Democrats Abroad respond to Overseas Taxation developments
Carmelan Polce, head of the Democrats Abroad Taxation Task Force, tells us about the latest initiative aimed at reducing the tax burden of Americans who live abroad, the Tax Fairness for Americans Abroad Act

Published on February 27, 2019

Carmelan, thanks for talking with The American about the current state of taxation for Americans who live abroad. Various people are putting forward bills and initiatives aimed at helping overseas Americans’ financial affairs including taxation. To get to the heart of it, who in the Washington, DC, establishment is pushing forward ideas that are likely to get through the legislative process?

That’s an excellent question, I wish I knew the answer myself! [laughs] Sometimes it’s difficult to know who has a genuine interest in the issue, and who is meeting you because they feel they need to but are not really motivated to do anything on your behalf. Oftentimes it’s not possible to know.

It’s been said that taxation of Americans living abroad started during the Civil War when the federal government sought to punish wealthy Americans seen to be shirking their duty to fight by “hiding” abroad. It was then enshrined in the Income Tax Act passed during the Great Depression. Do you think the US government still thinks this way?

I think there are some Americans who are befuddled by the choice that some of us make to live outside the United States, particularly because there are so many people born outside the US who are desperate to get in – if you have the good fortune to be born in the US, why would you why choose to live elsewhere? That does make us ‘suspect’ and misunderstood by the populus generally. Another reason our issues are not shown as much attention as we would like is that there are 330 millions Americans, and only 9 million of us live outside the United States. To lawmakers, that doesn’t sound like a very big number and we’re out of sight, out of mind, easy to push to the back burner. Thirdly, we have chosen to live abroad knowing – in theory – what the consequences would be from a tax point of view. That’s really not the case, many get quite a shock when they realize what their tax filing obligations are. Added to that, there’s a concern amongst the liberal side of politics that we’ve just had an enormous group of tax cuts, there’s pressure on Federal government to generate enough revenues to do all the things they want to do. All these things compile to make it hard for us to persuade Congress to act. The reality is that the political will to cut taxes further is hard to find.

How are Democrats Abroad trying to promote the idea of Residency Based Taxation [RBT]?

We outline the inequity of it, the fact that Americans abroad are already paying taxes in their countries of residence so its a burden for them having to pay taxes twice on the same dollar of income. Even if you’re filing from abroad and don’t have a tax liability owing to the US, oftentimes it’s so complex to prepare the forms used to declare offshore income that you have no choice but to hire professional tax return preparers who understand the tax laws of the US as well as those in the country where you live, so there’s additional cost. Research that we did in 2017 established that 67 percent of the survey respondents were paying more than $500, and some much, much more, to have their taxes prepared. That compares to an average of something like $200 in the US. Quite often you’re putting out all this money that you can ill afford to pay just to demonstrate to the US government that you don’t owe anything. That hardly seems reasonable.

Is the Democratic Party in the US behind what you’re doing with this?

They are very interested in the problem, in solving it for us, and examining the reform recommendations that we’ve put forward. Their concerns lie in how to create a proposal that has adequate protections against abuse by high net worth tax payers who could manipulate the laws and use offshore tax residency to move assessable income away from the reach of the IRS. Their want to serve bona fide Americans abroad who are genuinely in need of relief from the burden of this tax system but not open up an enormous loophole to be exploited by people who can hire clever lawyers and tax accountants and other arrangers of financial structures.

Could implementing RBT be tax revenue neutral?

That’s our ambition: a proposal that would not cost the US government any money. We worked on a proposal all of last year which was so complex that it was not finished before the end of Congress. Congressman George Holding wanted to initiate something, so he introduced a proposal on the last sitting day called the Tax Fairness for Americans Abroad Act [TFAAA], a broad, non-specific bill that didn’t answer several questions. But it meant we have a marker, a milestone that we have achieved something. It presents a framework that we can use to build an Act that has all the design elements we need to meet the needs of the overseas community and satisfy the concerns of lawmakers who don’t want to see this law abused. There’s enough there to prompt you to ask all the relevant questions as the holes in it are obvious. Now the provisions need to be agreed to fill those holes.

So a new bill will need to be reintroduced in the next Congress?

That’s correct.

And will Congressman Holding front your new version?

That’s my expectation.

Have the proposals been costed?

The version of RBT in the Tax Fairness for Americans Abroad Act was not costed by the Joint Committee on Taxation. The model with all the design elements that we’ve been discussing all of last year, that version has been in the hands of the Joint Committee on Taxation [JCT]. They’ve been analyzing and scoring it as we’ve been developing different aspects.

If you had to put a number on it, what’s the likelihood of your bill being passed in the next Congress?

It’s too soon to know. The Congress is too new. There’s an enormous proportion who don’t know anything about it because they’re too new. They’ve barely had a chance to ponder the overseas community. We have a big task ahead of us to educate them.

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