Sunday, December 21, 2014

adding intelligence to the tax net

My pal Al French sent me tantalizing news late last week.

When I was a criminal defense attorney in Gladstone and Oregon City, Al was a prosecutor with the Clackamas County District Attorney's office.  We crossed swords on several occasions in the courtroom.

In our private lives, we became friends -- sharing roots in coastal southern Oregon and finding common political ground.  Al was the guy who introduced me to The American Spectator.

But his news was not from crew at The American Spectator.  This time it was The Wall Street Journal.  "U.S. Expats Find hope in Senate Finance Tax-Reform Proposal."

Any headline that contains the words "Expats" and "tax reform" is bound to get my attention.  Especially after this very odd year of collapsing personal financial links with my Mexican bank accounts (warning -- rant ahead).

It turns out the stir has been caused by a report from the Republican staff of the U.S. Senate Committee on Finance.  As long as the Republicans were a minority in the Senate, no one much cared what showed up in their committee reports.  Come January, all of that changes.  And what were once merely wisps in the wind are starting to be taken a bit more seriously.

This is the source for all of the ripples in the water of the expatriate communities around the world.

The first factual statement is just that.  A fact.  But it is at the crux of not only this summer's collapse of electronic fund transfers from The States to Mexico, but also for a number of other issues brewing in the future.  As Elijah discovered, a cloud the size of a man's fist on the horizon can soon turn into a cyclone.

The fact?  It is right there on page 282 of the report: "The United States is the only industrialized country in the world that imposes citizenship-based taxation.  In other words, the United States taxes its citizens on their worldwide income even if the citizen resides outside the United States and has no connection to the United States other than citizenship."

That oddity in the American taxation system -- an oddity that has long been decried by many economists and tax reformers -- leads to all sorts of mischief.  Such as, the American belief that it can bludgeon foreign banks into disclosing otherwise private information in compliance with this bit of arcane policy.

The report goes on to support a test "to determine at what point a U.S. citizen is considered a nonresident of the United States and then at what point the U.S. citizen is considered to be a resident again."

Worrying about that test seems to be the type of thing lawyers fixate on.  There is a much broader question.  Why should any nation seek to tax revenue generated outside of its borders?

Let's take a simple example.  If I were to turn my house into a bed and breakfast, there are several things I must do.  The first thing would be to have my head examined.

But let's skip past my mental hygiene for a moment.  As a permanent resident of Mexico, I am authorized to earn income here.  But I must also comply with Mexican law.

That means getting all of the necessary business licenses and assorted paraphernalia of running a business -- like setting up an electronic account with the tax authorities to report my income and expenses.  During the past year, Mexico has established a rather sophisticated system that requires reports from Mexican businesses frequently enough that revenue streams will be simple to track.

When I pay all of my Mexican taxes, why should I also be required to report my income and pay taxes on the same income up north?  It is true that tax credits are allowed for foreign taxes paid.  But why should Uncle Sam bother his graying old head over what I do in Mexico?

There is one inconvenient truth here.  Quite a few expatriates and tourists in Mexico make income "under the table."  That is what we call it when our friends are involved.  If it is a millionaire, we somehow turn the same action into "tax fraud."

Whatever we call it, income earned in Mexico should be taxed here.  The Mexican authorities certainly believe that -- and have started enforcement programs.  Income earned in The States should be taxed there.

As pleased as I was to hear the news, I had to tell Al I did not have a rooster in that fight.  I am not going to indulge in any activity that will produce income outside of the American borders.  Quite the reverse.  As a homeowner, I now hemorrhage revenue.

The rest of my income is generated through retirement accounts that are taxed at the source back in the land of lessened opportunity.  The government gets its cut before I see a penny of my own money.

Even though the reform will not directly affect me, it sounds like a great idea to me -- along with a slough of other reforms -- such as abolishing most (if not all) deductions and flattening out the tax rates.

And, if by some miracle, this small reform of taxing only revenue generated within the border of The States should pass, Congress could then repeal the foreign bank reporting requirements that have killed the ability of American expatriates to transfer funds electronically between their bank accounts.

Mind you, I am not holding my breath.  But It would be nice to stop living and ding by the ATM debit card.

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