Tick – Tick – Tick: The Economy Bomb Part Two

by John Gaver

Again, let’s do the math.

As shown above, government data indicates that over 300,000 mostly wealthy Americans would choose expatriation each year, from 2000 to 2005 and increase, beyond that time. In fact, that rate has been increasing at a rate significantly higher than the growth of wealth in this nation, for many years.

Even so, for our calculations, we will only assume that the number of wealthy Americans who are leaving remains stable, at 300,000, which further assumes that Obama and Congress hold back any more legislation that the wealthy see as detrimental to themselves, their business or their rights.

However, now that the Bush and Obama bailouts have pushed the deficit to obscene levels and Obama’s socialized healthcare threatens to destroy what little is left of the US economy, that’s a very rosy assumption. OK. it’s a preposterous assumption. But this is, after all, meant to present a “best case” scenario – for demonstration purposes, only.

Based upon recent history, currently proposed legislation and other disincentives, it would probably be reasonable to assume a 10-20 percent growth in expatriation every year. But, my purpose in this calculation, is to be as conservative in my projections as possible. So let’s just stick with the fairy tale, stable rate assumption. Then, after you see how bad the best case scenario is, we invite you to recalculate, using your own assumptions, to get an idea of just how serious a problem we are really facing.

For now, sticking with the conservative numbers, multiply it out and you will find that if that 300,000 rate holds steady through 2012, the number of wealthy Americans that may have left the United States in that time (including 2007 – the last reported tax year) could easily reach over 1.8 million or well over the 1.4 million taxpayers that make up the top 1% of taxpayers.

That’s 1.8 million US expats from 2007 to 2012 and that’s using an extremely conservative, stable rate assumption.

Granted that not all of those expatriates are going to be wealthy. But, ask yourself, how many of those expatriates you really think will be poor or even middle class. Use your own estimates, based on common sense. Just keep in mind that the poor don’t leave unless they have to. They can’t afford it.

You can see that what appears to be a minor problem today, could turn out to be a catastrophe for the US economy tomorrow. Remember that in 2007, the top-earning 1% amounted to just barely over 1.4 million taxpayers. Depending on how many of those expatriates are wealthy, it’s quite possible that a significant portion of our most substantial taxpayers could be gone by the time we have a chance to vote Obama and his congressional enablers out of office. How much longer can this continue?

In fact, since this wealth flight has been going on for some time and it’s so difficult to estimate emigration levels, it’s anyone’s guess just how many wealthy taxpayers have already been forced to leave. So, ask yourself just how much of our current deficit can be attributed to the loss of tax revenue from the many wealthy Americans, who have already been forced to leave.

Think about it…

But consider this. Let’s just assume that things are not as bad as the picture I have painted. Suppose that the Census numbers are off by a whopping 50% and that the expatriation rate is only half as high as the US Census numbers indicate and not increasing, we still have a serious problem.

Do the math.

Then consider that in reality, due to Bush’s anti-privacy Patriot Act and Obama’s socialized healthcare that he intends to pay for on the backs of the wealthy, not to mention a dozen or more other pieces of wealth-punitive legislation that have been enacted since the 2000 Census (with the support of both parties, I might add), those 2000 Census numbers are much more likely to be off in the other direction. If that’s the case, then expatriation is increasing at an even higher rate than the Census Bureau predicted back in 2000. It might be much worse…

Actions speak louder than words.

Of course, the real evidence of the massive scale of native wealth flight is not in any statistics, but rather in the almost panic reaction of our government. Oh, our congresscritters and officials of the Internal Revenue Service and other federal agencies deny that expatriation of the wealthy is more than a minor problem. After all, if native capital flight were perceived to be a serious problem, folks would start asking why it’s so serious, which would lead right back to legislation and regulations, for which they were responsible. They can’t afford that. But, the government’s own actions belie their words. Consider this.

If native capital flight is not a very serious problem, why did both Republicans and Democrats in Congress suddenly find it necessary to add an amendment to the Health Insurance Portability & Accountability Act of 1996 (HIPAA) (26 USC 877(a)(1)), that claims the right to tax expatriate Americans for 10 years after they renounce their US citizenship and are taxpaying citizens of another country, if the US government thinks that one of their reasons for expatriation was to “legally” avoid U.S. taxes? Actions speak louder than words.

