This is happening because unlike almost every other developed nation the US has a worldwide tax system. Almost every other nation has a territorial tax system. The rest of the world with their territorial system taxes income earned within that country, the US rather taxes income worldwide, regardless of where it is earned.
For example, if a British company earns income in Germany, its pays German taxes on its German income. But if a US company earns income in Germany it pays both German taxes and US taxes.
This is not about avoiding tax on profit earned in the US, after the inversion companies continue to pay US taxes, they just don’t pay taxes on income earned outside of the US.
And the US double taxes their citizens living abroad the same way.
As an American making the same money as your non-american co-worker you are left with a lot less just for having a US passport.
It is even possible you have never set foot in the US yet are required to pay uncle sam's taxes.
Wanna get rid of your US passport? Not before you pay 10 years projected taxes and pay an abhorrent fee. You will also be listed on a government website so you can be shamed like a sex offender.
> And the US double taxes their citizens living abroad the same way.
The tax code has provisions to avoid "double taxes" on foreign income. You file Form 1116 to claim credit for taxes you paid to a foreign country as an offset against your U.S. tax liability.[1] That tax credit is separate from the income exclusion, which excludes the first ~$100k of foreign income from U.S. taxation.
Generally, your total tax liability will be your foreign liability on the first $100k, plus the greater of your U.S. liability or your foreign liability on the remainder. I don't see the big injustice, honestly. It's very similar to how state income taxes work in the U.S. where people are citizens of one state but work in another.
[1] Corporations file Form 1118 to claim similar credits.
Just jumping in here to voice my appreciation for you & @kspaans correcting a highly voted comment but very incorrect assertion, which is a dangerous combination because some people only read the first few comments and leave with that falsehood impressioned as fact.
Responding with a factual source and doing so in a graceful manner (i.e. not disrespecting the poster, but gently correcting them) is what makes HN great.
Meta-meta-comment: I've seen your posts for well over half a decade and you remark consistently with the quality of StravosK, patio11, grellas, pjmlp, et al. Never clicked on your profile but you're an engineer-turned-attorney, so that's from where the rigor and @grellas vibe originates. Anyways, thought I'd take the moment to say "hey, insightful stuff, keep it up.")
The f1116 (tax credit) only works well if foreign taxes are greater than US taxes. I revoked my f2555 (income exclusion) to make my taxes easier (I hit that point where it was just too much work). Everything was great until I got married abroad to a foreign national, then I had to file "Married filing separately" because my wife didn't have a SSN. This absolutely caused my tax filing to collapse, and now I have a bill from the IRS saying I owe a lot of money (really I don't, I screwed up on the math, but...damn).
It turns out I can get my wife a tax filing number so we can file jointly, and now I have to go back and revise a couple of years of taxes, and will ultimately wind up owing nothing (hopefully!). The IRS helpline really does help (I was incredibly distraught when I found out...getting a huge bill from the IRS for a tax filing 3 years ago is horrible), if you are an expat abroad, use it! But it is still a PITA!
I feel sorry for those in Switzerland, Hong Kong, or Singapore, where the exclusion only goes so far and you wind up paying tax beyond your credit, suffering high VAT and cost of living that those locales entail. You really need a professional accountant at that point to figure out how you can get relief (e.g. by using the Housing Exclusion). The big problem is that each country "works differently", and what is considered income tax in one country isn't the whole story (they might tax differently, like with a high VAT and usage fees, and what about taxes on health insurance and various social security fees you'll never be able to use?), you can still very well be exposed to double taxation.
When I was abroad for Lucent, they generously "did my taxes for free", leaving out the fact that they took the "first $100k" deduction for the company rather than crediting it to me. Fortunately IRS caught such shenanigans and made them send me a check.
What! How can you not see the injustice in a US expatriate who has not set foot in the US for 20 years paying taxes to the IRS if they earn over $100K and their country of residence has a lower tax rate than America? That is exactly what happens today, no other country does this, and there is nothing just about it!
If you're an expatriate who hasn't set foot in the U.S. for 20 years and don't intend to return, maybe you shouldn't maintain your U.S. citizenship. But I don't think that's the typical case. I think the typical case is someone from the U.S. living abroad for a few years, regularly visiting and intending to return.
A "US expatriate who has not set foot in the US for 20 years" seemingly understands at some level that a US passport/citizenship confers benefits that are worth retaining. Those benefits are not without cost.
Try putting money in a retirement fund in the country you live in. The bizarre requirements the IRS puts on reporting will see your compliance costs exceed the yearly growth of the fund. Sorry, but if your foreign investments include a retirement fund or a family trust, you may well be shafted.
