Solomon: The great American disconnect

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Polling throughout the country confirms diminished interest in American intervention to solve world problems, redefining foreign policy as "the less of it the better."

"Leading from behind" is often interpreted as a super power in decline; its global stature in decay. Even though the U.S. maintains a strong position among the industrialized nations in economic growth and stability, the apparent loss of credibility has not been muted. The world sees Russia and China challenging U.S. dominance with a "passive" America ignoring the creation and growth of violent fanatics (e.g., the Islamic State). Although the debate continues, some strategists believe that the American disengagement could prove disastrous in the long term should the apparent "isolationism" persist.

It is not only foreign adversaries and presumed allies that view our mode of international relations with skepticism. Another support system is showing signs of disintegration. More than nine million Americans live, work and raise families around the globe. These "mini-ambassadors" are uniquely positioned to share American values, cognizant of the cultural and behavioral differences that are pre-requisites for nurturing international business or inter-governmental relations.

Stand back. That nine million American citizen cohort has just be struck by a bolt of lightning. There's the American VP of a Swiss hospital who must decide between renouncing his U.S. citizenship or resigning. An American executive in the Philippines can no longer purchase mutual funds because U.S.-based firms are shutting down mutual fund trading overseas. In Dubai, a 15-year American resident can no long transfer funds from Dubai to her U.S. bank. In Lake Chapala, Mexico, a retirement community housing 10,000 Americans, the Banamex U.S.A bank is terminating all American accounts. What is dampening American global mobility?

In 2010 the U.S. congress added FATCA to the 77,000 page U.S. tax code (Foreign Account Tax Compliance Act). The idea was to catch the "fat cat tax cheats" who send billions out of the country to avoid taxes. In the process, the IRS pulled the rug out from under nine million average Americans. Many of these U.S. citizens accepted assignments abroad, adjusted to their new environment, and developed long lasting, close personal and working relationships within their host country.

FATCA requires that all financial institutions report annually to the IRS, transactions conducted with American clients. The clients also file a complex array of new forms to the IRS, covering earned income and investments worldwide. Some exclusions exist but the procedure is confusing, error prone, extremely time consuming, and cost the average American between $4,000 and $10,000 for a competent international tax accountant. Fines for errors, missed deadlines or miscalculations can be draconian.

Americans are taxed as U.S. citizens regardless of their residency, whereas the other 196 countries (except Eritrea) impose taxes based on residency. Thus, Americans living abroad, in addition to their foreign taxes, must also file with the IRS. Taxing based on citizenship began during the Civil War (1864) to discourage young Americans from leaving the country to avoid military service.

Foreign financial institutions that refuse to participate, pay heavy fines for doing business in the U.S.. Rather than serving as an agent of the IRS, banks are closing American accounts. Without financial institutions, Americans abroad cannot obtain a mortgage or a loan, invest, purchase mutual funds or insurance, or transfer funds, making survival a real challenge. Some are given the choice by their employers: give up your U.S. citizenship or quit. Renouncing citizenship has become a viable option. The rate of expatriation keeps rising exponentially, symptomatic of a major systemic problem. U.S. citizens are toxic abroad. U.S. firms will soon find it difficult to open export markets, evaluate business opportunities, create joint ventures, or make foreign direct investments.

In summary, the reckless, shotgun approach to stopping U.S. based billionaire tax evaders will have a severe negative impact on the U.S. economy in the near term future as the attitude and behavior of American citizens abroad reflects their desperation. Many view the U.S. as the greatest threat to their freedom and prosperity. By alienating nine million average Americans, the U.S. has created a second level of "isolationism". In addition to the risks created by "foreign policy avoidance," the U.S. seems to ignore the huge negative impact that renouncing U.S. citizenship could have on the American identity and image. American citizens abroad feel trapped by the global impact of U.S. tax policies and the disinterest in seeking a remedy.

Consider the "accidental American," born to U.S. parents living abroad, but has never lived in the U.S. He/she is now locked out of the international financial system in many parts of the world, because of U.S. citizenship.

It is time to reconnect with our U.S. citizens abroad, by joining the rest of the world in a tax policy based upon residency not citizenship. The 77,000-page tax code needs some serious surgery.

Norman B. Solomon lives in Brookline. He can be contacted at nbs-ch@live.com.


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