MarketNeutral
6th April 2010, 01:00 AM
You see, the United States Treasury is concerned about money leaving the country. Money that they’re going to need to pay their bills. The Federal government is running an operating budget deficit of over a trillion dollars this year and, by their own admission, this level of deficit spending is projected to continue for several years in the future. In order to service this unfathomable debt they’re going to need to do one of two things – drastically cut spending on defense and entitlement programs or significantly raise taxes. Which way do you think they’ll go?
My bet is that they will raise taxes and it’s not unthinkable to believe that the total tax burden for high income workers (the definition of which keeps changing all the time) will reach a combined total of 60% to 70% when you include state, local and federal taxes. Think about that – 60 to 70 cents of every dollar you earn will go to the government, with much of it being spent to cover the debt. And the state and local governments are in even worse shape. I project that will see increases in income taxes, capital gains taxes, payroll taxes, Medicare withholding, property taxes, sales taxes, death taxes, increased fees for services, all types of licenses and taxes we haven’t even heard of yet. If a state, local or the federal government can squeeze a nickel out of you, they most certainly will.
In an environment like this, more than a few people will stop voting at the ballot box and start voting with their feet. They will begin leaving the country with as many assets as they can and go somewhere where they can live their lives in comfort without watching everything they’ve worked for, everything they sacrificed for, get taken away in taxes or eaten up by inflation.
The federal government is aware of this real possibility. So aware, in fact, that they’ve been methodically preparing for this potential exodus of money for the past two years.
On June 17th, 2008 the Heroes Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081), also known as the Heart Act, was unanimously passed by Congress and signed into law by the President (a Republican no less). This piece of legislation was very well intended. It provided much needed tax relief for the men and woman of our military who are sacrificing their time and their lives for our country. But this bill also contained some language that targeted a very different group – expats who, for whatever reason, decided to give up their U.S. citizenship. The bill provides for withholding taxes of up to 30% on certain assets held by the expat as well as assessing the value of the property of the expat 24 hours prior to the renouncing of their citizenship. Keep in mind; only around 600 Americans renounce their citizenship each year, so the expected revenue from this small group is relatively limited. More important are the procedures and policies established by this bill that can be modeled for future legislation.
Okay, so this bill is not a big deal. Few people actually give up their U.S. citizenship and it’s not likely to directly affect you. What’s more, if someone decides to give up their citizenship, who really cares how much they’re taxed? But it does establish some policies, procedures and tax rates for individuals who decide to live offshore. Policies, procedures and tax rates that very well could affect you in the future.
As a follow up to the Heart Act of 2008 we have the Hiring Incentives to Restore Employment Act (H.R. 2487) commonly known as the HIRE Act (don’t you just love these names?). This is the jobs incentive bill that was signed by the President on March 18th amid little fanfare. In a congressional bill of 47 pages, presumably written to address the unemployment situation in the U.S., 21 pages are devoted to the treatment of foreign bank accounts and other offshore investment vehicles held or controlled by U.S. citizens. But I thought U.S. citizens were already required by law to disclose their overseas account to the IRS, so why do we need this legislation? Well, yes they are. But this law goes a bit farther in that it requires foreign financial and non-financial firms to report accounts held by American citizens to the U.S. Treasury. So, in effect, the United States Congress has passed a law that requires a foreign firm, located in a foreign country, to disclose account information held by a U.S. citizen (including name, address, tax ID number, account number, account balance, and flows of funds into and out of the account) to the United States Treasury on their demand. Now, that takes some nerve. What if the country where the financial firm is located has laws against disclosing this information? In that case, the law requires the financial firm to obtain a signed waiver from the account holder authorizing the firm to disclose the information. If they don’t sign the waiver, the financial firm is required to close the account. I spoke to an attorney friend of mine who told me that his firm is no longer accepting U.S. clients because they don’t want to be harassed by the IRS. Because of this law, foreign banks are likely to close accounts held by Americans due to the bookkeeping hassle or the potential liability posed by the U.S. account holder. The fact that banks and law firms will no longer want to work with U.S. citizens is an unintended consequence of this legislation. Or was that the real intended purpose?
Despite these two laws, the U.S. Treasury knows that a determined citizen, driven by the fear of increasing taxes and confiscation, will find ways to keep their privacy and their assets away from the long reach of the U.S. government. In fact, the Hire Act even has a name for these non compliant citizens – recalcitrant tax payers. And this is where I think a third piece of legislation will fill the gap.