Do you know how it works for mandatory retirement accounts enforced by your host country? China started including foreigners in their SS system, and I have no idea how that money works...I've just been ignoring the contributions (treating them as straight income taxed in full) for now.
Many democratic countries have courts without juries. E.g. in France (and in many other countries in Continental Europe, because Napoleon) only the Cour d'assises, which has jurisdiction on serious crimes, has lay judges (not exactly the same as jurors, but close enough). All the other courts, including all the appellate courts, have professional judges only.
That's not double-taxation if the US has a tax treaty with the other nation (which is does with most nations). You get tax credits for foreign income taxes paid such that you pay max(foreign_tax, us_tax).
Only if you've been living there over a year. I made the mistake of moving abroad in January and had to pay all of the foreign taxes and all of the US taxes for basically an entire year.
Yes, that's my understanding as well (IANATA)! And it's still not double-taxation: if us_tax>foreign_tax, then you pay foreign_tax + us_tax-foreign_tax == us_tax. (Or foreign_tax, if it's greater.) The citizenship taxation system means you can't move away and legally pay LESS taxes than if you'd stayed in the US. But you're welcome to pay more and not have to remit anything extra to the US. ;)
Specifically, double-taxation is when you pay taxes twice on the SAME earnings. Take the example of a US citizen living abroad in a country with lower income taxes. They will have to pay foreign as well as US income taxes: two like, you point out, rather than one. But the IRS agrees that double-taxation is mean, so they give you a foreign tax credit for the tax you've already paid. You pay an amount to the IRS to make up the difference in income tax. If it were double-taxation you would have to pay the full US income tax on the money you earned, after already having paid the full foreign income tax on it as well.
(Note I've been talking about plain-vanilla income, it's a whole new ball-game if you think about other investment income.)
Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes).
And it's not abhorrent. If you earned enough money to think it's advantageous to lose one of the most valuable passports in the world, you probably earned that money in large parts due to the support of the people and infrastructure of the United States. You don't get to drop your duties once you win big.
[1] $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015
>you probably earned that money in large parts due to the support of the people and infrastructure of the United States
Or, you know, not. It's ridiculous to suggest that if you earn money abroad, American people and infrastructure are largely responsible for your success.
I was talking about people renouncing their US citizenship to avoid American taxes.
That article is talking about renouncing their US citizenship to avoid an administrative nightmare. The people mentioned in that article probably owed little to nothing, but just didn't realize or didn't handle the finer details of their dual-citizenship very well.
First I think it was unfair of me to assume that you meant income earned abroad when reading it again you didn't actually specify. I don't think that's what you were implying, that if you were financially successful in another country the American people are somehow responsible.
If you renounce your US citizenship you don't just get to erase all your existing tax obligations and if you're wealthy enough (i.e., the IRS assumes you're renouncing for tax purposes) you pay an exit tax. At what point is one's "duty" to the American public satisfied? Why are Americans so exceptional in this regard, where practically every other country in the developed world lacks taxation by citizenship?
The claim was "probably". Anecdotes aren't very helpful here, only statistics. For example, I could say that if you're an American citizen you probably have brown eyes. A million counterexamples wouldn't make that wrong.
Edit: Why so many downvotes? I'm not saying he's right, just that cr1895 is arguing against a totally different claim.
American Imperialism at its finest. "Since we're the best country in the world, you couldn't have possibly become rich without us, and therefore you must pay to leave us!"
You're intentionally blowing the parent's comment dramatically out of proportion to what was actually said, as a cheap excuse to bash America.
The parent never proclaimed America was the best in any regard, nor hinted at such an attitude.
Nobody needs to think their country is the best just to implement negative tax policies. All it indicates at a base level is the desire to maximize tax revenue. That goes for countries with extremely high tax rates on high income, which is semi-common in the developed world: it does not necessarily mean those nations must think their country is the best, therefore they can tax the rich whatever they like and said rich won't leave.
But what if you weren't even born in the US, much less have ever set foot in the US. Do you think it's fair to "pay a toll" when you're working in a foreign country?
I don't think that's what he's saying. I think we are talking past each other, myself included.
a) cole seems to specifically be talking about very wealthy people who did work and earn money in the US but who renounced citizenship largely for tax purposes (e.g. Eduardo Saverin)
b) cole talks about the foreign-earned income exclusion, which is misplaced (for people like (a) this is very different from income earned on investments and for wealth which is subject to the exit tax)
There's a smattering of outright incorrect things too like having to pay taxes for 10 years after renouncing.
