updated 11:43 AM CET, Feb 6, 2023

Concerns over Sanders's proposed 'exit tax', as Dems' prez primary field shrinks to 2

Democratic presidential candidate Bernie Sanders Vidar Nordli-Mathisen, Unsplash Democratic presidential candidate Bernie Sanders

As the list of Democratic Party candidates still in the running for this year's U.S. presidential election has narrowed within the last few days to just two, some in the American expat community have begun expressing concern over a Bernie Sanders proposal to tax "all wealthy individuals" who might seek to relinquish their U.S. citizenships once his proposed "Wealth Tax" came into force, if he were elected.

As has been widely reported over the past few days, only Delaware senator and former vice president Joe Biden, and Vermont senator Bernie Sanders, are still officially running for the Democratic nomination and seen as having a chance, although Tulsi Gabbard has yet to formally announce that she is standing down.

This is prompting American expat tax experts and many American expats themselves to focus on Biden and Sanders's positions with respect to key expat issues, such as tax, to the extent that they've been expressed thus far.

Following Tuesday's primaries, Biden was seen to be narrowly ahead of the more socialist-leaning Sanders. This comes as the Democrats Abroad, the official overseas arm of the Democratic Party, is in the midst of its so-called Global Presidential Primary, which began on March 3 and runs through March 10, and which among other things allows for same-day registration. 

Among those highlighting the so-called exit tax element of Sanders's tax plans were experts at a recent London seminar held by Withers, the American expat tax specialists, which was aimed at helping executives at some of Withers' client firms to better understand how to advise their own clients, ahead of the pending U.S. election in November.  

Sanders's proposed expat tax has also been highlighted on Twitter, by expatriate Americans who have cited a key paragraph contained in an outline on the candidate's  website, under the heading "Tax on Extreme Wealth", which says: "The [Bernie Sanders-proposed] wealth tax includes a 40% exit tax on the net value of all assets under US$1bn, and 60% over US$1bn for all wealthy individuals seeking to expatriate to avoid the [proposed] tax."

The statement goes on to note that the Sanders wealth tax proposal would "include enhancements to the international tax enforcement and anti-money-laundering regime, including the strengthening of the Foreign Account Tax Compliance Act". 

Key details of Sanders's proposed expatriation tax, including the all-important minimum amount of assets an individual would have to own to qualify for the tax and the way such wealth would be calcuated were not immediately available. Nor was Sanders's press office immediately able to comment.  

A number of expatriate Americans interviewed stressed that their concern wasn't with Sanders's strategy of going after wealthy individuals, but with his apparent acceptance of the idea that an expatriation tax is ever acceptable, in any form.

"Any exit tax, let alone one as high as the one Sanders proposes, is a breach of fundamental human rights," said Laura Snyder, an American who has spent the past 25 years living abroad, 23 of them in Paris, where she is now, and who is an outspoken campaigner for American expats' rights.

"Multiple human rights instruments that the United States has both signed and ratified state that 'everyone has the right to leave any country, including his own'.

"What's more, the United Nations Human Rights Committee has explained that restrictions on this right are permitted 'only for the purposes of national security, public order, public health or morals, or the rights and freedoms of others'.

"So it is difficult to see how any exit tax, let alone one as high as Sanders proposes, can be justified on these grounds.

"Indeed, the ostensible purpose of his proposal is to deter expatriation, which, again, is a fundamental human right."

Snyder noted that in speaking openly about his planned exit task, Sanders "seems to have another purpose, too, which is to appeal to homeland voters who have bought into the myth of the wealthy American expat, whose only purpose in living outside the United States is to avoid U.S. taxation – even though in reality, we are just ordinary people who are being used as the scapegoats for extreme wealth inequality in the United States." 

Snyder knows this better than most, since she was involved in carrying out and ultimately writing up a major survey of U.S. expatriates in late 2018, in association with an American expat organization that subsequently decided not to remain involved in the project.

The survey, of some 602 American expats living in 47 countries, found that  most Americans living abroad are in fact not at all wealthy, and live abroad for "love" (the No. 1 reason given, by 39% of those surveyed), "professional opportunities", "adventure" and "family obligations", among other reasons, rather than to avoid their U.S. tax obligations.

Just 33% of those surveyed said their annual household income was more than US$70,000 (£54,000, €62,570), and just 10% said they enjoyed more than US$150,000 in income a year.

'Devil in the detail' 

Karen Alpert, an Australia-based tax expert and blogger whose website is called FixtheTaxTreaty.org, said that she personally shared Snyder's view that the Sanders exit tax "would be a violation of Americans' right to expatriate", but also noted that from a practical point of view, there was no clarity at all as to "how his new expatriation tax would interact with the current provisions".

"The current rules apply to anyone with an individual net worth of US$2m or more, while the Sanders proposal appears to apply only to households with more than US$32m in net worth (US$16m for singles)", she noted.

"The current provisions, meanwhile, are based on a deemed disposition: What U.S. income tax would you owe if you converted everything you own to cash, with the first US$750,000 of capital gain excluded, with no exclusion for anything that would generate ordinary income rather than capital gain?

