In 1974 Congress enacted Jackson-Vanik. By 2012 there was pressure to lift it. "U.S. trade representative urges repeal of law requiring U.S. to impose sanctions on itself" https://t.co/l2IjaUdCeN pic.twitter.com/6BttIRhgJH
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 3, 2020
The above tweet references a 2012 post from the Isaac Brock Society pointing out the hypocrisy of “Jackson-Vanik” and the United States. “Jackson-Vanik” – enacted in 1974 – was a U.S. law which imposed sanctions on countries who imposed unreasonable restrictions (exit taxes) on the rights of their citizens to emigrate to new countries.
By 1996, the United States (led by the Clinton administration) was imposing Exit Taxes on certain Americans who renounced U.S. citizenship. James Dale Davidson writing in “The Sovereign Individual” (1997) compared the justification (or lack thereof) for U.S. Exit Taxes to the rationale for Exit Taxes imposed by the East Germany, as follows:
If you accept the premise that people are or ought to be assets of the state, Honeker’s wall made sense. Berlin without a wall was a loophole to the Communists, just as escape from U.S. tax jurisdiction was a loophole to Clinton’s IRS. Clinton’s argument about escaping billionaires, aside from showing a politician’s usual disregard for the integrity of numbers, were similar in kind to Honeker’s, but somewhat less logical because the U.S. Government, in fact, does not have a large economic investment in wealthy citizens who might seek to flee. It is not a question of their having been educated at state expense and wanting to slip away and practice law somewhere else. The overwhelming majority of those to whom the exit tax would apply have created their wealth by their own efforts and in spite of, not because of, the U.S. Government.
James Dale Davidson – The Sovereign Individual page 117. (This book contains some of the most prescient observations about citizenship-based taxation I have ever seen.)
(Enacted as a revenue offset to the HEART Act in 2008, the United States of America now has the most brutal exit taxes imposed in the history of the world. In effect, it confiscates non-U.S. assets, acquired by people who did not live in the United States. Because of the confiscatory intent of the U.S. Exit Tax Regime, the Internal Revenue Code includes numerous reporting requirements whenever an individual renounces U.S. citizenship. To learn about the inner workings of the Section 877A Exit Tax – see the series of posts here.)
Guest Post – The Jackson-Vanik Act In Perspective
Thanks to Paul Malkovich for taking the time to research, organize and write this post on the Jackson-Vanik Act of 1974.
Where is Jackson-Vanik When We Need It?
The United States has always acted as a peacemaker in a world made up of several hundreds of nations. It has often butted into the affairs of other countries, but in a lot of cases, it has made changes that have bettered the world. The Jackson-Vanik Amendment of 1974 is one such Amendment that ensured the betterment of the human rights of citizens across countries.
The Jackson-Vanik Amendment is known to be the “single-most important piece of human rights legislation of the last century,” and may never be surpassed. For over four decades, America used this Amendment on countries – mainly the Soviet Union – to stop human rights violations. For over four decades, it succeeded in uplifting Non-Market Economy (NME) countries to Most Favored Nation (MFN) status.
If you consider the immense human rights benefits this one amendment has made, one would be inclined to look toward the United States as a savior – a country that looks after the betterment of all the citizens of the world. But closer home, in fact, at home – within the United States itself, its citizens have a very different story to tell. A story that echoes exactly what happened in the Soviet Union in the early 1970s. A story that tells of a government’s aim to force its citizens to stay within the confines of its boundaries. But let’s go back to the beginning where our story first starts – Soviet Union – 1972.
The early 1970s in the Soviet Union was a hard time for Jews in the Soviet Union. In response to a steady and ever-growing rise of anti-Semitism, Jews sought to leave the Soviet Union. The Brezhnev regime retaliated to the Jews leaving the Soviet Union and came down heavily on those trying to leave the country by imposing a prohibitively expensive exit tax known as diploma tax or education reimbursement fee, which essentially required any Jew leaving the country to repay the government for their education. The tax was anywhere from $5,000 to $25,000 – depending on the level of education of the exiting Jew.
Enter the Jackson-Vanik Amendment – an amendment named after its co-sponsors Henry M. Scoop Jackson of the Washington Senate and Charles A. Vanik of Ohio House of Representatives – both democrats. The Jackson-Vanik Amendment – a part of the 1974 Trade Act – was directly a U.S. retaliation on the Soviet Union to the restrictions that were placed on the emigration of its citizens – especially Jews. The message that the United States sent to Moscow was firm: If you deny your citizens’ basic human rights (read as- the right of people – especially Jews) to emigrate from the Soviet Union, you cannot conduct normal business with us.
