Recently by Mark Nestmann: Relinquish or Renounce?
The Tea Party contingent of the Republican Party wont like it. But, if President Obama and his minions have their way, U.S. taxpayers may soon be paying a new tax one based on their net worth.
Such wealth taxes are nothing new. Among other countries, France, India, the Netherlands, Norway, and even Switzerland levy a tax based on the net worth of individual residents. I last wrote about wealth taxes here.
The mechanics of a wealth tax couldnt be simpler. You prepare a balance sheet of your worldwide assets. Then, you subtract an exempted amount. (For instance, in France, the first EUR 600,000 of assets are exempt from wealth tax. This exemption is slated to increase to EUR 1.3 million in 2012.)
If your net worth is higher than the exempted amount, wealth tax is due on the balance. In France, the rates vary from 0.55% to 1.8%, although theyre scheduled to be reduced in 2012 to a top rate of 0.55%. However, if you have a net worth that exceeds EUR 1.3 million, youll need to pay the tax on every euro of your assets not just those assets above EUR 1.3 million.
Tax-and-spenders love wealth taxes. They defend the idea because they say it supposedly rewards hard work and penalizes non-productive investments. For instance, if you have a net worth of $2 million in a country that imposes a 1% wealth tax on the entire amount, youre obligated to pay $20,000 annually. Youll get that bill no matter how you invest the $2 million. If youve invested in non-income-producing investments (e.g., gold), you pay the $20,000, with no offsetting income.
On the other hand, if you invest the money in supposedly safe 30-year Treasuries yielding 4%, youll generate $80,000 in income annually (unless, of course, the Treasury defaults). You pay the $20,000 in wealth tax, tax at a maximum 35% on the $80,000 ($28,000) for a total tax of $48,000. You get to keep $32,000.
In this way, wealth tax apologists believe that this type of tax rewards productive investment and penalizes unproductive investment.
This, of course, is nonsense. Every dollar of wealth tax collected isnt available to invest in new factories, new technologies, or anything else. Like all taxes, the money goes into the hands of unelected bureaucrats who know better than you do what to do with your hard-earned dollars.
Nonetheless, I believe a wealth tax could be coming to the United States. And Exhibit A is the IRS newest draft version of Form 8938, Statement of Specified Foreign Financial Assets. You can see the draft form for yourself here.
The IRS created Form 8938 to put into place the requirements of the Foreign Account Tax Compliance Act (FATCA), signed into law by President Obama in March 2010. (FATCA is part of the larger HIRE Act, which I wrote about here.) Basically, if you have more than $50,000 of assets outside the United States, you need to file this form, beginning with your 2011 tax return.
Part II of the form requires you to list ALL foreign assets not just financial assets. While we dont yet have instructions for this form, the way the form is drafted implies that youll have to list everything you have offshore on it, including assets that are currently non-reportable. If Im right, this would include assets such as offshore real estate and precious metals stashed in a safety deposit box or private vault.
An attorney I know who practices law in Zurich tells me, There is a lot of this form that makes it seem like our Swiss wealth tax. The fact that the IRS is asking for both an accounting of financial and non-financial offshore assets definitely seems like a step in this direction. Also, you should know that there is nothing in the FATCA law that requires U.S. taxpayers to report all foreign assets. The law requires reporting of only foreign financial assets. Basically, the IRS has expanded the law on its own, although I suspect that the congressional architects of the FATCA wont mind at all.
If Im right about this, and Congress eventually imposes a wealth tax, it would of course encompass both U.S. and non-U.S. assets. The U.S. assets, of course, are relatively easy to track. The non-U.S. assets arent, especially those outside the financial system.
In Obamas socialist fantasy world, the government can tax and spend as much as it wants, however it wants, with zero consequences in the real world. Unfortunately, that view doesnt jibe with reality. The fact is that in countries that impose a wealth tax, many of those who have to pay it elect to leave permanently. Thats exactly whats happened in France, for instance. Many wealthy tax exiles from France now live in countries that dont impose a wealth tax.
Unfortunately, if youre a U.S. citizen, its not that easy. You cant simply leave the United States, even permanently, and hope to avoid its taxing authority. To legally sever your obligation to pay U.S. taxes, you must also acquire another nationality and passport. Subsequently, you must expatriate: give up your U.S. citizenship and passport.
Expatriation is the only way that a U.S. citizen or long term resident can legally eliminate their obligation to pay U.S. income, estate, gift, and capital gains taxes. To learn more about expatriation, and the potentially huge payoff in tax savings, check out my Billionaires Loophole report here. And if youre seriously interested in expatriation, we have helped dozens of former U.S. citizens legally sever their obligations to the U.S. government. For more information, contact me at email@example.com.
Reprinted with permission from The Nestmann Group, Ltd.