The fact that …
The combination of @citizenshiptax and #FATCA are the enforcement mechanisms of this proposed @USWealthTax. The Warren "Ultra-Millionaire Tax Act of 2021" https://t.co/sMjgTP9uny via @TaxConnections
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 5, 2021
Leads to the obvious question of …
Could @gabriel_zucman comment on how much of the revenue generated from the Warren Wealth tax would be based on non-US assets owned by individuals (who although US citizens) have @taxresidency in other countries with no connection to the USA. Is this theft from other countries? https://t.co/qAwHtIQ2UG
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 17, 2021
The fact is that Senator Warren is proposing to impose her wealth tax on property located outside the United States, purchased by individuals who live outside the United States, who have no connection to the United States other than (perhaps) the circumstance of having been born in the United States. Yup, it’s true.
On March 18, 2021, FATCA will turn on 11. The Senator’s proposed wealth tax explicitly states that FATCA is to be used to enforce this tax! Finally an (il)legitimate use for FATCA.
In the 18th Century Adam Smith wrote “The Wealth Of Nations”. In the 21st Century Senator Warren is proposing to impose a wealth tax on “The Wealth Of OTHER Nations”.
Discussion And Analysis
This is the second of what I expect to be a multi-part series on Senator Warren’s proposed wealth tax of 2021. As the above tweet makes clear, the practical utility of the tax depends on US citizenship-based taxation (to whom it applies) and FATCA (how are non-US assets located). In my first post, I referenced Senator Warren’s statement that:
But the idea behind wealth tax is you have to pay it if you’re an American citizen. It doesn’t matter whether you live in Texas or California or even whether you move to Europe or South America. If you want to keep your American citizenship, you pay the wealth tax and it doesn’t matter where you put your assets. You can try to hide them in the Cayman Islands, you can try to put them up in Switzerland, but it doesn’t matter, you still pay the two-cent wealth tax.
(I doubt that Americans living in Switzerland, who own Swiss assets, are trying to “put them in Switzerland. But, who am I to interfere with the Senator’s fantasy? Elizabeth appears to think the non-US world exists only to help Homeland Americans avoid US taxes. But, no matter …)
The Warren Wealth tax depends for its vitality on (1) citizenship-based taxation (one CANNOT move from the United States to escape taxation) (2) mandatory reporting (Report Early, Report Often, Report Everything) and (3) FATCA (we will find and tax assets located outside the United States).
The purpose of this post is two-fold:
First, to clarify that the wealth tax as written applies to non-US property, located outside the United States, purchased by people who don’t live in the United States and who are absolutely tax residents of other countries. They are being targeted because and only because they were born in the United States (or born outside the United States to a US citizen parent);
Second, to focus on the use of FATCA and reporting of information about non-US assets to locate these non-US assets.
What The Statute Says, Versus What The Statute Means
There is always a difference between what a statute says in the abstract and how it applies in reality. What matters is how the tax would apply in the context of the US tax system. How does the US tax system(s) work?
Income Taxation: When it comes to the taxation of the income of individuals (Subtitle A), the US employs the following three different (but often overlapping) and separate tax systems:
1. Residence: US Residents (whether citizens or not) are subject to worldwide taxation
2. US Source Income Only: individuals who are neither citizens nor residents (nonresident aliens) are subject to taxation on their US source income
Most countries employ 1 and 2 as described above.
3. Extraterritorial: Nonresidents (US citizens or Green Card holders) who are generally tax residents of other countries are subject to a system of worldwide taxation that is more more punitive than the tax system imposed on US residents
The United States is the only country that employs extra-territorial taxation.
(Generally Subtitle B – the Estate and Gift Tax Regime employs the same three tax systems.)
The Three Groups Of Individuals Impacted By The Wealth Tax – Who They Are
The Wealth Tax creates a new Subtitle in the Internal Revenue Code. Like Subtitles A (Income) and B (Estate and Gift), the new “Subtitle B-1 Wealth Tax” defines tax residency in terms of (1) citizens and (2) noncitizen residents and (3) nonresidents.