"The Sanders proposal appears to be closer to a substitute for [an] estate tax, being levied on total asset value, not just the portion that would be taxable as income if the asset were sold or liquidated."

Alpert went on to note that the interaction of America's citizenship-based tax regime with an exit tax added another potential layer of questionability: "This means that  what is being taxed is often assets that were earned – and taxed – in the would-be expatriating U.S. citizen's current country of residence, not in the U.S.

"Is Sanders proposing that both exit taxes apply? And would these measures apply to long-term U.S. emigrants and 'accidental Americans'?

"As usual, the devil would seem to be, for now at least, in the detail." 

A number of tax advisers interviewed said they are telling their expat clients to keep a close eye on the Democratic candidates' statements with respect to all tax issues affecting them -- and if they had been considering giving up their citizenship anyway, to now start thinking about doing it sooner rather than later. 

Among them is David Treitel, managing director of London-based American Tax Returns Ltd, although he added that "none of the clients have given us any real detail on their tax plans, just really bullet points so far.

"And in order to get any of their plans through, they would need a strong Democratic majority in both the House and the Senate."

Expatriation seen edging
back onto politicians' agenda

Potentially more of a concern, Treitel went on, is that Sanders's talk of coming aggressively after those seeking to expatriate appears to be putting the subject back on the agenda for discussion, in a way that Treitel says he can't remember it being since Brazil-born, naturalized American Facebook founder Eduardo Savarin renounced his citizenship in 2011 and in the process, managed to avoid having to pay what media reports at the time said would have been around US$700m in capital gains taxes when the company went public the following year. 

"Politicians know that homeland American voters are attracted by the idea of going after Americans who are looking to renounce their citizenships, which is seen as an 'un-American' thing to do, even though in some countries, American expats may have no choice, as dual-citizenship isn't permitted," Treitel said.

"Especially if those being targeted are seen as 'wealthy', the politicians see this as a 'win-win', since they also know that the American expat vote isn't capable of punishing them."

Definition of 'wealthy individual'

If Sanders were to raise the minimum total net worth required to trigger the exit tax to US$32m from its current US$2m or more, excluding certain exemptions, there is a possibility it could be seen as a potential vote-getter among expats, depending on his other positions. 

Liz Zitzow, managing director of London-based British American Tax, noted that for those looking to renounce their citizenships now, who qualify for the current expatriation charge, it normally ends up being equivalent to a deemed 23.8% capital gains tax on all of their assets "as if they were sold or cashed in on the day of their expatriation".

For those with significant sums held in pension assets, it can be more, she added. 

"Definitely, if I had any billionaire clients, I'd tell them to give up their citizenship now," Zitzow said.

"As it is, given that the trigger amount [now] is only US$2m, I advise non-Americans resident in the U.S. not to get Green Cards, and if they have them, not to keep them, as they could get them revoked by the U.S. Citizenship and Immigration Services (USCIS) and be expected to pay the exit tax."

Sanders in Democrats Abroad interview on FATCA

Last November, Sanders participated in a Democrats Abroad "Global Webinar", available here on YouTube, in which he revealed some of his thoughts on FATCA. (Joe Biden has not participated in one of the Democrats Abroad's interviews, and for this reason, little is known about his thoughts on FATCA and other expat issues.)

Said Sanders, to his Democrats Abroad interviewer: "I absolutely [would commit to direct the U.S. Treasury Department to study and then implement new guidance that would provide relief to ordinary Americans living abroad who are demonstrably not evading taxes].

“I know, and I’ve heard from many Americans living abroad, that this is a serious problem.

“I’m not going to hide from you the fact that I believe in progressive taxation. I think we’ve got to end the ability of large corporations and the wealthy to stash their monies in tax havens like the Cayman Islands, Luxembourg – and that I’m going to end.

“But on the other hand, where you have hard-working Americans, who do not try to evade their taxes or responsible American citizens – I don’t want to see them double-taxed. I don’t want to see them have to go through a bureaucratic maze in order to obey the law.

So...absolutely we will study it and we will make the necessary reforms. I can make sure that people simply pay their fair share of taxes, and nothing more.”

On the subject of a possible move to a residence-based tax regime from the U.S.'s current citizenship-based tax regime, which many experts say is the main reason that FATCA has had such a damaging effect on many expatriates around the world, since it was signed into law in 2010, Sanders said:  "I think I will be [that leader who will implement residency-based taxation].

"I have heard, as I said before, from many Americans abroad; we are one of, I believe, very few countries in the world that do not work under that principle. So this is something that I think we can take a hard look at, and implement."

The American Expat Financial News Journal has not been able to obtain his thoughts on such other issues of interest to American expats, including Rep. Carolyn Maloney’s Overseas Americans Financial Access Act (H.R. 4362) and Commission on Americans Living Abroad Act of 2019 (H.R. 4363); Rep. George Holding’s Tax Fairness for Americans Abroad Act (H.R. 7358); certain elements of President Trump’s Tax Cuts and Jobs Act 2017 that have been causing problems for American owners of non-U.S. small businesses, or the costs and hassles non-wealthy Americans and "accidental Americans" face if they wish to expatriate

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