While the Amendment was created to pressurize the Soviet Union to stop human rights atrocities, the amendment eventually was expanded to apply to all “non-market economy” countries or NMEs. The Jackson-Vanik Amendment became a norm for all countries that wanted to benefit from normal trade relations with the United States to comply with free emigration policies.
The benefits offered by the Jackson-Vanik Amendment
NME Countries that were in full compliance with the free-emigration criteria were provided with certain benefits:
• Eligibility to receive Most-Favored Nation (MFN) status (now known as ‘normal trade relations’) and treatment in trade
• Access to some of the government financial facilities
• The ability to complete a trade agreement with the United States
Any country determined as not complying with the free-emigration criteria were denied permission to complete commercial agreements with the United States. Such countries:
• Denied its citizens the right/opportunity to emigrate
• Imposed more than a nominal emigration tax or tax on visas/documents required for emigration
• Imposed more than a nominal tax, fee, fine, or levy on any citizen as a consequence of their desire to emigrate to a country of their choice
Countries subjected to the Jackson-Vanik Amendment
As of 2005, there were 12 countries that were subjected to the Jackson-Vanik amendment. These included – Belarus, Turkmenistan, Vietnam, Azerbaijan, Kazakhstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan. At this time, Cuba and North Korea were still non-compliant with the amendment and were therefore denied benefits that the amendment would have offered them.
By 2009, the list of countries subjected to the Jackson-Vanik Amendment narrowed down as some countries joined the WTO. The WTO requires that all its member states establish and maintain permanent normal trade relations with each other. Abidjan, Belarus, Moldova, Kazakhstan, Russia, Tajikistan, Uzbekistan, and Turkmenistan were subject to the Jackson-Vanik Amendment. Cuba and North Korea continued to be denied normal trade relations with the United States.
Since 1994, Russia had been in cooperation with the amendment. While some, like Blake Marshall, former executive vice president of the U.S. Russia Business Council simply saw this as a ploy used by Congress to disapprove Russian trade, human rights offenses, and foreign policy, others like Sen. Charles Grassley (R-IA) believed that every time Congress took a step toward supporting Russia, Russia took two steps back. For instance, Russia’s trade barriers on the U.S. meat (beef, pork, and poultry), and the lack of support in Iraq, hurt congress’ sentiments.
Post-Soviet Russia and the Jackson-Vanik Amendment
The Jackson-Vanik Amendment continued to hold good even after the collapse of the Soviet Union in 1991. Even though Russia opened emigration and hundreds of thousands of Russian Jews left for Europe, the United States, and Israel, and the Clinton administration found Russia in complete compliance with the Amendment, it took another 15 years for congress to graduate Russia from the amendment.
When you consider the United States’ sanctions against Moscow, there is one thing that’s very clear; the Cold War is still on. The Jackson-Vanik amendment that was then followed by President Obama’s Magnitsky Act and then followed by new layers of sanctions that President Trump would be forced to sign into law is proof of this.
Even while congress removed Russia from the Jackson-Vanik Amendment and granted Russia full trade ties in 2012 with Barrack Obama signing a law on Dec. 14, 2012, that same law imposed new sanctions that prohibited certain Russian human rights violators from entering the United States. In short, as one set of sanctions vanished, another set of sanctions appeared. The new act was known as the Magnitsky Act. Additional punitive steps were taken by the Obama Government after Russia invaded Ukraine in 2014 and then again when the country meddled with the U.S. presidential elections in 2016. Sanctions blocked international investment in Russia’s energy sector, which was the most important part of the country’s economy.
With a good background of the Jackson-Vanik Amendment brought about by the United States Congress, let’s look at how things look within the United States today. Today the United States has the world’s highest renunciation fee. At $2,350, this US renunciation fee is over 20 times more than the average renunciation fee of other high-income countries.
The US’ exit taxes are higher than most countries today. One would think that what’s good for the goose is good for the gander too. But here we have a country that has literally bullied countries in the name of human rights, but which ironically has exit taxes that are far above the normal rate.
What’s more – while people left the Soviet Union and even East Germany for economic reasons and political reasons, those countries had the decency of providing its citizens with full employment and complete welfare – albeit of low standards. The aged, the handicapped, and the widowed were not thrown to the wayside. True, wages and opportunities were held down, and most of the people who left were youngsters. America cheered when this happened. Today, that same America wants to prevent its citizens from seeking better opportunities in countries like Singapore, China, or Japan.
Today, the United States wears the same boot as Communist states back in the 1970s and views its citizens as nothing more than state property – simply to be kept at home or kept back by imposing heavy exit taxes.
