Representation by the worst we have
There is a wisdom that Duly Noted likes to repeat. Quite often, their most despicable members define communities. This is a likely outcome as we notice the “bad ones” first. This expresses an evolutionary trait that helps us to avoid danger. Furthermore, “good news is no news” makes us emphasize the negative. No conversation is made about good weather. Most Letters to the Editor are gripes. When have you thanked a tour operator for a perfect trip?
This emphasis of the negative has further aspects. The citizens of some countries may be unaware: their government is in the business of damaging their reputation. Here a preface is needed; your correspondent dislikes having to sketch what follows.
The case to be depicted comes from the ground level perspective of expat laments. It portrays an America that has the uncontrolled IRS as its ambassador. At home, the IRS is allowed to play hardball when softball would suffice. Abroad, being immune to the restraint of checks and balances, it can bully its non-resident subjects.
The misconduct stems from an anomaly of the US’ tax laws. In the company of North Korea and Somalia, America taxes its citizens and residents globally. Taxing those that live on a nation’s territory is a reasonable international standard. The problem: the States tax abroad those it cannot pluck locally. This is done even if the person resides abroad permanently where his income is generated. As this is absurd, the reader might need a translation. If an American resides in let us say, Germany, works for a Norwegian firm and has his assets in Zurich, then he will have to pay taxes to Washington. Naturally, his foreign hosts will also want their cut.
Treaties protect from double taxation. However, this protection is more theoretical than practical. As a resident of Switzerland, the writer did not have to pay capital gains taxes to the Swiss. However, the US collects such taxes and did so because the Swiss did not. Other forms of revenue the Swiss taxed but not the Americans. The outcome is a tax burden, which is higher than it would be if one would be subject to only one master.
What this amounts to is the extension of sovereignty beyond America’s borders. This assertiveness does more than to create a dangerous precedent. Odd is that hardly any “small and busted” country is as deferential to demands made upon it, as is the USA. Kicks in the shin by enemies – Iran, North Korea – are cheerfully absorbed. Nor will they count when the culprit is ready to “talk”. Here the “talk” is a whisper by one that carries cooked spaghetti impersonating a “big stick”. Generally, the friendlier a country is, the harsher will be its treatment.
For decades, taxation beyond the border had consequences even if the revenue generated was insignificant. It did, however, have negative effects on Americans abroad. The consequences of dual obligations make Americans more expensive than the natives are. This can result in executives that will, if the firm has a choice, not necessarily order US goods but the makes they know.
It is costly to be an American abroad. This goes beyond the levies. Nearly everyone affected will need professional help to file a tax return. The tax code creates much hay to hide the needle that can make a tax cheat out of the innocent. In the simpler cases of Swiss residents, that costs about two grand. Failing to file is a frequent “crime”. Dual citizens – and they are numerous in countries with mobile specialists that had children while in the US – are likely to step into that trap. By relying on common sense, they are often unaware that, contrary to international practice, upon maturity they become American tax subjects.
It is perhaps not surprising that as the rules tighten, expats run for the exit. Few of them do so light-heartedly and some cry when they capitulate before regulations. Denaturalization is performed before a consul. In some countries, the waiting period might be as long as two years. Through this America is losing good people, as expats tend to be skilled. One may add that the taxes and the filing might not be the only reason for jumping ship. Of concern are looming American inheritance taxes on assets domiciled and accumulated abroad, even if the beneficiary is a foreign resident. Especially threatened are small businesses that can be ruined by having a US partner.
Expats that are dual citizens have a further problem because of the IRS’ transcontinental grab. While the huge Credit Suisse has an American CEO, low ranking bankers find that their citizenship makes them into liabilities. To these the choice is unemployment or the expensive and complicated return of their passport. Informally, businesses now consider employees above the lowest level to present a potential risk.
Here, a matter that that pertains to some Swiss banks needs to be inserted. Mainly their American employees have illegally approached the wealthy in the States, showing them how to avoid taxes and to open Swiss accounts. This is criminal. Those that see their prejudices confirmed should be told that only a fraction of the funds at Swiss banks (they manage 26% of the world’s offshore wealth) represent “black” money. Stability, solid management, not having the € or $, means that regardless of a strict “white” strategy, the billions entrusted to the Swiss are again growing.
To be taken by the IRS to court in the US is a threat that now discourages US related operations. (While this posting was being finished, UBS announced that because of multiplying regulations, it is cutting back its US Dollar clearing services.) Even individuals that have nothing to fear avoid going to America that is seen as unpredictable. Some Americans here are told to take their business elsewhere. The fate of an American couple, illustrates this. For professional reasons, they had to live and work all over the world. Therefore, for decades, they had a declared Swiss account. One day, upon arriving in Switzerland, their bank told them that their money must leave by the end of the month. By then freshly retired, the angered couple decided to solve the problem by giving up their American residence and to move. Many avoid naturalization because of its economic consequences. There was a time when everybody with a brain wanted to become an American. Now IQs are applied to avoid any connection to the US.
Banks separate from their American clients –informally from the under ten million class- as they find the IRS paperwork too expensive. Mistakes are easily made. These are feared as the IRS can take their US operations hostage and initiate costly litigations.
Again, we must mention that Swiss banks allowed some of their bonus-driven personnel to violate host- and home-country laws. Even so, the cliché of burly persons with sunglasses depositing suitcases full of money is wrong. In fact, shady transactions, such as money laundering, are easier in Miami or Delaware than in Switzerland.
American pressure on the Swiss that try to correct abuses makes ample use of raw power. Two measures will make the case. First, American might was used to force the government to submit by making a retroactive law. Since two federal democracies are involved, this abuse is extraordinary. Second, in “negotiations” the ineptly represented Swiss were pressured to consent to a settlement whose terms were to be kept secret upon Washington’s demand. Understandably, the country’s legislature that needed to ratify the agreement, refused to approve of the deal.
The conclusion: to the regret of your correspondent, the thesis about decent nations being represented through the most obnoxious elements they have brought forward, is proven.
You might be wondering why, under the heading of damaging reputations, “spying” on allies –Snowden’s revelations- has not been mentioned? Elementary. Most outraged allies were in the know and the “kidnapped” data has been shared with them.