Posts Tagged ‘tax policy’

U.S. hunt for “tax cheats” hurts millions

The added tax burdens of living overseas can strain the patience of patriotic ex-pats. Photo: Joshua Ganderson,  Creative Commons, some rights reserved

The added tax burdens of living overseas can strain the patience of patriotic ex-pats. Photo: Joshua Ganderson, Creative Commons, some rights reserved

Can you name the only two nations on earth that tax citizens who reside abroad? Well, one is said to be Eritrea, in the Horn of Africa. The other is the U.S.

Of course, this is immaterial for Americans who have never left home. But over 7 million Americans do live outside the U.S. and they feel this unique distinction acutely. Besides being expected to file tax returns in the U.S. and their country of residence, changes in U.S. rules designed to catch tax cheats are making life difficult for ex-pats – and banks – all over the world. (I won’t bore you with the sea of details, other than to say FBAR and FATCA have become “f-words” to many.)

Now, throw out the term “tax cheat” and it only seems fair to go get what’s due. The trouble is these regulations treat everyone as a suspected criminal, without any expectation of personal privacy, or fair play, just for the crime of living abroad. Those who say “What’s the big deal? Just follow the rules!” should know that even (especially?) the experts call the rules burdensome, confusing and unfair.

Here’s more from Forbes Magazine about the difficult choices Americans abroad face in making sure they are in full compliance:

You must report worldwide income on your U.S. tax return. If you have a foreign bank account you must check “yes” on Schedule B. You may also need to file an IRS Form 8938 with your Form 1040 to report foreign accounts and assets.

Tax return filing alone isn’t enough. U.S. persons with foreign bank accounts exceeding $10,000 in the aggregate at any time during the year must file an FBAR by each June 30. Tax return and FBAR violations are dealt with harshly. Tax evasion can mean five years in prison and a $250,000 fine. Filing a false return? Three years and a $250,000 fine.

Failing to file FBARs can be criminal too. Fines can be up to $500,000 and prison can be up to ten years. Even civil FBAR cases are scary, with non-wilful FBAR violations drawing a $10,000 fine. For willful FBAR violations, the penalty is the greater of $100,000 or 50% of the amount in the account for each violation. Each year you didn’t file is a separate violation. Those numbers can really add up and be much worse than the 27.5% Offshore Voluntary Disclosure Program penalty.

Banks all over the world are now expected to identify American account holders and share that information with U.S. regulators. It’s hard to emphasize how burdensome the reporting requirements are for non-U.S. banks, which largely feel obliged to cooperate because of the U.S. dollar’s primacy in the world economy. Let’s just say if any other country made similar demands on the U.S. that simply would not fly.

Unable to ignore the demands, some non-U.S. banks are taking the easiest escape and refusing to let Americans open accounts. (Go ahead, try living abroad if no one will bank with you.) Here’s a succinct comment from Business week in a 2012 article “Why Foreign Banks are Shunning American Millionares“:

The attitude of American regulators is “Draconian,” says Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender. “I don’t open U.S. accounts, period.”

Now, this is all headache enough for full-blown Americans abroad. And you might think American millionaires, for goodness sake, have enough clout to push back, though there’s precious little sign counter-lobbying is getting anywhere. But there’s also the plight of thousands (tens of thousands?) of so-called “accidental Americans” in Canada.

There are many ways to be an accidental American. One may be the Canadian child of a parent who was American. Or have been a Canadian born in a town that shared services with a U.S. hospital. (Anyone born in the U.S. is technically a U.S. citizen even if they never set foot in the U.S. again and do not consider themselves American.) Imagine learning, as a working adult, or someone safely into retirement, that the U.S suddenly wants to have a very long and lucrative conversation about back taxes owed for a life that only took place in Canada?

That’s one reason why FATCA has garnered far more attention in Canada than in the U.S. and why much of that attention has been critical and despairing. One recent compromise concerned the fact that compliance with FATCA reporting requirements would violate Canadian privacy laws. As reported by CBC, this is being “solved” by using a Canadian intermediary… to violate Canadian privacy laws:

Canada is the last G7 country to sign an agreement with the U.S. to implement FATCA, in part because government officials say they spent a long time negotiating exemptions for Canada.