I have no real opinion on whether territorial versus worldwide taxation is correct, but I think this is incorrect. It's not "you couldn't have possibly," it's "you didn't." You're welcome to renounce your citizenship if you want to disprove the didn't part.
That's only true for "earned" income. Income from dividends, interest, capital gains, etc is still taxed from the first dollar just as if you were residing in the USA.
Furthermore, if you earn income as a freelancer, it's likely that you still have to pay self-employment tax.
Or, consider that when you're born in the US you become a US citizen. There was a fuss in the Netherlands recently where some Dutch people who were born in the US but were only there very briefly as a baby, and as such lived a Dutch life in the Netherlands. The article I linked goes into how much of an absolute pain it is to renounce citizenship.
There are benefits to being a Japanese, French, German, Norwegian, Australian or whatever citizen, yet none of them pay taxes at home if they reside in the US. They pay taxes where they live and work.
The problem is according to US law you still have to pay US income taxes for ten years after you renounce your citizenship. Not to mention the fact that you paid taxes for "the support of the people and infrastructure of the United States" when you lived there.
>you still have to pay US income taxes for ten years after you renounce your citizenship
Do you have a source for this? I've never heard about it.
All I know is they make sure your last N years of taxes are in order, charge you expatriation tax (if required), and ensure you have no unpaid federal student loans.
"Under the new law, any individual who had a net worth of $2 million or an average income tax liability of $139,000 for the five previous years[10] who renounces his or her citizenship is automatically assumed to have done so for tax avoidance reasons and is subject to additional taxes. Furthermore, with certain exceptions covered expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation were subject to US taxation as if they were U.S. citizens or resident aliens."
The key there is "assumed to have done so for tax avoidance reasons". I would note this is a guideline, and the IRS can make the same determination for other reasons. Basically if you pay nontrivial amounts of taxes before you expatriate the USG assumes you should keep paying.
>As an American making the same money as your non-american co-worker you are left with a lot less just for having a US passport.
This is not quite so clear cut. Yes, as an American working and living abroad you've got the privelege of forever dealing with the IRS/FBAR, some banks who simply won't talk to you because you're American, and probably an expensive tax professional to sort it all out for you so you avoid the devastating penalties for screwing it up.
But, most people won't actually be paying anything to the US government. I'm strongly opposed to taxation by citizenship, but let's not give the impression that everyone who lives abroad is paying twice.
They have painted the picture of these rich billionaires getting away without paying taxes, and once they got the draconian laws, they are applying it to every day Joe, who hardly make a six figure salary overseas. For a country which has no short supply of aspiring immigrants and US is actually very petty towards people who want to abdicate their citizenship.
tax is one part, but paperwork and penalties are the other scary part. I have only heard of it, how minute mistakes can end up with 50K fines etc. Probably some one who has gone through the filing taxes from overseas can give better insight.
US citizen who worked in New Caledonia for 2+ years. The scariest part is that I don't have any official documentation for what I earned. I had access to our payroll system that records the amount I earned in the local payroll system -- I didn't generally have a need to convert that to USD every pay period and record it. I was paid "in kind" for housing. And at the end of it all I got an unofficial letter stating what that amount was.
It's true. There are two specific forms which have 10,000 USD late fees which can compound at least three times per year each. So doing your taxes late could cost dozens of thousands of dollars. These are specific to controlling CFCs, not applying for the FEIE though.
I agree that double taxation is crazy BUT lets add the fact that US will tax you ONLY if your worldwide income is over a certain threshold (believe it is $90,000 currently). Not that I am defending this but there is difference between saying that you are double taxed vs you are double taxed only for a certain portion of income
See my sibling reply, it's _not_ double-taxation. If a US citizen works in a foreign country and happens to pay higher income taxes than they would in the US (e.g. in Canada), the US won't charge them any extra.
But it is. If I earn $120k in let's say the Netherlands, I pay NL taxes on all of it and US taxes on about $20k of it. I'm getting double-taxed on the amount over $100k. (Nice round numbers might not be accurate, but the idea is still there.)
That's why you claim a foreign tax credit on those income taxes you paid in NL. If NL charges less income tax than you'd be charged in the US, then your tax credits will reduce your taxable income to, say, $20k like you mentioned. But this isn't double taxation because you are only be charged tax to top up the amount of tax you pay to be in line with US income taxes.
This is exactly like state income taxes. It's not "double taxation" because you get to deduct your federal taxable income by the amount you pay in state income tax.