Lessons learned are lessons yet to be learned
The collapse of the Soviet Union and the Berlin Wall taught us all a moral lesson – that a country needs to make itself attractive to its citizens and keep them within their own country not by forcing them to stay behind by imposing their exit, but by making them want to stay within their own country and contribute toward its betterment.
This lesson is lost to the United States. The country must realize that if it wants its citizens to stay behind of their own will, it should first make itself attractive and conducive to the needs of its citizens.
Giving up US citizenship – against everything Jackson-Vanik stood for
The Clinton administration advocated a tax on some unrealized capital gains of expatriates. This, as had been noted by several opponents at the time, violated human rights law. The new income tax law evoked the same hardships that were faced by Germans who tried to free Nazi Germany back in the 1930s. It evoked the same hardships faced by those trying to get out of the German Democratic Republic and the Soviet Union in the 1970s. Anyone who wants to surrender their United States citizenship must go through the same rigmarole – pay higher taxes to get out. Paying property tax at the time of giving up one’s citizenship means the country is simply treating the entire process of expatriation as a sale.
Today, you are expected to cover an exit tax if you:
• Have assets over a net worth of $2 million.
• Have an average US income tax liability of greater than $162,000 for the five years prior to expatriation
• Have failed to comply with the U.S. federal tax obligations for the preceding five years.
While the last point is understandable, one does wonder how the first two points are different from what happened in the Soviet Union back in the early 1970s to which the United States opposed on the grounds of human rights violations.
Renouncing a U.S. citizenship should mean automatic cancellation of your tax obligations; however, this is not the case. You will continue being a non-resident until all prior obligations are complete. Getting a Certificate of Loss of Nationality does not mean the IRS will leave you alone. Not only that, but US citizens and those who possess green cards are required by the law to report their worldwide income even if they do not live within the United States (US citizenship-based taxation). Expatriation does not terminate any obligation to file U.S. tax return – it does not even terminate your obligation to report your worldwide income tax. Foreign Account Tax Compliance Act (FATCA) requires all non-US FFIs to look for records for customers with remote connections to the US and to report any assets and the identities of these people to the US Department of the Treasury.
GILTI Tax reduces the incentive for US-based MNCs to shift their profits outside of the United States to low-tax or zero-tax jurisdictions. Tax cuts and jobs act (TCJA) also affects businesses. However, both these work, to some extent, in favor of businesses and individuals.
The goal of many expatriates is to leave the United States with a clean chit – with a final break from the U.S. tax system. However, being a covered expatriate does not allow you to do that, thanks to the exit tax you must pay.
If an exit tax applies to a citizen, they will be treated as if they had sold all of their assets on the day that they renounced their citizenship, and they will be taxed on their capital gains. This will also have an impact on gifts that you present to the U.S. citizens as they will be required to pay tax on these gifts.
As if all this were not enough, the government also wants to keep a complete track of you even after you have decided to leave the country. You will require the following documents:
• Evidence of your U.S. citizenship.
• U.S. consular report of birth abroad (if this is applicable).
• Bio-pages of all the current foreign passports that you hold.
• Certificates of citizenship for any country.
• Evidence of name changes.
• Completed loss of citizenship questionnaire.
• Completed form DS-4079.
• Certificates of naturalization for any country.
• Completed informal loss of citizenship acknowledgment.
Congress had been adamant about standing its ground with regard to the Jackson-Vanik Amendment. It refused to approve MFN or trade credits without the Soviet Union giving concessions on emigration, removing diploma tax, and removing exit tax – even though the much-older Nixon-Brezhnev agreement did not call for such concessions. In the following years, when the Soviet Union did provide occasional concessions such as rescinding the exit tax, Congress still did not budge to overturn the amendment.
Here we are today – citizens of the same United States that passed this Amendment – now at the receiving end. Only this time, the Amendment does not work for us – it’s nowhere to be seen when we need it the most. Nobody mentions it; it’s put away like a hushed secret weapon – one that must be brought out only when the enemy must be quelled. A weapon that must be branded to bully countries we don’t like. A weapon that is not to be used by its own citizens against it. So, here we are, in a country that brags of fighting for human rights the world over, except at home.
While the rest of the world has to bow down to the power that the United States wields, its own citizens have no power to fight against the system – no power to fight against the same rules that its government fights against in other countries.
When Senator Henry M. Jackson formally introduced the amendment on the Senate floor on the 15th day of March 1973, he said, “Everyone has the right to leave any country, including his own, and to return to his country.” This one statement was the foundation of the amendment -an amendment that stood strong for 40 years. Where is that amendment now? Where are the free emigration policies it fought for? Where is the Jackson-Vanik when we need it the most?
Paul Malkovich – American Abroad Follow Paul Malkovich on Twitter @MalkovichPaul
Paul, very well written and excellent points.