The Cost of Citizenship

The New York Times reports on yet another embarrassing result of our goofy tax system - the elected Mayor of London is giving up his American citizenship.

LONDON - The mayor of London, Boris Johnson, who was born in New York and holds both American and British passports, recently said that he would not pay a tax bill from the United States on capital gains from the sale of his home in the London borough of Islington. Mr. Johnson pointed out that he hasn't lived in America since he was 5. He'd like to renounce his citizenship, but said the process was "very difficult."

It is, but I am doing it.  My "in-person final loss of citizenship appointment" is scheduled for Jan. 14 at the United States Consulate here. My British passport, acquired in 2012, will be my only one.

The number of Americans who're giving up citizenship is soaring, but from a small base.  In times past, very few people did that because being an American was a good deal.  Some claim that all these people are doing it to avoid taxes, but it's not that simple - being a moderate-income overses American now carries serious penalties.

His Honor explains:

But most, like me, are not tycoons.  We're responding to the burden and cost of onerous financial reporting and tax filing requirements that are neither fair nor just. (Living and working in London, I pay higher taxes, to Britain, than I would in New York.)

In 2010, Rep. Charles Wrangel, one of our better-known tax cheats, passed the Foreign Tax Account Compliance Act (FTACA), which requires foreign banks to report assets held by American clients or face a 30 percent withholding tax.  The law is so complex that many foreign banks refuse to open accounts for Americans and are closing existing accounts because they don't want the American government to bother them.  The Economist says this "heavy-handed, inequitable and hypocritical" law will cost American banks alone $800 million a year to implement.  This is on top of the extra costs Americans face doing business overseas.

Americans who owe no US income tax have to spend thousands of dollars paying accountants to fill out all the forms.  The FACTA penalties are so draconian that a taxpayer could lose all their retirement savings due to a bookkeeping mistake.

How This Hurts Us All

This idiocy hurts us in many ways.  The worst effect is that it makes putting an American sales force overseas much more expensive.  When I was in a mission school in Japan, I had classmates whose parents were from Norway, Italy, France, and other countries.  There were almost no American businessmen because it was so expensive for an American to work in Japan because of the US tax and legal hoora on top of all the other taxes.

Not long ago, Mr. Obama said that he'd like to increase the exports of American-made goods.  He is correct in recognizing that this would create manufacturing jobs which pay better than flipping fries, but his tax policies make this very difficult.

You have to sell stuff before you can export stuff.  It is possible to work through dealers, but dealers are loyal to themselves, not to you. Years of experience have shown that the only way to sell stuff in enough volume to make a difference is to have your own sales force "over there."

FACTA makes a strong overseas American sales force much more expensive and much harder than under the tax system of my day, which even then was noted for being more troublesome than that of our competing countries.  Anything that makes selling our goods more expensive hurts us, costs us money, and costs the government money in business profits taxes on the foreign sales that could otherwise be made.

Why on earth do they do it - and why do we put up with it?