Although the most contentious aspects of the law remain intact — the requirement for financial institutions to flag the account information of “U.S. persons” for the U.S. Internal Revenue Service to then verify if all taxes have been paid — the agreement allows the Canadian banks to provide the information the Canada Revenue Agency instead of the IRS directly.

Using the CRA as a “go-between” allows a mechanism for Canadians who feel they have been wrongly flagged to appeal, and also avoid an almost certain breach of Canada’s privacy act had banks been sending customer information to a foreign government.

Small progress was attained for fairer recognition of Canadian retirement and education savings programs, in terms of how they are taxed. Again from CBC:

While banks say they will still be left on the hook for the enormous compliance costs of tracking and reporting all this additional information on a some of their clients, this agreement spares them the penalties the U.S. was threatening for non-compliance; a 30 per cent withholding tax on all of their U.S. transactions.

The Canadian government has raised objections to FATCA from the beginning, saying the existing Canada-U.S. tax treaty allowed the U.S. to do all it needed to.

I’ve heard from at least one American in Canada who had to spend thousands of dollars with a skilled accountant just to file the papers to be fully compliant with reporting requirements. That person owed no taxes – zero – and all that came of it was a message stating he/she was deemed “at low risk for non-compliance”.  Indeed, some ex-pats can’t take the hassle and are considering renouncing their U.S. citizenship – not that doing so solves the whole issue.

Many Americans living abroad – and Canadians caught in this trap – are beyond frustrated. Accidental Americans are in a tremendous bind and even Americans complain of feeling like second-class citizens. Why second class? Because their reporting requirements are invasive and excessive, and because their plight is largely invisible. Scattered as they are, with a distracted and divided Congress, ex-pat Americans by and large have zero political clout, or redress. There’s some degree of fear in play too. Because it’s hard enough to argue with tax regulators or face an audit within the U.S. Risking that abroad feel suicidal. It’s frightening and oppressive, the opposite of what being an American is supposed to be.

Of course stay-at-home Americans can sniff and say “Well, you should never have left.”  Or, “If things are that bad, just come back and be done with it.” And yes, I am biased, because I too must navigate these rocky shoals. But who knew that American exceptionalism means less freedom to live and work in a larger world?

Afternoon Read: Another look at the NYS tax changes

Many of you were confused (or perhaps annoyed) by the table I posted a couple of days ago in my blog entry on the new tax rules, finding it somewhat internally contradictory.

The investigative news organization (and sometimes NPR partner) Propublica has an article today that makes it clear why some are saying taxes are going down for the superrich, and others are saying they’re going up.

Here’s a teaser:

“Under the overhaul, which was passed on Thursday, one bracket of wealthy New Yorkers will be getting a bigger tax cut than the taxpayers in any other bracket. Specifically, individuals making between $500,000 and $2 million will pay 2.12 percent less in state income taxes for 2012. In contrast, individuals making between $40,000 and $150,000 are only getting a reduction of 0.4 percent, as this New York Times chart shows.”

What, you say? Everyone said they’re getting a tax hike! Well, they are, relative to the base tax rate in NYS:

“New York Gov. Andrew Cuomo — and apparently, much of the media — has been using New York’s base rate of 6.85 percent to calculate the “raised” taxes for the rich. But for the past three years, wealthy New Yorkers making more than $200,000 (or $300,000 for households) have paid the base rate along with an income-tax surcharge on top of it. It’s also known as the “millionaires’ tax,” and it expires at the end of this year.”


Is Cuomo’s tax deal too cloak and dagger for a healthy democracy?

Governor Andrew Cuomo has been nothing if not consistent on the question of raising taxes for high-end earners:  From his campaign through his latest duels with public employee unions, he condemned the idea.

It would, he argued, make New York state uncompetitive and might even drive millionaires out.  This is a quote from October 17th:

“You are kidding yourself if you think you can be one of the highest-taxed states in the nation, have a reputation for being antibusiness—and have a rosy economic future.”

Then, last weekend, there was an abrupt about-face in the form of editorials, penned by Gov. Cuomo, which appeared in newspapers around the state.

Suddenly, the Democrat was describing the current tax code as unfair and suggesting that millionaires, in fact, do need to pay more, while middle class earners have their taxes cut.

It seemed like the opening salvo — a trial balloon maybe? — in a major new policy shift.

