Global Labor Mobility and Taxation

"Globalization has forgotten the worker.  Scholarship on the tax consequences of globalization emphasizes the movement of capital and corporations, neglecting labor."

Ruth Mason
Tax Expenditures and Global Labor Mobility

Alas, this is all too true.  In the debate about catching rich tax cheats and going after tax-evading corporations, the worker is hardly ever mentioned and the impact on him or her isn't even considered in the fights against tax evasion and the implementation of different and creative taxation regimes.

People migrate for many reasons but one of the most common is moving to another country because there are good employment opportunities there as opposed to where they are.  It's not just a question of different unemployment rates, it's also because a skill or a degree can be worth more in another market.   Speaking English in the U.S. or the U.K. is no big deal in the home country but a lot of English speakers can earn a living in other countries teaching that language or filling a job abroad where the foreign company has decided they want someone with native English.  The first is not well-paid but the latter can be if it's combined with other skills and talents including integration into the host country language and culture.  Other examples abound like plumbers, electricians, IT workers, secretaries, engineers, musicians, technical writers, construction workers and mid-level managers.  The terms "highly-qualified migrant" and "low-skilled labor" do not even begin to do justice to the diversity of the migrants seeking economic opportunity outside of their home countries.  Even workers from developed countries can better their situation by moving abroad if they find the right match and the right job.

For globalization to work for people, and not just to the benefit of corporations and elites, it is essential that natural persons (aka "human beings") be able to seek out opportunities all over the world and not just be "captive citizens" of their homelands while capital and jet-setters flow freely from one country to another.

The biggest impediments to global labor mobility are local laws and immigration policies.  The question today is:   Given the efforts of many states to combat cross-border tax evasion, talk of exit and diaspora taxes, and the attempt to create a worldwide system of financial information exchange are we putting a mighty tool in the hand of governments to extract revenue from their diasporas and to prevent emigration?

I think that is a real possibility.  We are already seeing how Americans abroad are disadvantaged compared to the migrants from other countries because of U.S. citizenship-based taxation.  Americans who seek work abroad can be double-taxed (owe taxes in both the host country and the U.S.)  This is a fact and you have only to check the IRS website to see that, while there are methods to alleviate that burden, they do not eliminate it.  Other possible impacts are having to pay for expert advice in order to fill out tax returns and to comply with reporting requirements (all required even if no tax is due).

How many Americans, if they knew the full extent of their own country's worldwide taxation regime and its consequences, would still contemplate taking a job in Canada, South America, Asia or Europe?  How many American companies, faced with the added cost and complexity of sending their U.S. personnel overseas, will simply fill the position with a local?  High-level managers (executives) will still be able to go but lower-level skilled people like an IT worker or a finance person will be shut out from all the benefits they might have expected to enjoy when they sought employment with a home country multi-national.

From that experience we can extrapolate and imagine what would happen if other countries developed their own "tax the diaspora" schemes.  Would a French person bother to go to California to start a small company if he knew he was going to have to report his financial activity and pay taxes to the French government?  Ditto for the young person from the U.K. seeking a job in Singapore or a Chinese national offered a job in Canada.  Much of it depends entirely on the ability to pay and this is where it could be become flagrantly discriminatory.  A potential migrant who is highly-skilled (an executive) or has a particular talent (a movie star) will probably command a high salary in the host country and will be able to pay experts to navigate the home country tax system as it applies to expats.  They will be able to take full advantage of globalization and international mobility because they can pay the direct or indirect tax on it.  The young who are just starting their careers, and those with skills that command only modest salaries, probably can't.

Many countries have floated the idea of taxing their emigrants.  You could almost say that the bigger the budget deficit, the more attractive it looks.  Very politically popular.  Plus, it would have the added benefit of discouraging emigration in a way that is just devious enough not to fall foul of international law.   So why haven't more countries gone ahead and done it?

One reason is because it was almost impossible to enforce.  A country can try to say to its diaspora, "OK, ladies and gentlemen, you owe us 1% of your earnings in the host country," but how in the heck to make that stick?    A Frenchwoman in Boston has a W-2 so the US knows what she makes and can tax her but that information isn't automatically passed along to the French government.   As for the contents of her bank account, American banks  are known for their fierce resistance to sharing that information with other countries even when it concerns a national of another country.  Other countries have similar policies and privacy laws to prevent it.

This is where automatic worldwide sharing of financial information comes in.  The scope of what is being proposed goes way beyond the idle rich and corporations (though this is given as the driver behind it).  It is no less than the exchange of huge databases containing private financial information on literally millions upon millions of people.  In these databases there will be retirees, plumbers, foreign language instructors, fast-food industry workers, stay at home mothers, and many many others who don't fall into the category of "rich".  FATCA contains provisions so that only accounts over a certain amount have to be reported but that is no guarantee that the databases won't still be filled with the lower or middle-income who have retirement savings, for example.  There is also no guarantee that other proposals like the French or UK FATCA won't apply different rules and seek a much lower threshold for their citizens living abroad.

The danger is not so much the automatic information exchange itself as it is the potential for governments to use that information in ways that have only a tenuous connection to the goal of unearthing those "rich tax cheats not paying their fair share," and everything to do with their own domestic agendas:  extracting tax revenue from all their diaspora members living abroad to balance their homeland budgets and, of course, slowing down emigration of the young, the skilled and semi-skilled, and the adventurous by making it onerous and financially disadvantageous to leave the home country.

The threat to global mobility as I see it is in the combination of a worldwide information exchange of financial information coupled with countries passing their own laws inspired by the American model of citizenship-based taxation.  With the first they would actually have means to enforce the second.

I personally do not believe for one moment that these countries would restrict the scope of these new tax laws to the entrepreneurs, idle rich and the investor class.  Why?  Do the math.  In 2010 there were around 40 million immigrants in the U.S.  Most are probably not rich or even upper-income.  If their home countries could get as little as 100 USD out of them, that would be a chunk of change, wouldn't it?  Same holds true for all other governments - even small amounts would make a difference where the diasporas number in the hundreds of thousands or millions of members.  And where these people do not have much political power in the home country and only modest salaries in the host country, they have few defenses against this.  As far as I've been able to determine there is nothing in international law that would prevent countries from doing this to their emigrants once their governments have the information in hand.  And you just have to ask to what extent global mobility would be slowed down by the implementation of enforceable diaspora tax regimes.

Maybe it won't ever happen.   Still, I would argue that someone should be watching this closely so that this sort of thing does not evolve into yet another impediment to global mobility and another nightmare for global migrants.  What is really distressing right now is that with all these potential impacts on the working international migrant is that international labor organizations and migrants advocacy groups are not more implicated in the discussions around information-sharing initiatives and cross-border tax issues at the international level.   There is a real potential here for abuse and the danger is that the burden will fall hardest on those who are least able to bear it.

Not the rich who have access to expensive international legal counsel and who will undoubtedly move their money around to whatever country decides not to share information with the others.  But on those who dream of distant shores and on those who are already there and terribly vulnerable twice over:  as immigrants in the host country and as emigrants from predatory states.