Why did our lawmakers find it necessary to include in that ominous HIPAA legislation, yet another provision (26 USC 6039G(e)(3)) aimed at slowing expatriation by requiring that the names of all who have expatriated during the previous quarter, be published in the Federal Register, as an attempt at intimidating those who might be considering expatriation? (It’s in there, too. Click on the link and read it for yourself. Also see “US Taxpatriates” at http://www.ActionAmerica.org/taxecon/taxpats.html, for links to those quarterly lists.) Actions speak louder than words.

Why then, did they follow-up that abominable law with the Illegal Immigration Reform and Immigrant Responsibility Act (IIRIRA), which modified the Immigration and Nationality Act (8 USC 1182(a)(10)(E)) to allow the government to permanently deny “wealthy” expatriates entry into the United States, if the US government thinks that one of their reasons for expatriation was to “legally” avoid US taxes? In other words, our government now considers the wealthy to be on a par with smugglers, prostitutes, drug dealers and child abusers, who are also denied entry to the USA. Actions speak louder than words.

And, what does the government use, in both of those laws, to determine if tax avoidance was among the reasons for a taxpayer’s expatriation? Income and/or net worth. If an expatriate had a net worth of $500,000 at the time of expatriation or earned more than $100,000 per year for the five years immediately preceding expatriation, then he is “assumed”, by the US government, to have expatriated to (legally) avoid US taxes. Actions speak louder than words.

To be fair, it should be noted that in 2004, the American Jobs Creation Act raised the numbers for determining if the individual expatriated to (legally) avoid taxes. Under that bill, if the individual had a net worth of $2,000,000 at the time of expatriation (up from $500,000) or had earned at least $124,000 in each of the five years immediately preceding expatriation (up from $100,000), then he was considered to have expatriated to (legally) avoid US taxes. Those two numbers were also then, indexed to inflation.

That same 2004 bill had another interesting provision in it. You see, it seems that out of the more than 300,000 estimated expatriations a year, less than 500 Americans had formally renounced their citizenship each year, through 2003, so the lists of expatriates that were created in the Health Insurance Portability and Accountability Act were embarrasingly short. Therefore, the reaction of our ever so astute Congress was to add a provision to that bill requiring US expats to formally renounce their citizenship. That year, 631 formal expatriations were recorded. The next three years formal expatriations numbered 762, 279 & 470. Of course, the only people who were surprised at this outcome were our sagacious Congressmen, who just couldn’t imagine why the vast majority of expats were still not signing up for their cute little list.

They obviously don’t care if poor people expatriate. But, these actions prove that they are beginning to panic about the number of wealthy individuals who are leaving and taking their money with them. Actions speak louder than words.

The point is that these laws are clearly aimed at punishing anyone who has the audacity to be rich and leave with their wealth, intact. If the IRS and lawmakers are not very seriously concerned about the number of wealthy taxpayers who are leaving IRS jurisdiction, then what reason would they have to pass such autocratic laws? Think about it… Actions speak louder than words.

Why, if Congress didn’t already know that hundreds of thousands of the wealthiest Americans are now structuring their holdings in preparations for leaving the USA, why did the Senate even considering a bill like the Civil Asset Forfeiture Reform Act of 1999 (S. 1701) that demanded that not only foreign nationals, but US citizens alike, disclose any and all financial information about foreign holdings that the government seeks or lose all future legal right to challenge any property forfeiture in any US court? Fortunately, that one was narrowly defeated. But you must wonder why they even considered such an autocratic bill. (Don’t take my word for it. Click on the link and read it for yourself.) Actions speak louder than words.
Could an Exit Tax be next on the horizon?

A true exit tax is considered to be one of the most ominous signs of a desperate government. The 10-year expatriation tax, passed in 1996, was bad enough. But, a pure exit tax would be far worse. But if you are waiting for that to happen, before you believe that we are in a world of trouble, then you can stop waiting. In fact, if you were waiting, then like so many other Americans, you missed it. In 2008, Congress passed and George W. Bush signed into law, the first ever US Exit Tax, as a part of the Heroes Earnings Assistance & Relief Tax Act (Public Law 110-245). (Don’t take my word for it. Click on the link and read it for yourself.) Actions speak louder than words.

So, I ask you, if our elected officials were not painfully aware that they themselves, have created a ticking economic time bomb that is now on the verge of detonating and destroying our whole economy, why would our lawmakers create such an abomination? This exit tax eliminates the 10-year expatriation tax and replaces it with a requirement that expats pay tax on the “unrealized” (unearned) capital gains of their worldwide estate, at the time of their renunciation. This could force the sale of long held retirement property, just to pay the exit tax (but only if the expat is stupid enough to formally renounce).