Hang on. If it reduces taxable income, that's not the same as topping up. You were right in the first part where you said it's a tax credit. But those subtract from your tax owed, not your taxable income, a difference that's important because it's a pretty large sum in dollars.
Here's a simplified model to illustrate:
Wlog, suppose the US charges a straight m rate per dollar, country X charges n. Suppose first k dollars of an expat are untaxed by the US.
Let's say the expat makes j dollars, an equivalent US citizen in the US makes the same, and so too a citizen of X.
The citizen of X is taxed nj by X, the US citizen resident in the US is taxed mj, and the expat would be charged (j-k-nj)×m by the US and nj by X for a total of m(j-k-nj) + nj if it were a deduction to taxable income.
Notably if there's no fixed deduction, every tax rate causes you to pay more than otherwise.
The point I mean with the kid working at Starbucks is that most wage earners will have a very simple tax requirements. In many countries they won't even need to send in a tax return since it'll be done automatically. If they are a US citizen on the other hand they will now need to employee a specialist tax accoutant to handle tax requirements from the US and put in their paperwork. All to determine they owe the US nothing.
Ted Cruz was born in Canada. HE was a US citizen at the moment of his birth without having set foot in the US. If his family hadn't moved back to the US then he could have grown up in Canada as a US citizen and he would have had to file US taxes once he started making money. All without ever having set foot in the US.
Just count taxes and countries:
a) you pay taxes to one country only - normal taxation;
b) you pay same taxes to the country BUT you are also paying additional taxes to US - double taxation.
You aren't paying more than if you live inside of the US. The foreign tax credit means you only pay the difference in income tax rates between the US and the foreign country. You don't pay everything you'd owe in the US (say 39% of your income), and then ALSO pay everything you'd owe in the foreign country (say 30% of your income, for a total in 69% of your income, THAT would be double-taxation).
Consider the case where you are earning enough money to be above the thresholds and in a country with higher income taxes than the US. The IRS will say that you owe X in income taxes, but will also give you a tax credit of X+Y based on the taxes you've already paid (assuming a tax treaty). As X+Y>X, you will not owe anything in the US.
Double taxation has a specific meaning and doesn't mean "paying more than one tax".
a) If I pay income tax and e.g. war tax, then this is two taxes. b) If I pay income tax and then earnings tax on top of that, then it is double taxing. c) If I pay income tax to country A, then same tax to country B, then it is double taxing.
We are talking about c).
Wikipedia:
Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes).
While I agree, there are a lot of problems with the tax system for ex-pats, and I would love some reform being an ex-pat myself, it's not clear to me why citizens shouldn't be double taxed.
Sure, for some things (national funding for roads, schools, etc...), ex-pats may receive no benefit.
But 53% of US discretionary spending is military spending. In what way does the US military provide more service to resident citizens than ex-pats? Now to my mind, all this military spending doesn't help anyone and just causes a bunch of problems, but that's not how our democracy works. I don't get to opt out of paying for the war in Iraq just because I didn't support it.
And what about programs like NASA, which I do support? They provide no less benefit to me than they do to resident citizens.
Given that large portions of the budget (Military, Veteran's Benefits, International Services together make up 63% of discretionary spending) serve residents and ex-pats, it seems like the most logical thing would be for ex-pats to get a tax discount (which they do), not to pay no taxes at all.
"Discretionary spending" is a term the left made up to lie about how much of the budget is things they want. Things they want are non-discretionary, other things are discretionary. It's political newspeak, not a comprehensible way to measure the government budget.
Incorrect, it has a perfectly precise legal meaning. Discretionary spending is government spending allocated through an appropriations bill. It's useful to distinguish between entitlement programs and non-entitlement programs.
Where did you get the idea it was simply "political newspeak"? Perhaps you should reassess the value of your contributions to these types of discussions in light of your demonstrated ignorance here.
It's political newspeak because the large majority of the federal budget is social programs and so is the overwhelming majority of "non-discretionary spending." Excluding it diverts focus away from the primary source of government expenditures.
It's language designed to make a particular thought unthinkable, which is the defining characteristic of newspeak.
You said: "Things they want are non-discretionary, other things are discretionary."
That simply isn't true. Things that are funded by an appropriations bill are considered discretionary because the level of funding they receive is up to the discretion of Congress. Things that are funded by a mandate are not considered discretionary because their funding is not up to the discretion of congress from year to year. The opinions of liberals or conservatives do not factor into which is considered which. There is a precise legal meaning here. It is not simply "a term the left made up".
