act will require persons who give up U.S. citizenship or long-term residence to pay a tax on all unrealized gains of their worldwide estate that exceed US$600,000. The gains will be assessed based on the fair market value of the assets and the tax due within 90 days of expatriation.

This bill also imposes a draconian 30% withholding tax on unrealized gains in an expatriate’s IRA or other pension plan. And don’t think about gifting assets to family members or friends still living in the United States: a separate 30% tax applies to such gifts or bequests.

The conference report on this legislation smugly states that U.S. citizens give up U.S. citizenship, but that the Tax Code shouldn’t provide an incentive to do so. Rather, that decision should be, in the report’s words, "tax neutral."

Give me a break. Taxing expatriates on a phantom gain that could quite possibly be taxed again by whatever country to which they relocate is hardly "tax neutral." Especially when the only alternative to this "alternative tax regime" is to make an to post a bond and pay an interest charge for the privilege of not paying tax on gains you never realized.

I’ll be tracking the progress of this deplorable proposal as it makes its way through the Senate. There’s a chance that President Bush would veto the bill, should it pass the Senate, but there’s no assurance he would do so, since bashing wealthy expatriates is so popular.

I’ve also prepared a special report on expatriation and the implications an exit tax will have on Americans considering expatriation. To learn more about this report, click on

Copyright © 2007 by Mark Nestmann

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