It’s my belief, based on the actions already taken by the U.S. government, that an exit tax will be instituted to capture money at the source (your U.S. bank), before it leaves the country. I believe that this exit tax will apply only to certain specified transaction (since senators, congressmen and their wealthy patrons will still need to get their money out of the country). Further, I think this tax rate will be in the 30% range (remember the Heart Act and the withholding requirements of the Hire Act?) and will be withheld by your bank and remitted to the U.S. Treasury at the time you make a transfer to a foreign entity. Like the provisions inserted into the Heart Act and the Hire Act, this exit tax will likely make its way into some well meaning piece of legislation, inconspicuously inserted in the arcane language of the bill and will become the law of the land. Most Americans will not even know the law exists and many of those that do understand won’t object because it will not have any impact on their lives.
http://primapanama.blogs.com/
My bet is that they will raise taxes and it’s not unthinkable to believe that the total tax burden for high income workers (the definition of which keeps changing all the time) will reach a combined total of 60% to 70% when you include state, local and federal taxes. Think about that – 60 to 70 cents of every dollar you earn will go to the government, with much of it being spent to cover the debt. And the state and local governments are in even worse shape. I project that will see increases in income taxes, capital gains taxes, payroll taxes, Medicare withholding, property taxes, sales taxes, death taxes, increased fees for services, all types of licenses and taxes we haven’t even heard of yet. If a state, local or the federal government can squeeze a nickel out of you, they most certainly will.
In an environment like this, more than a few people will stop voting at the ballot box and start voting with their feet. They will begin leaving the country with as many assets as they can and go somewhere where they can live their lives in comfort without watching everything they’ve worked for, everything they sacrificed for, get taken away in taxes or eaten up by inflation.
The federal government is aware of this real possibility. So aware, in fact, that they’ve been methodically preparing for this potential exodus of money for the past two years.
On June 17th, 2008 the Heroes Earnings Assistance and Relief Tax Act of 2008 (H.R. 6081), also known as the Heart Act, was unanimously passed by Congress and signed into law by the President (a Republican no less). This piece of legislation was very well intended. It provided much needed tax relief for the men and woman of our military who are sacrificing their time and their lives for our country. But this bill also contained some language that targeted a very different group – expats who, for whatever reason, decided to give up their U.S. citizenship. The bill provides for withholding taxes of up to 30% on certain assets held by the expat as well as assessing the value of the property of the expat 24 hours prior to the renouncing of their citizenship. Keep in mind; only around 600 Americans renounce their citizenship each year, so the expected revenue from this small group is relatively limited. More important are the procedures and policies established by this bill that can be modeled for future legislation.
Okay, so this bill is not a big deal. Few people actually give up their U.S. citizenship and it’s not likely to directly affect you. What’s more, if someone decides to give up their citizenship, who really cares how much they’re taxed? But it does establish some policies, procedures and tax rates for individuals who decide to live offshore. Policies, procedures and tax rates that very well could affect you in the future.
As a follow up to the Heart Act of 2008 we have the Hiring Incentives to Restore Employment Act (H.R. 2487) commonly known as the HIRE Act (don’t you just love these names?). This is the jobs incentive bill that was signed by the President on March 18th amid little fanfare. In a congressional bill of 47 pages, presumably written to address the unemployment situation in the U.S., 21 pages are devoted to the treatment of foreign bank accounts and other offshore investment vehicles held or controlled by U.S. citizens. But I thought U.S. citizens were already required by law to disclose their overseas account to the IRS, so why do we need this legislation? Well, yes they are. But this law goes a bit farther in that it requires foreign financial and non-financial firms to report accounts held by American citizens to the U.S. Treasury. So, in effect, the United States Congress has passed a law that requires a foreign firm, located in a foreign country, to disclose account information held by a U.S. citizen (including name, address, tax ID number, account number, account balance, and flows of funds into and out of the account) to the United States Treasury on their demand. Now, that takes some nerve. What if the country where the financial firm is located has laws against disclosing this information? In that case, the law requires the financial firm to obtain a signed waiver from the account holder authorizing the firm to disclose the information. If they don’t sign the waiver, the financial firm is required to close the account. I spoke to an attorney friend of mine who told me that his firm is no longer accepting U.S. clients because they don’t want to be harassed by the IRS. Because of this law, foreign banks are likely to close accounts held by Americans due to the bookkeeping hassle or the potential liability posed by the U.S. account holder. The fact that banks and law firms will no longer want to work with U.S. citizens is an unintended consequence of this legislation. Or was that the real intended purpose?
Despite these two laws, the U.S. Treasury knows that a determined citizen, driven by the fear of increasing taxes and confiscation, will find ways to keep their privacy and their assets away from the long reach of the U.S. government. In fact, the Hire Act even has a name for these non compliant citizens – recalcitrant tax payers. And this is where I think a third piece of legislation will fill the gap.
It’s my belief, based on the actions already taken by the U.S. government, that an exit tax will be instituted to capture money at the source (your U.S. bank), before it leaves the country. I believe that this exit tax will apply only to certain specified transaction (since senators, congressmen and their wealthy patrons will still need to get their money out of the country). Further, I think this tax rate will be in the 30% range (remember the Heart Act and the withholding requirements of the Hire Act?) and will be withheld by your bank and remitted to the U.S. Treasury at the time you make a transfer to a foreign entity. Like the provisions inserted into the Heart Act and the Hire Act, this exit tax will likely make its way into some well meaning piece of legislation, inconspicuously inserted in the arcane language of the bill and will become the law of the land. Most Americans will not even know the law exists and many of those that do understand won’t object because it will not have any impact on their lives.
http://primapanama.blogs.com/