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Sunday, August 12, 2012

Flophouse Series: Taxing the Diaspora

Within the debate over the U.S. practice of citizenship-based taxation, reporting of foreign (local to most of us) bank accounts and the proposal for new exit taxes lies some very fundamental questions:  Should states control emigration through tax policy?  Should brain drain (the flight of human capital) be treated the same way as capital flight (the movement of money and assets away from the country)?  Do diasporas owe something to their home countries and are their assets earned abroad legitimate targets for taxation?  And do the host countries have something to say about home countries trying to divert resources to fill their coffers and deal with their debt to the detriment of the host country tax base?  

In almost every debate on this subject on the Internet and elsewhere, the word "fair" is used by all parties.  "Homelanders" (citizens of the home country) suspect the emigrants of taking their capital (human or financial) earned in the home country and using it to live it up on Riviera or in Buenos Aires or Singapore.  Emigrants are equally suspicious of home country attempts to milk them of money and other assets earned abroad.  They see themselves as easy targets - low-hanging fruit for home country tax authorities - since diaspora representation is usually pretty poor in the home country political arena and efforts to "make them pay their fair share" are pretty popular domestically. In the case of the U.S. American emigrants might conclude that the nation is trying to escape its own obligations (and poor past decision-making) by trying to make the diaspora responsible for paying off a large portion of the national debt (a great deal of which was put on a Chinese credit card). In which case, perhaps Americans abroad ought to cut out the middle-man and send their tax money directly to Beijing.

With all this suspicion it is hard to have a measured, rational discussion about diaspora taxation.  This is a serious problem today between the American Diaspora and the United States.  The "debate" which is being conducted via letter writing, Internet forums and the like is feisty and often quite bitter.  If we start from the premise that the Other has nefarious motives, then we are in for a long and bitter fight that has the potential to harm everyone.  Yes, the U.S. government can make life very difficult for its emigrants with onerous reporting requirements, double-taxation and in various ways make it much harder for Americans abroad to do some very simple things like open local bank accounts.  On the other hand, there are 6-7 million U.S. citizens out there who might be in a position to do some real damage to U.S. interests.  It is not the sheer size of a diaspora that matters so much as its willingness to fight home country attempts to exert sovereignty over it in both the home and host countries using tools like public renunciation of citizenship, rallying public opinion, using the local and international legal systems, working through the political arena and the like.

But resolution (something that all parties can live with) is not going to be easy.  The first step really has to be establishing some kind of platform where a real debate is possible.  Some countries like France have given their diaspora direct political representation in the national parliament but the U.S. does not seem prepared to offer something similar.  There is however a very interesting initiative being proposed by Representatives Carolyn Mulroney and Michael Honda to create a Presidential Commission on U.S. Expatriates.  This is a modest but welcome proposal that could be the start of a real dialogue between the homeland and the American diaspora.  There is some risk here, however.  If the U.S. Congress simply decides to dismiss it as being unnecessary or a frivolous use of taxpayer dollars, some Americans abroad might interpret this as a sign that dialogue (which would be a kind of tacit recognition of the existence of an American diaspora) is not welcome and that any further efforts on their part to engage the U.S. government and the American people are simply a waste of time.

Over the next couple of days I'd like to use the Flophouse to look at the various merits and demerits of the diaspora tax systems that exist (like U.S. citizenship-based taxation which is nearly unique in the world) and others that have been or are being proposed  (Sarkozy had one and Patrick Weil had another).  I'd also like to look at some of the underlying and seldom discussed issues behind these measures which are about:  controlling emigration; preventing "brain drain" and capital flight; establishing or limiting sovereignty over international migrants, and how all the parties involved (home and host countries, emigrants/immigrants) perceive the obligations and duties of human beings to the original countries of citizenship and what each one thinks is owed to the country of residence or other country of citizenship.

To be very clear the following posts will not be an attempt to offer solutions nor will they be a complete overview of all the issues around this subject (just not possible on a blog).  Rather what I hope to do is to demonstrate just how complex the question of whether or not to "Tax the Diaspora" really is.


Tim said...

I'll be making a bunch of comments on this but first I will lay out a couple of big picture issues that have to be understood. First some Canada specific issues:

When you hear proposals from the likes of Sarkozy or Patrick Weil about "global" tax cooridination you have to remember that Canada was 25 years ago basically broke. In fact one province Saskatchewan in 1992 was within days away from defaulting on its debt(Today Saskatchewan by some standards is the most fiscal sound province). However, at least in Canadian minds Canada fixed its own problems through its own self imposed austerity measures(The 1995and 1996 Federal budgets had DEEP cuts on a percentage basis well beyond any of the austerity measures being considered in the EU). Others particularily many EU and US commentators would tie Canada fiscal improvement during those years to the worldwide economic boom that was part of the dot com bubble and thus those deep Austerity measures of 1995 and 1996 could not be carried out in the EU or US without serious hardship.

Tim said...

So back to Canada. Given the history of Canada's own budget problems and its "self" imposed austerity the idea that Canada has a moral obligation to help the EU and the US with sometype of Global high tax cartel, dispora taxes, Robin Hood Taxes, any of the other proposal that EU and US scholars put out to make the world a fairer place is going to tend to be met with a response of Go Screw. I remember an interview on Bloomberg TV with the chairman of the parliamentary Finance Committee during the big Global Bank Tax fight in 2010 when he quite clearly stated that both his constituents would be quite happy if Canada didn't implement a bank tax even if all other 19 G20 members wanted to do so.

Victoria FERAUGE said...

Hi Tim,

Sorry to reply so tardily (chemo 4 hit pretty hard this week). Thank you for giving some background on Canada. This move to create more transparency and to enlist governments in some sort of global tax regime sounds wonderful to those countries suffering from capital flight and/or fiscal crises. One has to ask though to what extent this is a pipe dream. Does the US or France really think such a thing will balance their books? I was reading that the percentage of national wealth held off shore by Americans and Europeans is 2% and 8% respectively. Hard for me to understand how going after that 2% is going to do much good. But it looks good to voters, right? Concerning Canada the government seems to be waffling a bit when it comes to FATCA and the like. Why aren't they being more aggressive in defending their sovereignty?

Christophe said...

Hi Victoria,

With regards to "Some countries like France have given their diaspora direct political representation", political representation is useful only when representatives are willing to communicate with their constituants. I contacted THREE times our newly elected one regarding FATCA and never got a single answer, not even to acknoledge the receipt of my communication. What's the point if they're only willing to discuss subjects they're confortable talking about. I am extremely disappointed.
I contacted my wife's senators in our home state, and here, I got in response not a standard form letter, but a private phone call where I was able to discuss my concerns with someone. Too bad I can't even vote for them.

Victoria FERAUGE said...

Hi Christophe,

That is depressing. You didn't get even one answer?

I've had the same experience with reps in the U.S. When I lived in Seattle I always got an answer.

Since I've moved abroad not so much.