Wednesday, May 09, 2012

Will rich people flee the U.S. if their taxes are raised?

That, at least, has been the claim of people such as our good friend Dan Mitchell of the Center for Freedom and Prosperity, who has written articles such as "Rich Americans Voting With Their Feet to Escape Obama Tax Oppression" (this is the same Mitchell who brought us the economic miracle of low-tax Iceland, and other such gems.) Wall St. Journal columnist Bill McGurn recently said that the U.S. tax code was turning its citizens into "economic lepers" and noted that the 1,788 Americans who renounced their nationality in 2011 were 'canaries in the coal mine."

Do such claims pass the test of, er, evidence? In a word, no. In four words: no, not at all.

Bruce Bartlett now has a fine piece in the New York Times skewering these and other claims. There does seem to be a sharp rise in expatriation since 2006, it is true, but it seems likely that the vast bulk of those expatriates are doing so for non-tax reasons, and these numbers are in any case a drop in the bucket when compared to the hordes seeking to become American citizens. And then there's the research. He summarises - and these constitute some useful links for those interested in this topic:
  • A 2006 study in the journal International Tax and Public Finance found that taxes played no role in internal migration flows in Canada.

  • Also in 2006, a study in the Cambridge Journal of Economics found no evidence that taxes affected migration within Switzerland despite a wide dispersion in local tax burdens.

  • An April 2011 study by the Political Economy Research Institute at the University of Massachusetts found that taxes play almost no role in a person’s decision to move from a state, although it will influence her or his decision of where to live once the decision to move has been made.

  • A June 2011 study in The National Tax Journal found little evidence that a sharp increase in New Jersey’s top income tax rate in 2004 had any impact on the migration patterns of those affected by it.

  • A new study by the University of Chicago economist Tino Sanandaji examined the international movement of billionaires from 1996 to 2010. He found that 87 percent stay in the country in which they were born; only a third of those who moved appear to have done so for tax reasons.
And if any more ammunition were needed, there are further studies from Citizens for Tax Justice, here, or this, here. (We will file this blog post in our permanent A-Z archive, under "Migration.")

Don't expect the evidence to keep the lobbyists quiet, though.


Anonymous Eric said...

Mitchell, Bartlett, yourself, and everyone else who thinks this is about "rich people fleeing" --- you all are missing McGurn's point: the U.S. laws are going far beyond their stated goal of preventing tax evasion by rich Americans, and are affecting ordinary middle class expatriates who are not getting rich in America and then "fleeing taxes", but who are already living abroad for reasons of career, study, or love.

The problem which McGurn points to is that the U.S., almost unique in the world, imposes the same reporting requirements on citizens permanently living abroad as it does on those living at home. This is not a tax problem (and it is not solved by tax breaks like the $95K Foreign Earned Income Exclusion); it is a paperwork problem. An American in London who opens a British bank account is clearly doing something of a different nature than an American in New York who opens a Swiss numbered account --- but both of them are treated as having an "offshore financial account" and have to file FBAR and Form 8938. An American in Sao Paulo who pays into a Brazilian pension plan is clearly not the same as an American in Miami who settles a Belize trust and transfers all his assets into it --- but both are treated as having a "foreign grantor trust" and have to file Form 3520. An American in Sydney who opens a fish-and-chips shop and incorporates it is clearly doing something different than an American in Silicon Valley who opens a Bermuda letterbox company and transfers U.S.-developed intellectual property to it --- but both are treated as having a "controlled foreign corporation" and have to file Form 5471.

The tax advice required to have these forms filled out properly is enormously expensive relative to the incomes of average expatriates. (The alleged targets of these laws, onshore abusers of offshore, barely even blink at the costs). And let me be clear that I am not talking about advice on how to avoid U.S. tax bills, because we expatriates are already paying taxes to the countries where we actually live which more than offsets the U.S. tax. I am talking about advice on how to report our ordinary, tax-compliant financial lives to a faraway government which sees everything we do as being "offshore" and threatens fines of tens and hundreds of thousands of dollars for inadvertent non-compliance --- fines which are life-altering for us middle-class expats, but again which real onshore tax avoiders and evaders in your own backyard with real offshore accounts will laugh at. Where is the "tax justice" in this, pray tell?

And now because of the U.S. FATCA law passed in 2010, banks in foreign countries are closing the accounts of U.S. persons legitimately residing in those countries and using those accounts to pay rent, buy groceries, and deposit paychecks. This is what McGurn is referring to when he says that Americans abroad are being turned into "economic lepers". This is why ordinary American expatriates are grumbling about the U.S. tax code. And this is why some who are blatantly not rich and who live in countries where they pay more tax than the U.S. will ever charge (such as Peter Dunn and Genette Eysselinck, who were interviewed for a Reuters article by Atossa Abrahamian last month) are renouncing their U.S. citizenship. We are sick of being the eggs who get broken so you can have your omelette, and we are sick of being smeared as rich tax evaders while the REAL tax evaders are sitting pretty in your own backyard.

12:07 am  

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