Washington’s Assault on American Expats
By William McGurn – Wall Street Journal
The U.S. is the only developed nation in the world that taxes its citizens on income they earn abroad.
This new year, spare a thought for that most underappreciated class of citizen: American expatriates. In a world where 95% of consumers live outside our borders, Americans working abroad serve as the sales and marketing force for Brand USA. All things being equal, people go with what they know: An American engineer will turn to American technology, an American businessman will hire fellow Americans, and an American contractor will likewise prefer American goods and services. In a nation trying to reach President Obama’s goal of doubling exports by 2014, that makes the expat a pretty valuable resource.
Alas, the U.S. tax code—the ugliest of ugly Americans—doesn’t work that way. To the contrary, new changes in tax law regard foreign financial institutions (banks, pension funds, etc.) as colonial subjects who must be dragooned into enforcing ill-thought-out U.S. regulations, or face huge fines. Indeed our tax code appears to rest on the assumption that the American expat is a criminal and must be treated that way.
This assumption is embodied in the IRS’s new Form 8938, which requires Americans who live abroad to report any foreign financial assets from stocks to partnerships to derivatives above a designated threshold. It comes on top of another form (the FBAR, or Foreign Bank Account Report) already required if a citizen has any foreign accounts that add up to more than $10,000. In some cases, you can be fined for failing to file even if you don’t owe the IRS any money.
As bad as this is, the burden will fall more heavily on foreign financial institutions. Within the next two years, these companies will be required to register with the IRS and to report information about their U.S. customers to the IRS—or face a 30% withholding tax on securities transactions that originate in the U.S. It’s all part of the Foreign Account Tax Compliance Act (Fatca), which Mr. Obama signed into law in March 2010 as part of one of his larger “jobs bills.”
Now most Americans have never heard of Fatca. Overseas, by contrast, it has become notorious. Financial associations on several continents are screaming foul, and some foreign banks have responded the way you would expect them to respond to something that makes dealing with American customers more costly and burdensome: They’re dropping their American customers.
One reason attention in the U.S. has been so muted is because of the nature of those affected. Though the State Department reckons 6.3 million Americans (not including military) are now living overseas, these people come from all over America and thus have no single voice in Congress. In addition, they are easily demagogued by our political class as fat cats living the glamorous life overseas.
The idea behind Fatca is that by cracking down on Americans abroad, the IRS would bring in $8.7 billion in tax revenue over the next 10 years. Even assuming it works—a big “if”—that’s about $1 billion a year. By any measure it’s a puny amount, not to mention the damage it does to the U.S. economy by making Americans more costly and difficult to hire.
Last month IRS Commissioner Douglas Shulman acknowledged that foreign financial institutions have “major concerns,” but he continues to push with the determination of Inspector Javert. That’s probably to be expected in an IRS official. Yet surely there’s a larger perspective missing here, one that might begin by asking why we are the only developed nation in the world that taxes its overseas citizens, forcing them to pay taxes in America as well as in the country where they are residing.
Yes, collecting tax revenue is important. Far more important in our century, however, is creating an economy capable of attracting the world’s most precious resource—capital. That capital is human as well as financial. Frank Lavin, a former U.S. ambassador to Singapore who now serves as chairman of public affairs at the global PR firm Edelman Asia Pacific, suggests that Americans overseas provide a vital component.
“The future,” Mr. Lavin says in an email, “belongs to the networkers—those who can bring together ideas, people, products and financing from around the world. The expat community is the human counterpart to the social sites—and they help ensure that the best America has to offer is connected with individuals and businesses around the world.”
At the end of the day, after all, the global economy is really about human beings interacting with one another, bettering themselves and enriching their societies as they do. From the Ohio contractor working in Baghdad to feed his family back home, to the American professor teaching in Hong Kong, to the Boston-bred banker working in London, these individuals are overwhelmingly productive and law-abiding. In an ever more competitive global marketplace, their presence provides a critical boost to American fortunes in key parts of the world.
So here’s a New Year’s resolution for the IRS and its allies inside the Beltway: Maybe it’s time we treated these Americans as economic assets instead of criminal liabilities.