In addition to there being a legal distinction, there is also an accounting distinction. Medicare and social security, the two biggest non-discretionary expenditures by the federal government, come out of entirely different piles of money than discretionary expenditures do. Were you not aware of that?
Your income taxes are not funding social security. Your social security taxes are not funding things that come out of the general budget. Cutting social security benefits would not free up more money to fund the things you think government should be doing.
So, although I get that you do not like the nomenclature, I don't get how it makes some particular thought unthinkable. They are two different things. They should have two different names. It seems far more Orwellian to pretend like there isn't a legal difference between the two, simply because it would make achieving political goals you happen to find favorable easier.
You seem to be under the impression we could take the money from social security or medicare and spend it on stuff you like better. Legally, that isn't true. So yes, in the sense that it would be totally freaking illegal, it is "unthinkable" to cut social security in order to lower income taxes.
You might as well refer to calling animals "lions" and "tigers" as newspeak, because they make the thought that they are actually the same species of animal unthinkable. Well, they aren't the same species of animal. So it ain't newspeak, it's just nomenclature that you don't like.
It is perfectly accurate to describe spending appropriated from the general fund as discretionary and social security as non-discretionary whether or not you like the terminology. They're two different things, one of which is up to the discretion of congress, one of which is not.
Come up with a new term if you'd like. But you've strongly implied you think the two types of spending aren't different. That's not Orwellian -- that's you simply not understanding freshman high school civics. You also claimed that "discretionary spending" is a term the left made up. Are you going to post a citation for that, or admit you were wrong?
> Your social security taxes are not funding things that come out of the general budget.
Actually, they kind of are. Considering that SS invests (solely?) in treasury bonds, which are then used to pay for programs. Much of the national debt is owed to Social Security.
> Medicare and social security, the two biggest non-discretionary expenditures by the federal government, come out of entirely different piles of money than discretionary expenditures do. Were you not aware of that?
Medicare and social security are paid for through income taxes. The trust fund is entirely a work of accounting fiction. It contains only IOUs from the government to itself.
The system is built on a lie.
When the system was originally put into place, benefits were paid out to people who never paid the tax. From day one the money collected from taxpayers went to paying the previous generation's benefits. It wasn't saved in a trust fund, it was spent. The only reason there is any surplus money at all is that the population has been expanding, so they collected tax from more people than collected benefits. If we allowed people to opt out of social security and everybody below retirement age did so then the "trust fund" would run out of money long before it paid out as much as it ostensibly owes to people, because most of the money those people paid has already been spent on previous retirees.
But the remaining "trust fund" money was also spent. It's gone. They didn't invest it in real estate or shares of HP, they lent it to themselves and then spent it. The "trust fund" is a piece of paper that says the government owes itself money.
> Your income taxes are not funding social security.
My social security income taxes are funding social security for existing retirees. My federal withholding income taxes would fund social security in any year that the "trust fund" decreases in size, because that's where the rest of the money actually comes from.
> Your social security taxes are not funding things that come out of the general budget.
They do in any year that the "trust fund" increases in size.
> Legally, that isn't true.
The people who decide where the money goes are the people who make the law. A law can't be illegal. It could be unconstitutional, but I don't see any obvious reason why changing social security or medicare benefits would be unconstitutional.
> Cutting social security benefits would not free up more money to fund the things you think government should be doing.
It certainly would. Even if we keep the charade of separate accounting, reducing social security benefits would increase the size of the "trust fund" which serves as a long-term/perpetual debt sink for the rest of the government which allows the rest of the government to spend the money in present day and pay it back arbitrarily long in the future (or, as has historically been the case, never). Or if you prefer to look at it more directly, reducing both social security benefits and social security taxes would allow withholding taxes to be increased in the same amount without changing the total amount of money the government takes out of the taxpayer's paycheck.
You can't actually borrow money from yourself. You can do all the paperwork you like but at the end of the day the credit and the debit cancel out.
You didn't answer my question -- do you have any sort of proof that "discretionary spending" was actually invented by radical leftists? That was your original claim, remember? Do you stand by that claim, or no?
So, let me summarize your argument: You think that we should re-engineer the language to get rid of the distinction between discretionary and non-discretionary spending, in order to achieve a policy goal you find favorable. The situation is simple -- people like medicare and social security much better than the rest of government. In order to undermine support for popular social programs, you wish to change the language. I get that you believe there isn't really a distinction because of the way the government has borrowed from the SS trust fund. I don't entirely disagree with that. But you're still arguing for dumbing down the language to alter how people feel about government programs.
