There are simple tweaks you could make that would cost the U.S. nothing in lost revenue, save you a packet in enforcement expense and make our lives easier. The options are laid out in an essay I commend to everyone on your staff: “A Simple Regulatory Fix for Citizenship Taxation,” by John Richardson, Karen Alpert and Laura Snyder.
One option is to change the rules on particular compliance nightmares that have become obsolete. Here’s just one example.
The U.S. taxation of such PFICs — that is, plain vanilla but foreign mutual funds—is ruinous. Moreover, the reporting requirements are so Kafkaesque that many professional accountants refuse to take clients who own even one. And yet, in most developed countries, mutual funds are regulated almost exactly like their U.S. analogs and must also distribute all income and gains.
At a stroke, your Treasury could change the regulations to exempt an entire category of funds from PFIC reporting, starting with these run-of-the-mill retail investments. In the same way, you could tweak dozens of other nonsensical rules.
But there’s an even simpler step you could take. Contrary to lore, there’s no U.S. statute that ties U.S. nationality to tax liability. Instead, the Treasury established that link in past regulations. This means you, Dr. Yellen, can break the link again.
Our proposal—as laid out in detail by Richardson, Alpert and Snyder—is that you introduce a new category of taxpayers, in addition to the many you already have. It could be called “qualified nonresidents,” and would include U.S. citizens who live permanently in another country and pay taxes there as though they were its nationals.
These qualified nonresidents would be exempt from filing returns to the IRS and FinCEN, and from paying taxes on any income that’s not sourced in the U.S. They already don’t owe anything, so the revenue loss would be close to zero. Moreover, the IRS could divert its own resources from this complex and unprofitable enforcement area to others that are more worthwhile.
This change would align American taxation of individuals with the systems of all other developed countries. It would free us expats to live, earn, save and invest as other people do. And whenever any of us move back to the U.S., we’re yours again. Never would it have cost so little to help so many with such negligible fuss. Please consider it.
Andreas Kluth is a columnist for Bloomberg Opinion. He was previously editor in chief of Handelsblatt Global and a writer for the Economist. He's the author of Hannibal and Me.