In a previous post, I talked about dual citizenship, the advantages and pitfalls of it. While I still believe in the system as a whole that it fosters cultural exchanges of many subjects, there has been a recent trend in the last two years that is effecting US citizens living abroad. Taxes.
If you are like me, the first thing that you blurted out is surely to be some explicit about the Internal Revenue Service (IRS). Unfortunately, the IRS is not the organizational unit of the US government that sets the policy or rules.
For this, the correct direction to be pointing the proverbial finger is at Congress. The IRS’s only job is to follow the laws that the law makers have made, and believe me, some of those laws, like the thousands of other laws made, would make anybody’s head spin in disbelief.
Some might say that it is unbelievable and you might not know it, but US citizens are ditching their status as Americans in droves. Like a form of genocide that we are going to call ‘Citizide’ as a dramatic term for what’s really just renouncing one’s citizenship. A step that an increasing number of US citizens living abroad are taking to avoid the complicated and expensive – and more expansive by the day – tax burdens imposed on them by their home country.
In the first six months of 2020 alone, more than 6,500 people have renounced their US citizenship, a tenfold increase from one year prior.
To some extent, it’s a sure bet that part of this mass exodus is due to the civil unrest in the streets with the ever overwhelming political rampage that has formed in Washington DC over the last few decades.
Other possible reasons for the large exit can be attributed to the pandemic, the political uncertainty of congress, no matter each person’s personal reasons, it’s still very clear that having citizens abroad who remain US citizens is beneficial, enriching the lives of those at home through the exchange of ideas and cultures.
With the inevitable rise of virtual work and education, and with many countries now offering remote work visas for US citizens, tax code innovation must keep up to avoid punishing those who choose to roam. Failure to do so will only increase citizide.
The US is one of only two countries in the world – the other is Eritrea – that uses citizenship-based taxation. This means that US citizens living in any country are subject to US taxes on income earned anywhere in the world. Most other countries, such as the United Kingdom, Canada, and Australia, use residence-based taxation, where residents only pay taxes on the income earned from the country in which they are living. US citizens, on the other hand, are often subject to double taxation, as well as complicated reporting measures.
Those living abroad must also pay capital gains tax on property sold, which, if they get caught on the wrong side of an unfavorable exchange rate shift, can lead to even greater losses. Imagine paying taxes for gains you never actually made.
Knowledge and wealth generated abroad often find their way back to the US. Many expatriates are working for American businesses, from investment banks and tech giants to hotel chains and media companies. Their support helps these US companies expand internationally. Having an international presence is hugely beneficial for these companies, which in turn brings innovation and wealth back to the US. Working for a US company abroad leads to knowledge sharing between foreign and local workers and the generation of new ideas and insights that benefit both countries.
Let’s also not forget that a lot of people want to live and work abroad and are happy to do it. Often, the motivation for their move is more emotional than a promotion or a bigger paycheck.
The InterNations Expat Insider Survey found that the most common reason for Americans to move abroad is love, with 17% of American expatriates moving for a partner. Quality of life and work is also a driving factor.
A study by MetLife found that expatriates tend to be happier in their jobs than those working domestically, as well as being twice as likely to recommend their workplace to someone else. Policy that makes living and working abroad harder for Americans is an infringement upon their liberty to follow their hearts, chase their dreams, and pursue their happiness.
As of June 2020, more than 40% of the US labor force was working remotely full time. As the future of work becomes more remote, living and working abroad, at least temporarily, will become more enticing to average Americans, and those of us who stay will be better off due to the ideas, cultural influence, and experience will be imported back into the US.
An estimated 8.7 million citizens live abroad, and at the alarming rate they’re renouncing their citizenship. The blind US government doesn’t know what it’s losing.