What Do the U.S., North Korea, and the Old Soviet Union Have in Common?

Sadly, the answer to this question is that the United States is in unsavory company because of taxation.

For one thing, the U.S. Internal Revenue Code applies even to citizens who live and work abroad, an approach followed by very few nations other than hell-holes like North Korea. No other developed nation has this “citizenship-based” tax system, largely because it is unfair and anti-competitive. It is unfair because Americans who live and work abroad already are subject to all applicable foreign taxes (much as foreigners who live and work in the U.S. get the pleasure of dealing with the IRS). And it it anti-competitive because this punitive policy makes it harder for U.S. firms to earn a larger share of the market when competing in foreign markets. America’s tax policy is so punitive that some people are giving up their citizenship. But rather than dealing with this problem by fixing the tax code, politicians have decided to impose punitive exit taxes. The Economist has some of the unpleasant details: 

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

Another embarrassing feature of U.S. tax law is that exit taxes historically have been adopted only by the world’s most reprehensible regimes. As Richard Rahn explains in the Washington Times, the United States should not mimic the Soviet Union by confiscating the wealth of people who displease the ruling elites:

One of [the] old Soviet Union’s actions that was most heavily and correctly criticized by human-rights activists both left and right was its confiscation of the wealth of those who chose to leave the U.S.S.R. The right to emigrate is considered by civilized people to be a basic human right. Regretfully and embarrassingly, the U.S. Congress has just passed a law that places a higher tax burden (and in some cases wealth confiscation) on those who choose to permanently leave the United States, and may make some “tax hostages.”

…People who choose to renounce their citizenship are often looked upon as traitors, both by those in totalitarian and authoritarian states, and unfortunately sometimes by those in democratic societies, even when their intentions are benign. Many who immigrated to America over the last four centuries had some, or most of, their wealth in the old country taken from them in one form or another. This was rightly considered unjust. Yet, the descendants of many of those who suffered just voted to do something similar that differs only in degree, but not in kind or spirit.

…The apologists for Fidel Castro and Hugo Chavez will be able to point to this new U.S. law and ask why this is any different from the property takings by the aforementioned thugs? Yes, it is [a] bit different, but behind it is the same mean-spiritedness and disregard for property rights and the right to emigrate because of political beliefs. Such laws only make the United States look hypocritical to the rest of the world.