Dateline: Bogota, Colombia
The United States is well known as effectively being the only country in the world to follow its citizens wherever they go and not only tax them but impose income-generating regulations no matter where they live in the world—even if you spend zero days in a calendar year in the United States.
Thanks to citizenship-based taxation, if you are a US citizen or green card holder you will forever be subject to paying tax in the United States.
There has been an effort by a few vocal people in Congress to propose new laws that would change this procedure and bring the United States in line with every other country in the world with regard to taxing their expats.
In recent years, we have seen bills such as Territorial Tax for Individuals in the United States or the Tax Fairness for Americans Abroad Act introduced by Congressman George Holding. This is perhaps in response to the effort by US citizens living overseas who want to know why they are the only people in the world subject to a gamut of taxes, even if they live overseas.
In this article, I’m going to talk about the Tax Fairness for Americans Abroad Act (TFFAAA), the issues with the bill itself, the issue of American politics and culture, and why I don’t expect any bills like the TFFAAA to ever pass.
WHAT IS THE TAX FAIRNESS FOR AMERICANS ABROAD ACT?
The bill for the Tax Fairness for Americans Abroad Act is very simple. Basically, it was the follow-up version of what was called the Territorial Tax for Individuals which was proposed when they were passing the Tax Cuts and Jobs Act in 2017.
The bill was proposed by Congressman George Holding in 2018. The goal of TFFAAA is to help Americans living abroad by changing our tax laws to align more closely with the laws of the rest of the world, where expats are not charged tax on foreign earned income.
TFFAAA aimed to use the same criteria as the Foreign Earned Income Exclusion (FEIE), which allows you to exempt your salary.
Like the requirements of the FEIE, to qualify for the TFFAAA you need to either have a bona fide residence outside of the country or a tax home in another country for the past three years.
There were some caveats that were based on someone not having any money in the United States or not having certain US-based sources of income. Basically, you had to be entirely established outside the United States. Your money and your company needed to be somewhere else.
If you did that and you had been tax compliant for the last three years, then you can become a tax non-resident, much like how it works in every other country in the world.
TFFAAA WOULDN’T SOLVE THE REPORTING PROBLEM
The problem that the Tax Fairness for Americans Abroad Act does not address is that, unlike every other country in the world, the US tax system involves more than just taxes. One of the greatest burdens of US citizenship for those living overseas is reporting.
The Tax Fairness For Americans Abroad Act does not address things like the Report of Foreign Bank and Financial Accounts (FBAR). You would still have to file your FBARs and you would still have to file for all your foreign bank accounts.
In my case, I had one year in which I had misplaced my debit card for one of my bank accounts in Georgia. I ended up having upwards of ten new account numbers for one account – and I had to report each one of them. The filing became absolutely hellish and this bill would not address instances like mine.
The regulations imposed by FATCA wouldn’t change with the bill, either. A lot of other regulations wouldn’t change.
In fact, you would actually be deemed a non-resident for tax purposes, which would mean that if you had US-based investments you would often end up paying higher tax rates. You wouldn’t be able to avail yourself of certain deductions or other tax benefits available to citizens and so basically it would ultimately remove many of the benefits of investing in the United States.
As often happens in the US Congress, this solution was put forward rather quickly and didn’t address all the issues. It’s not simply a black and white issue where if you don’t live in the United States you’re out of the system. It was a proposed solution where they won’t tax you but they’ll still tax you and you still have to file Form 5471, etc.
It really doesn’t solve the problem in its entirety.
CULTURE KILLED THE TAX FAIRNESS FOR AMERICANS ABROAD ACT
The bigger issue on why this bill, or any other bill like it, is not going to pass is due largely to the culture of the United States. The United States, for over 100 years, has had a policy of citizenship-based taxation. It has become a part of their DNA.
Since the beginning of Nomad Capitalist, I’ve talked about how culture is important. Other people focus on demographics or other statistics. I like to first look at culture. If you don’t understand the culture of a place, you won’t get very far in understanding it as a whole.
The culture of the United States and its people is inward-looking – they believe that the US is the best country in the world and that anyone would be lucky to live there.
In the past 15 years, during times of international conflict, I heard Americans say that you shouldn’t leave the United States to even visit other countries. That’s part of the culture and the politicians feed into and off of that. It’s a part of the national discourse and the political rhetoric.
And this extends outside of the US as well. I have friends from the UK who live in Dubai for example, and they go to the embassy in Abu Dhabi to have afternoon tea. They can go to the embassy to hang out because the UK loves its expat community.
If you call the US Embassy, you get nothing. The inward-looking culture of the United States means that they aren’t there to serve you – the person who left – they think you’re lucky to be one of them.
THERE IS NO POLITICAL GAIN FOR SUPPORTERS
Now there are people who are on the front lines, talking about this issue. I have some friends who are playing the advocacy game. They’re going out and complaining because it’s unfair. But at a certain point, as a business person, I say let’s be pragmatic.
Is it unfair? Of course! But we move on.
The advocacy thing to me just translates into constantly whining about a problem that’s not going to be solved. This bill didn’t make it through.
Bills like it aren’t going to go through because there’s no political capital. Nobody really wants it and nobody cares.
The Tax Fairness for Americans Abroad Act is essentially dead. It is never going to pass. Why? The bill has been sitting around for over two years and the congressman who sponsored it just retired after voting maps were redrawn, creating a much more left-leaning constituency.
If you understand the culture, how politically expedient would it be for the entire House of Representatives and Senate to get together to discuss taxes on this small community of people? Their constituents already think expats are tax dodgers, parasites, and unpatriotic.
There is nothing to gain politically. Who would want to vote for that? It didn’t even get out of committee.
Can you imagine the attack ad against the guy who votes for this? You’ve seen attack ads in the United States. No one wants to be the guy who voted for tax breaks for companies that ship jobs overseas. They don’t want to be attacked for voting for tax cuts on wealthy people. They would get clobbered.
Regulatory bills like FATCA got pushed through, and there will be more and more rules. Other western countries are going to start slowly creeping towards adopting the same policy where their expats will have to pay taxes. They’ve already started to be more difficult, tracking their nonresidents to make sure they truly are a nonresident and not subject to taxation.
GO WHERE YOU’RE TREATED BEST
I don’t expect these bills to pass and I don’t think any future bills like it ever will. Don’t expect much change where this is concerned. This was one of the factors I considered when I left the United States and renounced my citizenship. I decided that I needed to remove any opportunity for any new laws to affect me.
I use the analogy of an abusive relationship. If you’re in an abusive relationship and your partner punches you in the face, you don’t wait around for them to stab you in the throat. You take the hint.
US policymakers have been very vocal about their stance with regard to taxation. They’ve shown through their actions that this is what they believe. That’s the punch in the face. Don’t wait around for the stab in the throat.
Life isn’t fair. There is injustice all over the world that people face. But you move on. You can’t spend your entire life wallowing over the fact that you were treated unfairly. You have to move on to whatever’s next.
You can go where you’re treated best.
You don’t have to stay in the US. You don’t have to keep your US citizenship if it’s not serving you.
Now, if you want to stay a US citizen, then stay a US citizen. If you want to live in the United States, then live there. What I’m saying is that if you’re going to live overseas and hope that someday the US tax system will change, you will likely be disappointed. You should govern your actions accordingly.
