In a perfect illustration of just how ridiculous the US government’s tax policies are, Mayor of London Boris Johnson is being pursued by the IRS for capital gains taxes he owes for selling his residence in London. Apparently Mr. Johnson was born in New York and, despite the fact that his parents returned to Britain when he was five years old, has never given up his US citizenship. Like many other people who through no fault of their own become United States citizens, he never realized that the US government, situated as it is across an ocean, claims to be the rightful owner of a substantial portion of his income and assets.
If Mr. Johnson hasn’t paid capital gains tax on the sale of his house, I’m assuming that he also hasn’t filed a yearly Form 1040 tax return, nor has he probably submitted his annual Report of Foreign Bank and Financial Accounts (FBAR). I’m sure IRS is salivating right now just thinking about all the penalties, back taxes, and interest they can charge him.
The sad thing about this situation is that it takes a prominent example like this to expose the absurdity of US tax laws. US citizens living abroad have for years been seeing their access to foreign bank accounts cut off due to over-reaching laws such as the Foreign Account Tax Compliance Act (FATCA), and the situation will only get worse. While Mr. Johnson may end up getting a slap on the wrist due to his political stature, the same cannot be said for other innocent victims, not just the accidental Americans, but those who have lived and worked abroad for years and decades and now find themselves shut offfrom an international banking system that now sees Americans as toxic.
Some would argue that Mr. Johnson should merely renounce his US citizenship. If only it were that easy. The overwhelming majority of Americans living within the United States have no idea that the US imposes an expatriation tax on those who renounce their citizenship. If you give up your US citizenship, the IRS still expects you to pay a tax! The IRS deems that all property of an expatriate is deemed sold for its fair market value on the day before citizenship is renounced. Due to inflation, the monetary thresholds that require payment of that expatriation tax aren’t terribly high, a net worth of $2 million. Someone approaching retirement age who owns his own house and has saved and invested for the past 30-40 years could easily reach that figure, and because that figure is not indexed to inflation it will gradually ensnare more and more people. Plus, anyone who hasn’t complied with “all US federal tax obligations” for the previous five years must pay the expatriation tax even if they would have otherwise been exempt.
Obviously the accidental Americans, or folks like Mr. Johnson who couldn’t possibly be aware of the myriad taxes imposed by the US government, cannot have complied with the previous five years of US tax obligations and thus are subject to that expatriation tax.
In practice, failing to pay such taxes used to mean that there would only likely be an effect if someone owing the tax traveled to the United States, as that would place him at risk of arrest or prosecution. But as the international banking and financial system becomes more and more intertwined and interdependent, and as the US seeks to extend its authority overseas, US tax authorities and regulators have begun to put pressure on foreign banks and financial institutions that serve Americans living abroad. As Americans living outside the US can well attest, that pressure has become so great that many banks have decided to stop providing services to customers who are American citizens. American expatriates have become lepers within the international financial system.
The idea that the US government can claim taxing authority over transactions that take place abroad is absurd. How long will it be before someone gets the bright idea to pay off the national debt by declaring everyone in the world an American citizen, so that all of their income and property can be taxed? (Note to any IRS employees or Congressmen reading this: it’s not feasible, don’t even think about doing it.) The only other country in the world that taxes its citizens living abroad is Eritrea, whose diaspora tax has beencondemned by the US State Department.
So what does all of this tax stuff have to do with money and banking? It’s quite simple. The American financial system is becoming more and more restrictive all the time. Banks and money services businesses cooperate and share information with the government and law enforcement on a more and frequent basis. The ability of someone to open an account, hold some money, and not have the government find out where every single penny is spent is just about dead in the United States. Naturally, foreign jurisdictions provide an escape valve for those who don’t want the government snooping in their business, and the United States is now trying to close those valves.
Cracking down on “tax havens” such as Switzerland and the Cayman Islands is one step, as is forcing other countries to adhere to FATCA, and penalizing foreign banks who fall afoul of the US government’s labyrinthine regulations. The fact that innocent Americans get caught up in this mess is of no concern to the government, which is intent on forming a financial Panopticon. We’re forced to use the government’s money, forced to use the government-formed banking cartel, and forced to divulge all of our financial details. Pretty soon, there will be no escaping. Those who ignore laws like FATCA, or who fail to empathize with American citizens abroad who are forced to suffer its effects, will find themselves in a world of hurt once the escape valves are completely closed off and the full force of the government comes crashing down on those still residing in the homeland.
Paul-Martin Foss is president of the Carl Menger Center for the Study of Money and Banking. He was Congressman Ron Paul’s monetary policy aide from 2007-2013.