The growing number of wealthy Americans giving up their U.S. citizenship to avoid taxes have been given a public face by the case of Facebook co-founder Eduardo Saverin, a Brazilian-born Singapore resident who gave up his U.S. passport shortly before the company's IPO, which could be worth up to $11.8 billion.
Saverin won't be avoiding U.S. taxes entirely. Americans who renounce their citizenship, according to Bloomberg, "may incur an “exit tax” on unrealized capital gains if their assets exceed $2 million or their average annual U.S. tax bill is more than $151,000 during the past five years." In Saverin's case, that penalty could turn out to be as much as $365 million. Attorney Eugene Chow explains in more detail how this works here.
There's also the issue of whether Saverin will be able to return to the United States. As Talking Points Memo's Josh Marshall pointed out yesterday, U.S. law specifies that "any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States" can be denied a visa to return to the country.
I e-mailed past Explainer helper Laura Danielson, an attorney with the firm of Fredrickson & Byron who teaches immigration law at the University of Minnesota Law School, to ask about this law. She pointed out that in these cases, the burden of proof is on the government to show that the person is renouncing citizenship for only tax reasons. "As a practical matter that is a very difficult burden as it requires proving the person’s intent," she wrote.
Of course, the timing of Saverin's decision certainly makes it seem like he was trying to avoid U.S. taxes on his Facebook windfall. But can the government really prove that he didn't, say, object to the war in Afghanistan or want to get back to his Brazilian roots?
Senators Chuck Schumer and Bob Casey are trying to erase that ambiguity with a new bill that would make it easier to keep guys like Saverin out of the country for good. Here's a summary from Schumer's office:
"Under the proposal, any expatriate with either a net worth of $2 million or an average income tax liability of at least $148,000 over the last five years will be presumed to have renounced their citizenship for tax avoidance purposes. The individual will then have an opportunity to demonstrate otherwise to the IRS by meeting specific IRS requirements. If the individual has a legitimate reason for renouncing his or her citizenship, no penalties will apply. But if the IRS finds that an individual gave up their passport for substantial tax purposes, then it will prospectively impose a tax on the individual’s future investment gains, no matter where he or she resides.[...]
So long as the individual avoids these taxes, they would be inadmissible to the United States forever.
This would seem to reverse the burden of proof, making the individual responsible for proving they have a "legitimate" reason to renounce.
I don't have an awful lot of sympathy for Saverin, who seems to have not quite thought through what he was getting himself into, and I'm with David Frum on the tortured reasoning of those who are seeking to turn him into some kind of libertarian folk hero for abandoning the country where he grew up and made his fortune. But the new law seems a little problematic.
Citizens should certainly be discouraged from renouncing their citizenship and an exit penalty seems reasonable. Having a free society requires that if citizens don't want to be citizens anymore, they have the right to leave. Continuing to penalize someone after they've left because we don't approve of their reasons doesn't seem particularly democratic.
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