1. Residence: US Residents (whether citizens or not) subject to worldwide taxation – the non-US assets of this group are foreign to US residents
2. US Source Income Only: individuals who are neither citizens nor residents (nonresident aliens) – US assets of this group are foreign to these individuals
3. Extraterritorial: Nonresidents (US citizens or Green Card holders) who are generally tax residents of other countries – the non-US assets of this group are foreign to the United States and local to these individuals.
Locating The Assets: How Information Reporting Facilitates Enforcement Of The Wealth Tax On The Non-US Assets Of People Who Are Tax Residents Of Other Countries
The general provisions include a focus on (1) assets that are “foreign” to the United States and (2) FATCA.
(1) Assets Foreign To The United States: I would expect that these would be assets that are factually located outside the United States or entities that are defined by the Internal Revenue Code to be foreign.
(2) FATCA: FATCA has provisions that apply directly to Foreign Financial Institutions and to individuals. I would expect the strengthening and expansion of provision applying to both.
How The Proposed Law Locates Non-US Assets
SEC. 2904. INFORMATION REPORTING.
(a) IN GENERAL.—Not later than 12 months after the date of the enactment of this section, the Secretary shall by regulations require the reporting of any information concerning the net value of assets appropriate to enforce the tax imposed by this chapter.
(b) METHOD OF REPORTING.—The Secretary shall, where appropriate, require the reporting made under subsection (a) to be made as a part of existing income reporting requirements (including requirements under chapter 4 (relating to taxes to enforce reporting on certain foreign accounts)).
SEC. 3. STRENGTHENING DISCLOSURE REQUIREMENTS.
(a) REGULATORY AUTHORITY.—The Secretary of the Treasury (or the Secretary’s delegate) may issue such rules and regulations as necessary to prevent taxpayers from avoiding the purpose of information reporting requirements under the Internal Revenue Code of 1986 by placing assets in any foreign corporation, partnership, or trust in which the taxpayer holds directly or indirectly, a significant interest as the sole or principal owner or the sole or principal beneficial owner.
(b) FATCA ENFORCEMENT PLAN.—The Secretary of the Treasury (or the Secretary’s delegate) shall develop a comprehensive plan for managing efforts to leverage data collected under chapter 4 of the Internal Revenue Code of 1986 in agency compliance efforts. Such plan shall include an evaluation of the extent to which actions being undertaken as of the date of the enactment of this Act for the enforcement of the requirements of such chapter improve voluntary compliance and address noncompliance with such requirements.
You can expect an expansion of the International Information Returns.
You can expect FATCA to impose more reporting requirements on foreign banks and individuals.
Tax Residents Of Other Countries Will Bear The Brunt Of This
Senator Warren repeatedly states that the enforcement mechanism of her wealth tax is US citizenship-based taxation. But, citizenship-based taxation is actually:
The United States imposing worldwide taxation, on the non US income, earned by people who are tax residents of other countries and do NOT live in the United States.
The extra-territorial scope of the wealth tax leads to exactly the same result.
But, this simple point appears to not have been considered by the Senator and her ilk (or maybe it has).
It’s hardly a surprise that a US based article about the proposed Warren wealth tax was notable in that:
More than 700 comments and not a single one references that the US extraterritorial tax system will confiscate the assets of those with @taxresidency in other countries who were US born: "Warren's @USWealthTax would cost 100 richest Americans $78 billion" https://t.co/VqN43lwTvF
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) March 8, 2021
Seriously, taxing income of the the tax residents of other countries is bad enough.
Should the United States really be scouring the world to impose wealth taxes on assets located in other countries which are owned by the tax residents of other countries? This is the question that Senator Warren needs to answer.
Of course, if the United States, joined the world and moved from citizenship-based taxation to residence-based taxation this problem wouldn’t exist.
For your reading pleasure …
Bill Text – Ultra-Millionaire Tax Act – March 1 2021
John Richardson – Follow me on Twitter @Expatriationlaw