U.S. Expats Can’t Renounce Their Citizenship Fast Enough
(Bloomberg Opinion) -- The swearing in of new citizens often makes news in the U.S., especially if it happens in unusual circumstances such as one party’s national convention. Much less reported are the many citizenship renunciations by Americans, and the travails leading up to these life decisions. Almost all those giving up their U.S. nationality are expats. And for each renouncer going through the ordeal, there are countless others thinking about it. Why?
One recent press release in particular has caused quite a stir. It suggested that, after “a steep decline” in recent years, renunciations in the first half of this year soared to 5,816, more than twice as many as gave up their passport in all of 2019. The implication, as reported breathlessly in the American media, was that expats, already fed up with President Donald Trump, finally despaired over his mishandling of Covid-19 and quit. Other factors were cited as merely secondary.
But these renunciation numbers are notoriously flawed. They’re based on a list of names of renouncers published every quarter by the Internal Revenue Service — experts call this a form of “doxxing.” That list lags in time and jumbles data. In reality, most embassies and consulates stopped making renunciation appointments this spring, owing to the pandemic. And the dip in prior years, according to experts, was due to backlogs and underreporting.
By the best estimates (see chart), renunciations have been rising since 2010, when the Obama administration passed the notorious Foreign Account Tax Compliance Act (FATCA), inflicting misery on U.S. expats everywhere. In 2014, the government raised the renunciation fee from $450 to $2,350. Undeterred, expats kept at it. The American bureaucracy then indirectly slowed the pace with red tape in the first three Trump years. But we’re back on trend in 2020.
But that’s clearly not the reason why so many expats have been trying to drop their nationality for the past decade. Instead, as I described last year, it’s the nightmare of American tax and financial reporting, in which any accounts or assets deemed in Washington, D.C. to be “foreign” are automatically suspect, requiring extra disclosures that can be ruinous in time, expense and peace of mind.
The U.S. is almost unique in the world in taxing based on citizenship rather than residency. It’s also uniquely parochial in being unable or unwilling to distinguish between, say, a rich American living stateside and stashing money offshore and, for example, a middle-class American married to a German and teaching elementary school in Berlin. The hell starts with that conflation.
Before 2010 America’s citizen-based taxation didn’t necessarily disrupt the lives of expats like this school teacher. That’s because few expats even knew about the horrendously complex reporting rules or bothered with them. But FATCA required them to make new and redundant disclosures or face the prospect of tens of thousands of dollars in fines or even prison. It also required their foreign banks, brokers and insurers to report on them to the IRS, or face draconian sanctions.
Unsurprisingly, many foreign banks and brokers therefore stopped taking “U.S. persons” or green-card holders as customers. So American expats have increasingly been locked out of retail finance in their host countries.
Worse, the European Union then started passing laws with bureaucratically sublime names such as MiFID II and PRIIPs that imposed new rules on everything from mutual funds to life insurance. This scared the U.S. banks and brokers of American expats living in Europe, so they also started kicking out their customers with foreign addresses. Many Americans overseas are financially marooned.
In their desperation, several have been taking their struggle to the courts. Fabien Lehagre, a French citizen who is also an “accidental American” because he was born in California, wants to invoke the EU’s data-privacy laws to have FATCA declared illegal in Europe. A U.S.-British dual citizen calling herself “Jenny” is trying to crowdfund a legal odyssey to do something similar in the U.K. Another challenge is underway in Canada. Occasionally, there are even small victories.
But on the whole, Americans abroad feel ostracized by their own country. Like their fellow citizens back home, they’re caught up in the tribal clash between Republicans and Democrats. But when it comes to acknowledging the hardship of expats, the Democrats have mostly refused to listen. The GOP has since 2016 called for the abolition of FATCA and citizenship-based taxation in its platform. But the few Republicans who've tried to effect change have so far failed.
If the estimated 9 million Americans living abroad were recognized as a political geography, they would rank ahead of 40 states by population. Their ill treatment by the U.S. tax and compliance regime would be headline news, and probably solved in a bipartisan tweak of common sense. But they’re not a bloc. Like much about American democracy, this discrimination seems unfair. And yet, these millions of voices must be heard.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He's the author of "Hannibal and Me."
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