US Erects a Berlin (Tax) Wall

Something I missed while I was away: a substantial new tax on Americans who want out.  As its name implies, the Heroes Earnings Assistance and Relief Tax Act of 2008 (will some self-respecting legislator please put a stop to bill names adding up to forced acronyms) is mostly about tax relief for service members and veterans.  But there is also a section ("revenue provisions") which puts a potentially big price tag on the renunciation of US citizenship.  Renunciation is now treated as a tax event, in the sense that you are considered to have sold all your assets just before renunciation, with attendant capital gains consequences.

Two observations.  First, the regulators must have considered earlier measures ineffective in policing tax-related renunciations.  Under the 1996 immigration reform law and section 212(a)(10)(E) of the Immigration Act, individuals deemed to have renounced their citizenship for tax purposes are inadmissible for immigration purposes (the provision was prompted by the amusing story of Kenneth Dart, who renounced his citizenship only to have his new homeland Belize name him as its consul in Sarasota, where, surprise, he had been living all along).  That is, if you’re a tax-renunciant, you can’t come back; no more visits to your $15 million NYC pied-a-terre! 

Some 470 individuals were listed last year in the Federal Register as such (look for your Zurich-residing college classmates here).  Guess that wasn’t enough.  Now everyone with a net worth of over $2 million takes a hit.  The new law also applies to green card holders who abandon their permanent residence (think long-time residents retiring back home).  As described in this WSJ article, US heirs to foreign estates will also suffer, through the application of the stiff gift tax rather than fading estate duties.  Get that rich uncle of yours to naturalize, pronto!

Second, the new rule is arguable inconsistent with human rights norms.  Article 12 of the International Covenant on Civil and Political Rights "everyone shall be free to leave any country, including his own."  Now we don’t usually think of the gilded-age set as a protected class under international law.  But consider the individual who was born a US citizen abroad, by virtue of parentage, who may never have even set foot in the United States (may not even know who Patrick Henry Benjamin Franklin is).  Should she have to pay an exit fee from US citizenship?