The Decline of US Tax Revenue
We have seen, heard, and even spoken of the phrase, “Increase taxes on the rich.” However, the US tax code only targets US citizens and resident aliens. So, how is this a result of declining tax revenue? Answer: More wealthy US citizens are becoming expatriates (at least in the tax sense).
In the movie, and play, “Noises Off!” two characters in the play, “Nothing On,” are stated as being, “living out of the country to avoid paying income tax.” Although it is not that easy, the basic premise is the same.
How Many are Leaving?
The US Treasury Department stated that the first quarter of 2011 saw 499 Americans expatriating. Although this number is negligible compared to the 3.1 million millionaires in 2010, Treasury has noted a steady, near-straight line increase since 2008. This line is not shallow either, but is at a steep angle, and looks to increase each quarter. 499 expatriates for first quarter 2011 is 115 more than the quarterly average for 2010. Q1 2011 expatriate number is four times more than 2009 and nine times greater than the 2008 quarterly averages.
How Much is Noncollectable?
Actually, this question is misleading. It should state, “How much is the US not receiving?” Since the IRS does not disclose income number, we will need to estimate. We will use $ 2.5 million per year as wages , with at least $ 20 million in investment income. These numbers reflect an average high-level manager or director. Taxes are based on 62% combined wage tax (41.5% base with 3% surtax, 2.5% payroll, 0.9% Medicare surtax (ObamaCare), 10.1% Social Security tax, 4% average state tax) and 25% on investment income.
Compare the number of taxes of the middle class wage earner (base income, FICA (social security and medicare) and state tax). 7 separate tax liabilities against the wealthy compared to 4 to the average person. Now, let us plug the numbers.
First, the wealthy person: $ 1,550,000 in taxes, plus $ 5,000,000 in taxes on investment income. Total tax liability is $ 7,050,000.
Now, for a $ 36,000 per year single filer and $ 10,000 in investment income: $ 6,565 in wage taxes, plus $ 2,500 in investment income tax. Total tax liability is $ 9,065.
Now, with a quarterly average of 499 expatriates, the total expatriates for 2011 could be 1996. Now, taking this number and multiplying it to the total tax liability of the above wealthy person, the US will lose $ 14,071,800,000. That is $ 14 billion per year.
Why are More Millionaires Leaving?
One conjecture is ObamaCare. This is only one reason, as millionaires are only contributing 0.9% to that act. However, there is a deeper issue.
Millionaires understand economics, and thus, have found that the price of being a US citizen is too high. IRS is targeting scofflaws with non-US investments and non-US accounts. Additionally, the IRS is violating its own rules regarding foreign income. Foreign income is only taxable if it enters the United States. However, if a non-US account is held in a bank with branches in the US, that account is classified as a US account, and subject to tax. This is where the IRS is in violation, because non-US banks without branches in the US are also being targeted.
The best answer to the question above is best stated by Peter Connors, a tax attorney in New York.
I think this is coming to the forefront because of offshore reporting and banker reporting issues; there is a price to being a citizen of the U.S. and at a certain point the price may not be worth it.
Final Note
In economics, there is a very poignant and irrefutable law that the US politicos miss. The Law of Diminishing Returns is the bitter pill that our tax system cannot handle. The Law states that, “as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee” Change employee to taxpayer, and product to collectable taxes, and you will see the issues here.
The US tax code would benefit from using The Law of Diminishing Returns to its advantage. For many years, I have advocated a flat tax. Today, the following countries have a flat tax: Bosnia and Herzegovina, Bulgaria, Albania, Czech Republic, Estonia, Georgia, Guernsey, Hungary, Kazakhstan, Iceland, Iraq, Jersey, Kyrgyzstan, Latvia, Lithuania, Macedonia, Mongolia, Montenegro, Mauritius, Romania, Russia, Serbia, Slovakia, Ukraine. The mentioned countries that have a stable political system are seeing an increase in US business investment and employment.
- Are Taxes Causing the Rich to Renounce Their Citizenship? (blogs.wsj.com)
The Average Joe Economic Show by Brandon Holm (Host) is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.
Based on a work at averagejoeecon.info.
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