That sounds pretty Orwellian to me. It's a classic case of accusing one's opponent of the very thing you are doing.
So. Please refrain from these ludicrous, childish accusations about radical leftists and whatnot when you don't have proof and are in fact yourself engaging in Orwellian language games. Take 5 seconds to appreciate what an asshole that makes you look like, OK?
> You didn't answer my question -- do you have any sort of proof that "discretionary spending" was actually invented by radical leftists?
What are you actually asking for?
Even if the first person to ever use the term was William F. Buckley (which I rather doubt), what matters is who popularized it into common usage, which requires a population of people who would then have to be categorized as left or right. But even that wouldn't work because people don't fit into boxes. A Republican who supports expanding Medicare is on the left of that issue regardless of their party affiliation. Are you asking me to write that PhD thesis?
Both sides do this. "Intelligence community" instead of "spy agencies" is one of the right's. You know which side invented it because of who benefits from it. The proof is cui bono.
And I never said it was invented by Karl Marx or Leon Trotsky. The left comprises the likes of Nancy Pelosi or Hillary Clinton. Do you want citations to such people using that term or taking advantage of it? Here:
The right has come up with their own version of the lie, because the left generally uses "discretionary spending" to make the military budget look bigger (as with the OP), so the right now talks about "non-military (or non-defense) discretionary spending." That one is even worse. It cuts nearly the entire budget out of the budget. But it's a convenient lie whenever you want to cut "non-military discretionary spending" because it makes it look like five times as high a percentage of the budget than it really is.
> The situation is simple -- people like medicare and social security much better than the rest of government.
In no small part because their advocates have structured the language around them in order to make them immune from criticism.
For example, social security writes a bigger check to people who made more money while they were working. It might make more sense to make payments more uniform by reducing payments at the high end by a small percentage. And a small percentage of social security is an enormous amount of money. As in, 1% of social security is larger than the entire NSF budget. But if we consider only "discretionary spending" then we can't even consider that. It becomes unthinkable.
> But you're still arguing for dumbing down the language to alter how people feel about government programs.
Removing biased terms is quite the opposite of dumbing down. It's not even like they're using "discretionary" in the same sense as it's used in economics and personal finance -- in that sense the only non-discretionary part of the government budget would be the small subset of the military necessary for the government's survival and not one penny of social security.
I would love to see some proof of your position that undoing an Orwellian language change is an Orwellian language change. That's one heck of a status quo bias.
> Please refrain from these ludicrous, childish accusations about radical leftists and whatnot when you don't have proof and are in fact yourself engaging in Orwellian language games. Take 5 seconds to appreciate what an asshole that makes you look like, OK?
You're the first person in this thread to use the term "radical leftists" and ending your posts with ad hom attacks says more about you than the person you're describing.
Territorial versus non-territorial taxation isn't such a simple issue. In a non-territorial system, it's very easy for a company to set up internal transfers to shift profits to whatever happens to be the lowest-tax jurisdiction.
Moreover, the U.S. system generally does not double-tax income that is already taxed elsewhere. A U.S. company that pays taxes on German income will receive a credit for those taxes paid against its U.S. liability: http://www.cbpp.org/research/the-fiscal-and-economic-risks-o....
Also, the US has one of the highest corporate tax rates in the world. If you can go to Ireland and pay something close to 10%, its a no brainier.
The tax rates are pretty crazy in the US if you think about it. A single person small business just getting started still has to pay 33% of their profit even if their profit is $1,000 for the entire year.
I'm not a tax expert but this statement is true if you only look at the statutory corporate tax rate before deductions and tax credits are taken into account. Once those are done and you used a weighted average based on country size, then the US is not that much higher (http://www.forbes.com/sites/taxanalysts/2015/03/25/the-truth...).
I don't disagree that tax reform is necessary but taxes help pay for the infrastructure, safety, and public goods that we all tap into and take advantage of.
> I don't disagree that tax reform is necessary but taxes help pay for the infrastructure, safety, and public goods that we all tap into and take advantage of.
People say that, but with specifics to corporate taxation the tax revenues in question flow to US Treasury. US highways are funded by a combination of Highway Trust Fund, gasoline taxes and road tolls, public safety and other goods such as parks and libraries are funded by local property and business taxes.
The way the funds flow is set up currently, increase or decrease in corporate taxation would not result in change of funding for the local services you mentioned. Federal government is not sending a bonus check to Cupertino, CA or Redmond, WA because they managed to squeeze a few extra billions off Apple or Microsoft.
