Cross posted from the RenouceUScitizenship blog.
A FATCA fairy tale …
A “Bed Time story” explaining why FATCA does not matter in the least for those it was supposedly intended to target!
Once upon a time in America –
There were some homelanders who didn’t pay their fair share!
Most of the taxes were paid by higher income earning homelanders!
Unless you were a “super wealthy” homelander in which case you could create your own special tax system and pay the lowest taxes of all!
Which created many revenue shortfalls. So Congress passed laws to benefit Homelanders and forced Americans abroad to pay for those benefits, by including “Revenue Offsets” in those laws.
The President asked:
“Mirror, Mirror on the wall. What’s the greatest “Revenue Offset” of them all?”
The Face In The Mirror Answered:
The greatest “Revenue Offset of Them All” is FATCA. FATCA is the “gift that just keeps on giving”.
And the President signed FATCA and sent the IRS to hunt Americans abroad with the greatest “Revenue Offset Provision Of Them All”
How tax complexity hides evil and injustice …
In my last two posts, here and here, I discussed the “problem” (if it is one) of how some U.S. corporations avoid U.S. taxation through strict compliance with U.S. laws. For U.S. corporations there is “good news” and there is (mostly) “bad news”.
First the “good news” – The “good news” is that U.S. tax law is so complex that clever lawyers can exploit the “loopholes” (well at least according to Homelander politicians).
Now the “bad news” – The “bad news” is that U.S. tax law is so complex that clever lawyers have to exploit the “loopholes” (well at least according to the company lawyers.
It’s the complexity stupid! U.S. tax law is so complex that few people know what is required of them. U.S. tax law is so complex that in some cases the IRS doesn’t understand what is going on. According to a recent post at least one commentator believes that the IRS does NOT understand the rules of international tax that apply to Americans abroad.
Exploiting complexity, how the super rich avoid paying the same rate of tax that you do …
The impetus for this post is an article that appeared on December 29, 2015 in the New York Times:
For The Wealthy, a Private Tax System that Saves Them Millions by Noam Scheiber and Patricia Cohen. This really is a must read. It certainly explains the conditions that probably gave rise to the U.S. Exit Tax (See S. 877A of the Internal Revenue Code).
The general message in the article is that those who can afford expensive accountants and lawyers can turn the complexity of the tax code to their advantage. In other words, the payment of taxes is just a game, that only those who can’t afford good lawyers are required to pay play. (Lest anybody think that I sound like the people at “Tax Justice Network”, I wish to make it clear that a am a right wing Conservative. I believe in freedom. I believe in democracy. I believe in personal responsibility. I also believe in a just system of laws.)
The U.S. tax system is NOT about paying your fair share. It’s about being subject to the same rules as everybody else. You see, when some people are able to opt in to a “private tax system” (for example: “I’ll have a Geithner“), well that means that not everybody is playing by the same rules.
Let’s pause our program for a moment and take a trip down memory lane.
And now back to our regular programming …
But, hey that’s what complexity does. It obscures the rules. Once the rules are obscured, it’s impossible for people to play by the same rules. The game is no longer about playing by the same rules. The game is about understanding the rules. Once the rules become too voluminous, there are no more rules. Too many laws are equivalent to having no laws.
Charles W. Adams makes the point better than anybody in his book “Good and Evil” – Taxes and Civilizations.
I strongly recommend this article by Noam Schieber and Patricia Cohen in its entirety. To whet your appetite, here is an excerpt:
Organizing one’s business as a partnership can be lucrative in its own right. Some of the partnerships from which the wealthy derive their income are allowed to sell shares to the public, making it easy to cash out a chunk of the business while retaining control. But unlike other publicly traded corporations, they pay no corporate income tax; the partners pay taxes as individuals. And the income taxes are often reduced by large deductions, such as for depreciation.
For large private partnerships, meanwhile, the I.R.S. often struggles “to determine whether a tax shelter exists, an abusive tax transaction is being used,” according to a recent report by the Government Accountability Office. The agency is not allowed to collect taxes directly from these partnerships, even those with several hundred partners. Instead, it must collect from each individual partner, requiring the agency to commit significant time and manpower.
The wealthy can also avail themselves of a range of esoteric and customized tax deductions that go far beyond writing off a home office or dinner with a client. One aggressive strategy is to place income in a type of charitable trust, generating a deduction that offsets the income tax. The trust then purchases what’s known as a private placement life insurance policy, which invests the money on a tax-free basis, frequently in a number of hedge funds. The person’s heirs can inherit, also tax-free, whatever money is left after the trust pays out a percentage each year to charity, often a considerable sum.
Many of these maneuvers are well established, and wealthy taxpayers say they are well within their rights to exploit them. Others exist in a legal gray area, its boundaries defined by the willingness of taxpayers to defend their strategies against the I.R.S. Almost all are outside the price range of the average taxpayer.
Among tax lawyers and accountants, “the best and brightest get a high from figuring out how to do tricky little deals,” said Karen L. Hawkins, who until recently headed the I.R.S. office that oversees tax practitioners. “Frankly, it is almost beyond the intellectual and resource capacity of the Internal Revenue Service to catch.”
The combination of cost and complexity has had a profound effect, tax experts said. Whatever tax rates Congress sets, the actual rates paid by the ultra-wealthy tend to fall over time as they exploit their numerous advantages.
From Mr. Obama’s inauguration through the end of 2012, federal income tax rates on individuals did not change (excluding payroll taxes). But the highest-earning one-thousandth of Americans went from paying an average of 20.9 percent to 17.6 percent. By contrast, the top 1 percent, excluding the very wealthy, went from paying just under 24 percent on average to just over that level.
“We do have two different tax systems, one for normal wage-earners and another for those who can afford sophisticated tax advice,” said Victor Fleischer, a law professor at the University of San Diego who studies the intersection of tax policy and inequality. “At the very top of the income distribution, the effective rate of tax goes down, contrary to the principles of a progressive income tax system.”
Think of it. While the wealthiest homelanders pay a lower percentage of tax than most middle class Americans, and Warren Buffett paying a lower rate of tax than his secretary, the Obama administration is “hunting Americans Abroad” via FATCA and CBT. You just can’t make this up.
That said, Americans abroad have already left America. Many of them are citizens of other nations. Unless those homelanders can buy a second citizenship they are stuck in America (for which they are compensated with lower tax rates). Should they try to renounce their citizenship, they will face the full wrath of the S. 877A Clinton Exit Tax. Somehow this reality reminds me of something Winston Churchill once said:
In closing – Good night, sleep tight and don’t let the FATCA fairies bite …
Note that the problems for both Americans abroad and for homelanders are the result of the country being ruled by a dysfunctional Congress and an archaic Internal Revenue Code. This isn’t even a “offshore problem”. Tax reform is a no brainer. Congress is either NOT listening, can’t listen or will only listen to a certain (wink wink) group of people!
Citizenship Taxation - Theory vs. Reality 