But, the point of all these laws and many others not mentioned here, due to space consideration, is that they are clearly aimed at discouraging wealthy Americans from moving their wealth out of the jurisdiction of the IRS and then moving offshore themselves. The words of the federal government on this issue are belied by their extremely desperate actions. Actions really do speak louder than words.

In fact, if native capital flight was not a very real and serious threat to our tax revenue, there would be not a single reason to even propose, let alone pass, such draconian laws, as those mentioned above.

Many have already gone.

A July 1999 report titled, “Private American Citizens Residing Abroad”, compiled by the US Bureau of Consular Affairs, contradicts the claims of the IRS and others who insist that expatriation is not a serious problem. It shows that an enormous number of American citizens already reside offshore. The following numbers represent only a very small portion of that report (only 10 cities) and only US citizens who have NOT yet renounced their citizenship and further, only those that the Bureau knows about.

• Mexico City, Mexico 441,680
• Toronto, Canada 250,000
• London, England 200,000
• Vancouver, Canada 200,000
• Tijuana, Mexico 196,000
• Frankfurt, Germany 138,815
• Guadalajara, Mexico 111,100
• Calgary, Canada 105,000
• Manila, Philippines 105,000
• Santo Domingo, Dominican Republic 82,000

Just the American expatriates in those 10 cities alone, numbers almost two million and that’s only the ones who have notified US authorities of their whereabouts, at that. In fact, there is very good reason to believe that less than one expatriate in 10 ever formally renounces or notifies US authorities of his whereabouts after leaving.

Then consider that we have not even begun to touch the outlying areas in those countries or the hundreds of small island nations and emerging countries, favored by expatriates, like Belize, Bermuda, Caymans, Grenada, Panama and Trinidad and Tobago, that have thousands of US expatriates, each.

As you read the above numbers, you might be tempted to think that many of these people are just working offshore and intend to some day return. Not so. According to Wall Street Journal staff reporter, Barry Newman, writing in a December 28, 1998 article titled, “Renouncing U.S. Citizenship Becomes Harder Than Ever”, even among the millions of expatriates that the IRS knows about, in 1994, they received just 257,000 returns claiming any special tax breaks for citizens overseas.

As someone who lived in London for an extended period, I can assure you that the first thing that you learn when you move offshore, is that there is a huge tax break for living offshore. Therefore, if you live offshore and file your tax return, you will certainly take that exemption. However, since only 257,000 returns claimed any such exemption and the government knows of millions of US expats, that can only mean that millions of US expats didn’t file at all. There is only one reason why millions of US expatriates would risk the ire of the IRS, by not filing. They know that they will never face that ire, because they don’t plan on returning!

In fact, during my time in London, I met more than a few US expats (almost all in the upper-income groups), who expressed to me that they have no intention of ever returning to the USA.

Since I lived in a modern building, targeted at US expats, with money to burn (more than $1600 per sq. ft.), I naturally met a lot of expats in the lobby, as I came and went. I also met a lot of expats around town, who would hear my Texas drawl and approach me. They would tell me that they were from the USA and that it was nice to hear an American accent.

When I asked, most of the expats that I met would tell me that they had been gone for years and had no intention of returning. One gentleman told me that even in the unlikely event that he should ever want to return, he would have to pay over a million dollars in back taxes, that the IRS would claim that he incurred since he left, if they even knew about him. It turns out that he was one of those millions who just left and, as he put it, “never told the jailer where he was going.”

Though I already knew the answer, I would usually ask about why they would want to live in the UK, with that country’s exceedingly high taxes. I would ask, as though I was interested in doing the same. When I asked that way, I found that most expats would open up and tell me all about ways to structure my finances, so that my income would be based in low tax jurisdictions, meaning that I would be legally responsible for UK taxes, only on that portion of my income that I brought back into the UK.

The question that you must now be asking is, did I ever consider not returning? The answer is no. We also maintained a home in Texas and would not have incurred that additional expense, if we thought that there was even a remote chance that we would not return.

(The above not withstanding, we have considered expatriation, as a last resort and with Obama pushing socialized medicine on us and running the USA into more debt than can ever be repaid, that last resort may come to pass sooner than we might have expected.)

The point is that if I could so easily meet so many of these permanent expats, there must be a lot more of them out there.

How many more expatriates are out there who have not renounced and simply dropped off of the government’s radar? It cannot be denied. Many of the wealthy are already gone and many more are leaving every day.

Part Three tomorrow.

Copyright 2009 John Gaver, All rights reserved.