But in fact, that editorial was a quick “hold onto your hats” gesture, signaling that we were about to see a major shift in our tax code — as in, right now.

With no public hearings and no public debate, the governor had struck a behind-the-scenes deal with legislative leaders in Albany that will shift significantly more of the tax burden to the wealthy.

Regardless of what you think about the deal itself, it’s hard to view this as a shining example of open democracy and debate.

Yesterday, New York’s League of Women Voters, Common Cause and the Public Interest Research Group put out a joint statement questioning the process.

The announcement today of leadership’s agreement on a proposal to revise the state’s tax code responds to the call by many to make tax policy fair.

However, the process by which the deal was struck is a continuation of the backdoor-deal making that has defined Albany culture.

It is important that the people’s business – particularly policies that will directly impact the taxpayers and the economic health of this state – be conducted in the open.

The public should have an opportunity to learn of, and comment on, such important fiscal and policy matters, not simply be informed after the fact.

Matters of this magnitude should not be decided in secret, during the legislative hiatus and without a formal process.

Each of these important issues should be the subject of hearings and public discussions, with sufficient time for the public to understand and comment on what may be proposed or under consideration.

These concerns are underscored as these issues have not been the subject of recent hearings and the substance of today’s announcement has not been previously vetted through the formal legislative process.

Accordingly, the tax code should not be hustled through a special session, where these crucial matters are debated in closed conferences and then voted on the next day.

The point, really, is that if state officials can strike a good deal quickly and in secret (and again, it’s open to debate whether this is a good deal), what’s to stop them from doing really awful things quickly and in secret?

What do you think?  Did this deal take you by surprise?  Is it okay a policy shift of this magnitude occur behind closed doors?

Breaking: Governor Cuomo and legislative leaders have struck a deal on taxes

And while it doesn’t involve extending the millionaire’s tax, it does involve raising taxes on the very wealthy, at least temporarily.

This news just came out a few minutes ago via a press release from Governor Andrew Cuomo’s office, but the New York Times has a nice summary here.

Essentially, the deal will create several new tax brackets–the newly- implemented top bracket expires in December 31, 2014.

Those new brackets are shown in a handy table, below, from the governor’s press release. (PLEASE NOTE the figures in the table are comparing tax rates with the millionaire’s tax in effect, to those under the new deal, and that’s why it looks like almost everyone’s getting a tax cut.)

The new brackets would mean that every married-filing-jointly couple (so romantic!) that makes less than $300,000 will get a tax cut. And couples making more than $2 million–such as the Monopoly man and Mrs. Monopoly–will pay about 2% more (See the NYT article for a little more nuance on this).

Interestingly, it appears the top “middle class” tax bracket–couples making between $300,000 and $2 million a year–will be the ones to see their tax rates drop most significantly. Under the existing code, they paid between 7.85% and 8.97%–now they’ll pay 6.85%. But that tax rate would have dropped back to 6.85% in any event, when the millionaire’s tax expires at the end of the year.

Those making less than $300,000 will see their rates drop less than .5%.

These numbers are difficult to parse, but I’m going by what’s in the press release. Here’s that information, keeping in mind the top bracket’s rate’s are dropping compared to their current (with-millionaire’s-tax) rates:

Income Level Previous Tax Rate New Tax Rate
$40,000 to $150,000 6.85% 6.45%
$150,000 to $300,000 6.85% 6.65%
$300,000 to $2 million 7.85% – 8.97% 6.85%
Over $2 million 8.97% 8.82%

As is clear, that increase in the top tax bracket’s rate won’t entirely replace the revenue that’s lost when the millionaire’s tax expires. But according to the press release, it will bring in $1.9 billion that would otherwise have been lost. Again, that top bracket expires at the end of 2014–and apparently the brackets would “increase with the rate of inflation.”

I’m sure we’ll be unpacking the complications of these new rules in the days, weeks and months ahead.

Morning Read: Gov. Cuomo embraces a tax-the-rich plan?

A foolish consistency is the hobgoblin of little minds, adored by little statesmen, philosophers, and divines — or so thought Ralph Emerson.

Is that the proper context for viewing Governor Andrew Cuomo’s sudden embrace of a plan that would cut middle-class tax rates, while boosting taxes on the wealthy next year?

