It Isn’t the UK: Why a US Tax Hike Won’t Cause Millionaire Exodus

Jimmy Sexton
Dubai

Jimmy Sexton argues that U.S. tax hikes won’t drive millionaires away because expatriation costs more than staying put.

President Trump once claimed that taxing the wealthy would make “a lot of the millionaires…leave the country.” In reality, few, if any, would go if the government raised taxes.

U.S. millionaires can’t simply leave. The United States is one of only two countries in the world, Eritrea is the other, that taxes based on citizenship rather than residency. In most countries, you pay taxes where you live.

Don’t like the rates? Move.

Americans don’t have that option. Even if they settle in the United Arab Emirates, where personal income tax doesn’t exist, they still owe the Internal Revenue Service.

The only way to escape U.S. taxation is for Americans to renounce their citizenship. Expatriation is a drastic, often irreversible move, one most Americans aren’t willing or able to make.

For many, renunciation feels unpatriotic. Others can’t imagine leaving home. And plenty work in fields, like medicine, law, or government contracting, that require licenses or opportunities only available in the United States.

Even those willing to renounce face major hurdles. Many may even struggle just to get a renounciation appointment. They must also already hold another citizenship to expatriate. If they don’t, they’ll need to get one, typically through ancestry or citizenship by investment (CBI).

But most CBI passports don’t compare. People who are used to traveling the world visa-free on a U.S. passport rarely trade it in for one that requires a visa almost everywhere.

Then there’s the exit tax. Most wealthy individuals qualify as covered expatriates, those with a net worth of $2 million or more, an average annual income tax bill exceeding $206,000, or unresolved tax compliance issues.

That classification applies to most millionaires by default.

The exit tax has two components. First is a mark-to-market tax on unrealized gains: You’re taxed as if you sold everything the day before renouncing. There’s a gain exclusion of $890,000, but that doesn’t go far for most high-net-worth portfolios.

Second, the government taxes deferred compensation, such as IRAs, as though fully distributed the day before expatriation.

It gets worse for the heirs. U.S. citizens who receive gifts or inheritances from a covered expatriate are generally hit with a 40 percent gift or estate tax.

If a parent renounces citizenship and their child doesn’t, the child could lose nearly half of whatever they inherit.

And finally, U.S. source income, like dividends, interest, and partnership income, remains subject to U.S. tax.

Most millionaires, even those who could afford it, won’t expatriate. The cost to themselves and their heirs is simply too high.

The United States may be the only country in the world that can raise taxes on the wealthy without driving them away.

Whether or not raising taxes is a good policy, it won’t spark a mass millionaire exodus.