America's Self-Destructive (and Imperialist) Tax Regime

One of my main issues at the Cato Institute (and one of the reasons I was a founder of the Center for Freedom and Prosperity) is protecting and promoting fiscal sovereignty. I don't want international bureaucracies such as the United Nations or Paris-based Organization for Economic Cooperation and Development telling nations what kind of tax systems they're allowed to have - especially since those bureaucracies want to undermine tax competition in order to prop up high-tax welfare states. While I realize international tax issues are not that exciting, there is an excellent column in the Wall Street Journal Europe that shows the negative impact when nations (in this case, the United States) seek to tax economic activity in other nations. When foreigners no longer want to invest in America and when Americans are compelled into giving up U.S. citizenship, that's a sign of a bad tax code:

American expatriates are fast becoming the world's financial refugees. Onerous legislation from the U.S. government is making it too difficult – and too expensive – for banks to service U.S. citizens that live abroad. ...An increasing number are taking the most drastic step and renouncing their citizenship. ...bankers, lawyers and accountants are waking up to the wider implications of the new rules. American expats, it seems, may only be the first to suffer. ...Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don't comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door. Earlier this month, the law firm Withers conducted a survey of bankers, accountants, independent financial advisers, trust companies and other private client advisors to analyze the impact of the HIRE Act. Over half said they have seen instances where Americans were denied investment and banking services in the last two years. And 95% expect this to increase as a result of the HIRE Act. ...The U.S. government already taxes expatriate citizens on their worldwide income regardless of where it is earned or where they live, making them the only people in the developed world who are taxed in both their country of citizenship and country of residence. ...there has been an explosion in the time it takes us to keep U.S. expat clients compliant with the U.S. tax regime. He says that their bills have "at least doubled" in the past couple of years. ...A number of banks decided that the concept of U.S. citizenship was too nebulous for them to police. Darlene Hart, the chief executive of U.S. Tax & Financial Services says that when the rule came out in 2001 many of her U.S. clients received letters from their wealth managers telling them that their investment portfolios had been liquidated. Now a second wave of banks – especially in Switzerland but increasingly in the UK and the Channel Islands – are closing their doors to Americans because of the added burden of the HIRE Act. ...What then are U.S. expats to do if even more banks cut them adrift as a result of those reviews? A small but growing number have decided that the best way to avoid the rules is to hand in their passports. According to U.S. government figures, twice as many Americans renounced their citizenship in the last quarter of 2009 than in the whole of 2008. The numbers are still only in the hundreds but are expected to rise now that the HIRE Act has been signed. Ms. Hart says the last time she checked it was not possible to get an appointment at the U.S. embassy in London to renounce citizenship until 2012. In Bern, you couldn't get an appointment until June next year. ...Those that don't want to take such a drastic step can move their investments back to the U.S. However, this can be tricky without an address in the U.S. because of the Patriot Act, which tightened up the procedures by which banks verify their clients' identities. ...although it is the U.S. expats that are suffering the most at the moment, the impact of the new law could eventually be felt far more widely. The banks that sign up to the new rules are likely to pay for the required upgrades to their systems by increasing the bank fees for their rest of their customers. And eventually the reverberations from the HIRE Act may also be felt back in the U.S. ...Nearly three-quarters of respondents to the Withers survey said they expected to see investment into the U.S. decrease in the coming years because of the HIRE Act. Wegelin & Co. is, for one, advising its clients to exit all direct investments in U.S. securities.