Monday, 31 May 2004

Without representation: I've always believed that the least effective advocate is the one who calls for something that benefits himself. Whether it's the college student who says tuition is too high, the record-label executive who wants longer copyrights, Jesse Jackson, or the wealthy aristocrat who decries the estate tax… when the premise of your argument is "let's all agree on something that benefits me," your credibility goes down the drain.

So when I learned today that the Senate voted to raise taxes on expats to pay for Dubya's cherished tax cut on stock dividends, I took a deep breath. I'm one of those crazy people who thinks paying taxes is a patriotic duty; it's not an especially pleasant duty, but nonetheless I look at it through JFK's "ask not what your country can do for you" prism. If one-third of my paycheck is what it takes to keep my country safe and sound, then here's my share, and God Bless America. I may grumble like everyone else when I'm signing over the check, and I'll surely raise heck when I find out the gubmint spent my money on million-dollar hammers and junkets to Hawaii—but I won't argue that I'm paying too much, because I've been to Cambodia, and I've come back here to tell you the United States Government is the best damn bargain your tax money can buy.

But I know first-hand about taxes and expats. I thought my tax returns were baroque and confusing before I left the United States, but for the past three years the governments of Australia, New Zealand and America have made it legally impossible for me to exist, much less determine how much I owe them in taxes. Entire consulting firms pore over my tax documents like gypsies reading a Tarot deck. I don't even dare to dream anymore of the carefree days when I could prepare my own return.

As it happens, the United States is one of only a handful of countries in the world that taxes its citizens no matter where they live. (Depending on who you ask, the others are North Korea, the Philippines, Ethiopia, Egypt, or some combination thereof.) If you're a Canadian citizen and you go off to work in Brazil, you only have to pay Brazilian taxes; the Canadian government doesn't follow you. Likewise if you're a Russian in Indonesia, or a Norwegian working in America: You only pay the taxes of the country that you're living in. You don't pay taxes to fund Canadian government services, and then pay another set of taxes for the same services in Brazil.

There is, one must admit, a certain logic to this situation—unless, unfortunately, you're an American. An American abroad has the special joy of seeing tax dollars fly out of his pocket and do almost nothing for him: My taxes, the ones I send to America, are spent on courts and police and armies that I can't call upon to protect me. My tax dollars are put to work in hospitals I can't use, schools I can't attend, highways I can't drive, benefits I can't collect, fire trucks that won't come to my house. At most my tax dollars go to a consulate building somewhere nearby that I can call if I lose my passport or get arrested; imagine how you'd feel if you paid your taxes and got only the Department of Motor Vehicles in return.

So I know this issue first-hand. And, as it happens, this tax increase will not affect me directly, because Australian tax rates are even higher than American ones, and the "foreign tax credit" is still in effect: Instead of paying one-third of my paycheck to America, I pay one-half to the Australian government— which the IRS, in an uncharacteristic display of mercy, credits against what I owe. So I wouldn't see a tax increase under the proposed new rules; the people who would be affected are the Americans who just got bombed in Saudi Arabia, where there's no income tax, or the ones in Hong Kong or Kenya or other places where the taxes are lower than in America. Until now, the federal goverment waived tax liabilities on the first $80,000 of income for those people, which meant bluntly that they paid about $30,000 less in taxes in exchange for giving up the legal protections, civil rights, health, safety, security, and all the other taken-for-granted benefits of being an American citizen, with the added bonus that many locals in these countries think killing an American would make a grand political statement.

What this will do to me, indirectly, is fire all of my colleagues in those danger-pay countries. For most expats the company is paying all or part of their taxes, as part of the package deal that convinced them to go overseas in the first place—which means the company will see a potential $30K increase in the cost of keeping Americans out in the field, which means that suddenly the local talent is looking that much more attractive. It'll be good for the Saudis or the Chinese or the Kenyans, because it'll open up jobs for them to fill… but my expat counterparts will likely end up on the unemployment line back in America: With the economy as it is, they'll have to scramble to find jobs back in the States.

For American companies in undeveloped nations where there's no "local talent" to speak of, or even in developed countries where a given skill is in high demand, this is a tax increase that will penalize those companies for hiring Americans. For Americans working independently in third-world countries, it's a surprise tax burden that will make it difficult or impossible for them to continue. For some it will mean tax evasion (since the wages you're paid abroad are not reported to the IRS, compliance is truly voluntary); for some it means "taxation without representation" and renouncing their American citizenship. I'd like to think that, if I weren't an expat but had all the facts at my disposal, I'd still be strongly opposed to this tax; if anything I think Americans should be encouraged to travel and live abroad: It makes us healthier as a nation, and I don't think we should penalize and double-tax Americans who go overseas. If that's what Senator Grassley wants, then he's not my kind of Senator; my hope is that he's been misquoted or misinformed, and that this "tax cut" proposal to raise taxes on expats dies in committee.

Thanks to The Gweilo Diaries for spotting this. The Gweilo would immediately owe Uncle Sam an extra $30,000, so his opinions of this bill are expressed a bit more pungently.

- Posted by Scott Forbes at 1:33 am. comments.