This from the Associated Press:

The Democrat released an opinion piece for newspapers Monday, building a case for revision of tax brackets and rules to make it “fairer” after decades of inaction. His proposal, major elements of which are still being negotiated with legislative leaders, drew immediate praise and rebuke.

“It is the end of the dominance of the anti-tax message politically,” said Richard Brodsky, a former assemblyman from Westchester who is now a senior fellow at the Wagner School at New York University. “It’s a master stroke from Cuomo in that he doesn’t just solve New York’s problems, he now gets into a national conversation about bipartisanship and fairness in the economy. … This will change national debate.”

Others saw a flip-flop.

“This is just painting a distorted picture of the current and past tax system in order to justify what he’s doing,” said E.J. McMahon of the fiscally conservative Manhattan Institute. “He wants to increase taxes for wealthier New Yorkers, so he is inventing this narrative.”

You can read Gov. Cuomo’s public letter on all this here.  He appears to cut to the chase in this passage:

Simply put, to me “fairness” dictates that the more you make the more you pay and the higher your income the higher your rate. Also, you should be treated the same as people with similar incomes and differently from people who make significantly more, or significantly less, than you earn.

I would create multiple brackets and rates increasing on a graduated basis throughout and indexed to inflation. I would add more income brackets for the middle income and add high end brackets. The actual rate span should be several points from low to high.

So what do you think?  Does New York need a new tax system, one that shifts a bit more of the burden to high-end wage earners?  Is the current system, as the governor argues, unfair?  Comments welcome below.

In the Supercommittee’s failure, a stark 2012 election

There has been a lot of ink spilled over the failure of the congressional “supercommittee” to find a path toward systemic, long-term deficit reduction.

After digging through the various accounts of what went wrong, it strikes me that the collapse of the effort boils down to a fairly simple ideological difference over taxes.

Republicans put forward a series of proposals which would have effectively locked in the pattern of taxation established by President George W. Bush, one that reduced the tax burden on America’s wealthiest citizens.

Yes, the plan developed by Sen. Pat Toomey would have boosted revenue somewhat by closing high-end tax loopholes, but the concept essentially institutionalized the notion that capital gains taxes and estate taxes should remain low or nonexistent.

Ultimately, the Toomey plan would have placed the largest burden of deficit reduction on America’s middle and lower classes, not by raising their taxes so much, but by cutting the programs, public sector jobs and services that many families rely upon.

After some early uncertainty, meanwhile, Democrats appear to have solidified their stance around the notion that America’s wealthiest citizens need to contribute significantly more to Federal revenues, both to pay for government programs and cut the deficit.

They hope to return the nation to upper-end taxation rates more in line with those seen during the Clinton years.

Yes, President Barack Obama put Social Security, Medicare and other entitlements on the table for negotiated cuts.  But the real core of the Democratic plan appears to be to allow the Bush-era tax cuts to expire at the end of 2012.

The good news here is that this ideological log-jam gives us exactly what democracies need in an election season:  a clear choice.

Voters who believe that income tax rates on upper-wage earners are too high and that further tax hikes will stifle investment, innovation and job creation in the middle of a painful economic slump, have a party that shares that conviction whole-heartedly.

Voters, meanwhile, who believe that the Bush-era tax cuts were a major give-away to the wealthy, contributing mightily to dangerous national deficits at a time when the US faced two wars and historic economic challenges at home — well, they have a party that shares their views.

My sense is that Republicans and Democrats feel pretty comfortable marching under these banners over the next twelve months.

Both sides think they have a winning ideology, one that will capture the hearts and hopes of the American people.

What do you think?  Do either of these approaches fit your sense of where America needs to go?

Morning Read: Should Congress “go big” to tackle deficits?

The Adirondack Daily Enterprise notes this week that Rep. Bill Owens (D-Plattsburgh) has embraced the idea that a congressional supercommittee should “go big” on a grand scheme to cut budget deficits.

“The long-term health of our nation depends a great deal on the success of the super committee,” Owens said in a prepared statement. “Members of this panel have an opportunity to set aside politics and do what is best for the country by working together to reduce the deficit.”

A letter was sent to the committee — which is trying to hammer out some kind of budget-balancing deal — by roughly 100 Republicans and Democrats, arguing that “all options for mandatory and discretionary spending and revenues must be on the table.”

