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Eduardo Saverin controversy: Slam the door on tax refugees—A Commentary by Bruce Ackerman ’67

The following commentary was published in the Los Angeles Times on May 18, 2012.

Eduardo Saverin controversy: Slam the door on tax refugees
By Bruce Ackerman ’67

My Op-Ed on Wednesday put the spotlight on people like Eduardo Saverin, who enjoy the benefits of life in America but then renounce their citizenship. If they cut themselves off from from the United States, I think we should reciprocate -- and severely limit their right to return to the country they have repudiated.

But as commenters "benewman" and "Scotsgirl151" point out, some U.S. citizens never do live here as adults because their parents move them abroad as children or because they were born abroad to U.S. citizens. This raises a different problem. As "Scotsgirl151" puts it: "Why should someone born and raised overseas with no connections to the US be banned from visiting as a tourist just because they have decided to only retain the citizenship of their home country? It's very strange to want to punish the Accidental Americans."

I agree: It would be a mistake to overextend my point to this very different case. When Congress returns to the issue, it should make special provision for “accidental Americans” to exempt themselves from new restrictions.

Naturally enough, most comments challenge my treatment of the Saverin issue.

"Blacknote" raises a fundamental question: “Why should ANY American living overseas have to pay the US ANY money for NOTHING?" "J’ai deux amours" elaborates: "The rest of the world honors their expats, does not require a monetary tribute when they are abroad and welcomes them back home with open arms."

But the law currently allows each American working abroad to exempt $95,100 from income taxes -- that’s $190,200 for a successful dual-career family. The current system simply prevents high-salary types from avoiding their fair share of U.S. taxes by establishing their primary home abroad.

"FromPatriottoExpatriate" points out that this exclusion "is available only for earned income." True enough, but he or she then makes a mistake in concluding that "the rest of income is subject to double taxation making it impossible to survive."

For starters, Singapore (where Saverin now claims residency) and many other countries don’t impose any taxes on capital gains. Once Savarin escaped America’s tax on his post-IPO Facebook stock appreciation, he will pay nothing at all. Even if he had taken citizenship in a country that imposed such a tax, the U.S. has signed tax treaties with a host of countries that try to deal with double taxation in a fair way.

If somebody has complicated capital gains issues, he’ll have to hire a skilled lawyer or accountant. Too bad: Ordinary working people would love to have such problems!

More generally, the comments are full of complaints about the Obama administration’s efforts to enforce the Foreign Accounts Tax Compliance Act, which Congress passed in 2010 in response to scandals involving the use by taxpayers of Swiss banks to hide assets from the IRS.

I have no sympathy with these complaints. It's past time to beef up foreign enforcement because this sort of tax evasion is a very real drain on the Treasury. Transition problems are inevitable. But the result will be a fairer system, in which honest taxpayers can be more confident that others aren’t cheating.

"FromPatriotToExpatriate" and others also defend Saverin-like conduct by pointing to what's been called the "exit tax." "The wealthy pay dearly to renounce," he or she wrote. In fact, they're supposed to pay taxes on the value of their assets at the time they leave, but the IRS lets them defer these and pay interest instead, until they choose to sell the assets. The current interest rate is a low 3.28%.

In any case, the exit tax looks to the past; my proposal looks to the future. It tells our departing fellow citizen that he is not welcome in the place he used to call home. As "jsherman1" notes, a 1996 statute already authorizes the U.S. attorney general to exclude people from our borders who “have renounced United States citizenship for the purpose of avoiding taxation.” But it just doesn't happen. The Justice Department confronts overwhelming practical difficulties establishing the taxpayer’s bad motive.

There may be better days ahead. Senators Charles E. Schumer (D-N.Y.) and Bob Casey (D-Pa.) announced a legislative proposal this week that may rectify this situation.

This is not the place to discuss the details of the Casey-Schumer plan. But it is a hopeful sign that something constructive may well result from Saverin’s decision to abandon his country.

Bruce Ackerman is professor of law and political science at Yale and author of the "Decline and Fall of the American Republic."