Surprisingly enough, people who live and work abroad tend to acquire other overseas assets along the way. The IRS sees a plain-vanilla European mutual fund, for example, as a “passive foreign investment company,” and requires disclosures that are Kafkaesque. The Obama-era Foreign Account Tax Compliance Act made things worse. It threatens foreign banks with drastic penalties if they fail to provide information on customers who are “U.S. persons” (citizens or green-card holders). As a result, many financial institutions simply refuse to serve Americans at all.
Owing to the original sin of citizen-based taxation, moreover, every tweak to American tax law seems to exacerbate the problem. President Donald Trump’s reform of 2017 added rules aimed at the overseas profits of U.S. companies. Inadvertently, the IRS now treats the American owner of a lemonade stand in Belgium like Google, forcing them to declare a new kind of income known — say it out loud to feel it — as GILTI.
The original targets of this harsh regime were rich Americans living in the U.S. and stashing money in hidden offshore accounts. But hardened tax cheats developed new evasion strategies long ago. The victims today are Americans abroad with ordinary incomes and no special tax expertise. They include “accidental Americans” who aren’t even aware of the rules — children born in the U.S. while their foreign parents happened to be visiting, for instance, or people born and living abroad whose fathers were U.S. soldiers.
Some U.S. expats renounce their citizenship, but few want to cut ties to their country, and for most the cost is prohibitive in any case. They should never be made to feel that it’s necessary. At a minimum, the U.S. should simplify the rules for its expats and raise the balance thresholds so middle-income filers are exempt. But the best solution would be even simpler: Follow the example set by almost every other economy (did I mention Eritrea?) and base the personal income tax on residency, not citizenship.
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Andreas Kluth is a member of Bloomberg’s editorial board. He was previously editor in chief of Handelsblatt Global and a writer for the Economist.