Why I’m Giving Up My Passport
by Foster, on News
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.
Some 3,000 Americans gave up their citizenship last year, a tiny number that’s nevertheless been soaring. Yes, a few expatriates may be trying to avoid future taxes, as Senator Charles E. Schumer accused the Facebook co-founder Eduardo Saverin of doing two years ago, when Mr. Saverin, who lives in Singapore, surrendered his passport ahead of the company’s initial public offering.
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.)
Some 7.6 million Americans live abroad — expats would be the 13th most populous state, if we were a state. Many are overseas temporarily, for work or study. But many others marry foreigners, start companies or have long-term overseas assignments. We are just like ordinary Americans — except that we lack representation.
The United States is an outlier: Its extraterritorial tax laws apply to American citizens and companies no matter where they are. We are the only country (except, arguably, Eritrea) that taxes all of its citizens on worldwide income rather than where the income is earned. Expatriate Americans have to pay taxes once, wherever they live, and then file again in the United States.
The I.R.S. doesn’t tax the first $97,600 of foreign earnings, and usually doesn’t double-tax the same income. So most expatriates owe no money to the I.R.S. each year — and yet many of us have to pay thousands of dollars to accountants because the rules are so hard to follow.
The extraterritorial reach of the income tax dates from the Civil War, when the government wanted to prevent Americans from fleeing to Britain to avoid taxes. This outdated and harmful relic has only gotten worse.
It’s one thing if a New Yorker creates a shell entity in the Cayman Islands to evade taxes. It’s another if an American who has spent most of his life overseas, as I have, creates a legitimate company. The I.R.S. doesn’t care about the distinction. Under a 1962 law, it treats the two companies I’ve started as “controlled foreign corporations,” subject to detailed regulatory requirements, though a majority of our employees and clients are foreigners.
Moreover, if you are an American, you can’t invest in foreign mutual funds without paying punitive tax rates. This is a blatantly protectionist measure for American funds, but it also makes saving for retirement very difficult.
Renunciations of citizenship have soared because of a 2010 law, the Foreign Tax Account Compliance Act, which requires foreign financial institutions to report assets held by American clients or face a 30 percent withholding tax. In response, many foreign banks will no longer take American clients and are terminating existing accounts. The Economist says this “heavy-handed, inequitable and hypocritical” law will cost American banks alone $800 million a year to implement. Moreover, the magazine reported, “seasoned tax dodgers are not so naïve as to hold money in their own names.”
Most of us who are overseas long term simply accept the status quo. Some may fear that renouncing their citizenship will put a bull’s-eye on their back with the I.R.S., even if they’ve complied with all laws. It does not help that members of Congress occasionally threaten to bar any Americans who renounce from ever visiting the United States again.
Like many Americans, I didn’t choose to grow up abroad. My father is from New York, and my mother, who died in 2012, was from North Carolina. They moved abroad for work in the 1970s, and ended up in a poor neighborhood in Madrid, where they ran drug rehabilitation centers. I went to an American school in Spain and recited the Pledge of Allegiance each morning. Except for two years in childhood, four years at college in North Carolina, and two years in New York, I’ve lived overseas all my life. At 38, I’ve voted in only one American election and I don’t have much connection to the United States. Almost all my friends are cultural mutts — people with hybrid backgrounds, for whom nationality isn’t the most important part of their identity. If America makes it so difficult to be American, I’ll happily just be British.
The challenges facing expat Americans abroad would disappear if the United States taxed and regulated only those who lived in America. Sadly, American politicians don’t care about Americans living abroad. It is easier to demonize us as tax dodgers than to fix irrational policies that no longer make sense in an interconnected world. The founders agreed on “no taxation without representation.” Why can’t Congress?