My examples should have been more national such as the military, our National Parks and all of the national institutions that provide public goods that we share in like the FDA, NASA, etc. Even then though, don't local and state projects often tap into federal matching grants such as for major infrastructure projects?
You should probably also count man hours needed to consider deductions, amortization schedules, tax credits etc. Doing corporate taxes is another layer of work that adds a burden to running a business. Simplified tax systems do not have these costs.
But that number takes into account the capital that companies park overseas to avoid the nominal rate. So it's not a good counterargument to the idea that companies park money overseas to avoid the nominal rate.
Put another way, the low effective rate doesn't disprove that 35% is too high--it demonstrates the effect of having such a high nominal rate.
It would be better to have a competitive nominal rate. Then companies would move their capital based on business, not tax, reasons.
For example, the U.S. tax rate provides an incentive for overseas manufacturing. If Apple moves capital from Ireland to China to invest in a new Foxconn factory, they pay a lower tax rate than if they moved the same amount of capital from Ireland to Texas to invest in a new factory there. Even if all the business costs were same between China and Texas, China would win on the tax costs.
It's an impediment to bringing more manufacturing jobs back to the U.S., and a one-time tax holiday will not solve it. The rate needs to be permanently lowered. Unfortunately the people most upset about the decline of U.S. manufacturing jobs tend to see the corporate tax rate as a tool of justice, and therefore reject lowering the rate on principle.
Effective tax is calculated after corporations use all of the things generally described as "loopholes" to reduce their effective tax rate. Measures to close said loopholes would obviously increase it.
Are countries with a territorial tax system hurt by businesses leaving in order to seek out a lower tax rate? That seems to be the argument the US government is making - although I haven't seen any data - anyone have a link?
But it doesn't work even in the US's case. US companies will routinely "sell" their intellectual property to a subsidiary in e.g. Ireland and then license to back to the US company to avoid paying US taxes. There are some highly successful US companies who, per the books, make nearly $0/year profit within the US.
They should charge executives Irish income taxes if they pull that off.
(While Ireland's corporate taxes are low, their personal taxes are ~59% over ~100k, and that _includes_ capital gains, and a lot of things that are tax advantaged in the states)
The loophole[1] regarding tax residency allowing a company to be effectively stateless was closed a while back. That was one of the things being exploited in this. The net effect, however, was that the companies in question just started using the Caymans and other similar jurisdictions.
Foreign taxes are effectively a business expense for corporations in the US, since the foreign tax credit allows them to not pay taxes on the taxes paid to foreign countries.
I think this makes sense. If I live in the US and make some product and sell it in Germany, then whatever profit I bring home from Germany (less German taxes) is still an income that was effectively earned in the US, since I am living and working here. The business transactions occurred in Germany, but the income was 'earned' by my labor in the US.
From this point of view, a territorial tax system is a subsidy designed to make goods more competitive in foreign markets. (Since I don't have to pay taxes on foreign profits, I can lower the price I charge overseas.)
I thought the issue was that companies acquire say an Irish company and then instead of 35%, they are paying 10% and then instead of paying taxes in the US, they figure out how to move around goods and services to make it look like the profit was territorially gained in Ireland when in fact it was in the US. That is the issue. The greed is typically on the corporate side, more so than the government.
This was my understanding too. All parts of the world pay a "Licensing Fee" to the Irish company worth almost all of the profit on the good/service, and now all income is made in Ireland.
> This is not about avoiding tax on profit earned in the US, after the inversion companies continue to pay US taxes, they just don’t pay taxes on income earned outside of the US.
I assume you mean to the US, but many of these companies don't pay taxes in the countries in which they operate either.
This is most BS thing about USA. Every year I have to make sure I do not transfer money to my own accounts in India but transfer it to may father's account etc.
This does stop making the profits appear in the lowest taxed country. Google just paid a large fine to the UK for making UK profits appear to happen in Ireland.
and this will merely accelerate the moves off shore as the US tax system and the petulant attitude of US politicians are both out of control. Heck, they seem to taking lessons of how to screw up straight out of Atlas Shrugged.
The real fix is tax reform, not going full on ballistic because companies and individuals are fleeing the taxation tyranny. The IRS long moved from taxation to a political weapon.
You've over simplified and misunderstood. If a UK company bills a German company for goods, tax is paid wherever the profit is made, which would be in the UK. If a British company sends a consultant to a German company for a month, the tax is paid where the profit is made, which again is in the UK.