So far, the GOP leadership has refused to budget on the idea that a budget plan would include significant revenue increases. What do you think?

Are you hoping for a plan that erases the debt without hiking your taxes? If so, what major programs are you willing to give up?

Or do you think some people should pay more in taxes to close the gap?

Why do so many things cost more in Canada?

It’s a fact that currencies fluctuate, and that there are winners and losers when that happens. Canadians who can make the trip like to shop in the U.S. for the larger selection of goods – and for the usually lower prices. From books to cars, many things simply cost more in Canada – sometimes a lot more. The mystery is why that is still the case, when Canadian dollar is near or above parity, as has been true for most of this year?

This article in the Globe and Mail covers that long-simmering irritant. The good news is products now cost an average of just 11% more over U.S. prices, down from 18% in April. But what keeps the gap so wide in the first place?

Bank of Canada Governor Mark Carney just appeared before the Canadian Senate’s standing committee on national finance. Reasons for price disparity likely include:

….higher taxes, higher labour costs, higher transportation costs – in part because of a smaller, more widely dispersed population – differences in inventory levels and a more concentrated sector on this side of the border that reduces competitive pressure to cut prices.

[Carney said] “In Canada, the top four retailers have a 28-per-cent market share, compared with only 12 per cent in the United States”

Finance Minister Jim Flaherty wrote to the Senate committee asking it to study the issue back in September.

“Canadians are rightly irritated when they see large price discrepancies on the exact same products being sold on different sides of the border,” the minister wrote. “I share their irritation.”

The comment section for the article is full of frustration, and plain puzzlement, as with this post from “alamogordo”:

Recently a friend of mine in NY purchased a Regency wood stove which is made in BC Canada. The price difference was more than 1,200 dollars less in the US on a stove that retails for $3,600 in Canada.

That’s quite a difference.

It’s good for retailers in the U.S., but Canadians consumers are not amused.

So, how would you explain this? Higher taxes? Pure uncompetitive price gouging?

What’s your best example of doing well by shopping across the border?

A property tax cap rebellion?

Newsday is reporting that 34 of the 234 municipalities which have reported their budgets to the state Comptroller’s Office have voted to override the new state property tax cap. Thousands more have yet to report to the comptroller; some of them, including St. Lawrence and Franklin counties, have taken the preliminary steps of a public hearing and a local law that will allow an override if and when  local officials decide they can’t live within the 2 percent limit on increases.

The New York Times is also reporting local pushback on the tax cap today.

The communities, which include affluent New York City suburbs and rural communities near the border with Canada, are declaring that they cannot restrain the growth of property taxes and still comply with a variety of state-mandated programs and provide the services residents expect.

The Times quotes Gregory J. Edwards, the county executive of Chautauqua County. He’s a Republican who ran for lieutenant governor last year. In a letter to residents this month he called the cap  a political “scam.”

“The 2 percent property-tax cap is nothing more than a campaign slogan meant to get them re-elected and give local leaders the pain for their failure to act,” Mr. Edwards wrote in his letter, referring to Albany lawmakers.

According to the Times, Edwards has proposed a tax increase of nearly 13 percent for Chautauqua County, which he says is entirely attributable to increases in state-mandated costs.

There’s more:

Each passing day seems to bring a new act of legislative rebellion. In just one week this month, on Monday, the Town Board in Hammond, in the Thousand Islands region, voted to override the cap; on Tuesday, the Board of Supervisors in Seneca County introduced a measure to do the same thing; on Wednesday, town officials in Massena, in St. Lawrence County, passed their own override; and on Thursday, the Town Board in Harrietstown, in the Adirondacks, followed suit.

And from Cuomo:

But Mr. Cuomo is now emphasizing the cap’s symbolic value, saying “this mentality of automatic pilot, where the property taxes just keep going up 5, 6, 7 percent every year,” will no longer be tolerated by New Yorkers. Indeed, in some communities, residents have chastised their local officials for not sufficiently embracing his push to keep taxes down.

“What you’re seeing this year, which you didn’t see in years past: there is much more attention and discussion about the increases in the property tax,” Mr. Cuomo said. “That is a great accomplishment and a great positive.”

What do you think?