If a UK has a German subsidiary, that's different.
For those of you starting companies that may one day be worth a lot of money, there is a key insight to draw from this: it is better (from a tax point of view) to be a foreign company than a US company.
This is especially true if you expect most of your future customers to be outside the US.
In the long run this gives an operating advantage to foreign corporations -- again for tax efficiency only.
In the intermediate time frame all governments change their laws all the time, and there are going to be changes in tax rules coming that will make cross-border SaaS sales painful for tax load and administrative burdens, for instance.
Your choice is when to flip your business from US to foreign status. You can see the government attacking late-stage inversions because that is where the revenue and political brownie points are.
This tells you that early-stage migrations are still possible and may be cost-effective for you. At some level, for small companies, practical considerations can be used to offset unfavorable tax rules. (Translation - amounts are small enough to not matter, or be swamped by normal expenses so that they don't matter).
The US tax system is King Canute.
Source: I am an international tax lawyer in my real life.
The pointless arrogance of the powerful is the lesson.
This is expressed in various ways, from the HN chortling about ignorant legislators attempting to define pi = 3, to the extremely correct observation that the bond market holds far more power than any central bank.
For those of you starting companies now, probably the last thing you should be optimizing for is the amount of corporate tax your company will be paying after it becomes a unicorn.
Many decisions you make today can be changed/fixed-up later. The company I'm at started as a WA LLC before re-incorporating as a Delaware C-corp and taking a $9.2M A-round. Bit of cost and hassle but not the end of the world. We've adjusted the structure of our engineering org several times both as our situation changed and as we learned what worked for us. Again, changeable.
However, if you choose to incorporate in the USA you may end up with a permanent, unfixable disadvantage relative to your international competitors. The political left seems hell-bent on both keeping world-wide taxation and bringing in Hotel California style rules.
This does not apply to just unicorns. Even a mid-size corp with a large international presence is impacted.
You can ignore all this if your goal is to stay both small and domestic. But an organization like Y-combinator which can spread the legal cost/overhead across its cohort? It would be something worth giving serious thought.
>Yet even by the Treasury Department’s own admission, the latest rules will not be enough to completely halt the flow of companies seeking to renounce their American citizenship, just as the two previous rule changes did not. Such a move would be possible only with an overhaul of the tax rules by Congress, which few believe will happen soon.
I would have loved to have more info about that. What other loopholes didn't this fix? What are they proposing Congress do in this overhaul?
In this global economy, as long as nation states exist and are inhabited/colonized by supranational corporations the tax loophole will always exist. That is the root of the problem: the incompatibility issues of the old nationalism with the new globalism.
tldr; it's a century old patch-work remnant from the Civil War to WW1 era. The US Government at this point does not want to give it up, because it means giving up tax revenue (and thus has implications for how much they can spend), and there's nothing they hate more.
Another attempt to close the loop holes in the US's byzantine corporate tax system doomed to failure. The Treasury Department says as much in the article.
A flat corporate rate on income earned, in the US, minus income lost, in the US, equals taxable income, done and fair. If a corporation can't compete in the US without support of its international shell games, then it probably wasn't competitive enough to matter anyways.
For that matter, there are good arguments to be made to simply eliminate corporate income taxes entirely. After all, any profits ultimately flow to individuals and their individual tax returns. Of course, good luck ever getting that passed politically.
This is clearly false. Every country has rules and limits about who can enter and what they can do while there; backed by the threat of imprisonment or deportation.
Ever try to take twenty thousand in cash through airport security? Here's a secret: Those millimeter wave body scanners are only incidentally for drugs and weapons.
Yeah -- you're right. I was making a different point involving how wealth is built. It takes creative capital. It isn't just money. So stick with an uncompetitive tax system, and eventually the brightest won't end up on your shores, and they'll live, create, and bank elsewhere.
Generally when people say capital they're referring to large amounts of money, sufficient to fully-capitalize a business venture. Somewhere in the neighborhood of $10 million and up. A "capital-intensive" industry is one in which you need a lot more than this to enter the market.
Also it's not exactly easy to emigrate. People may be mobile, but they're not liquid.
The solution is not to force us companies to pay tax with yet another layer of positive law, but not to tax them at all, anywhere, unless they wish to voluntarily pay taxes.
For example, if a British company earns income in Germany, its pays German taxes on its German income. But if a US company earns income in Germany it pays both German taxes and US taxes.
This is not about avoiding tax on profit earned in the US, after the inversion companies continue to pay US taxes, they just don’t pay taxes on income earned outside of the US.