… it is impossible for anyone to begin to learn that which he thinks he already knows.Epictetus, Discourses, Book II, ch. 17
Over the past two weeks there has been a twitter storm over an article by Axios claiming that “Wealthy people are renouncing American citizenship.”
The Axios article perpetuates the myth that people are renouncing to avoid paying US tax. Nothing could be further from the truth. It is important that we debunk this myth, because as long as people (including our representatives in Congress) think they know that renunciations are mainly done by the ultra-wealthy, they won’t take the time to understand the true reasons for the increasing trend in renunciations.
So, how wealthy are those who renounce? Unfortunately, even the IRS doesn’t have very good data on this. In August, a quantitative analysis of IRS renunciation data written by Paul R. Organ, a University of Michigan student, appeared on the IRS website. The author had access to internal IRS files listing all renunciations from 1998 to 2018. This would include all individuals listed in the Federal Register cross-referenced to those who filed form 8854 with the IRS. This is the most complete renunciation dataset studied to date. Net worth data on renouncers is only available starting in 2005, as prior to this there was no requirement to report net worth to the IRS following renunciation. Of the 35,790 expatriations from 2005-2018, only 1,950 (5.4%) reported net worth in excess of $2 million. It is interesting to note that 17,040 renouncers did not file form 8854 and a further 1,860 did not complete the net worth computation on their filed form 8854. That is, 52.8% of those who renounced did not report their net worth to the IRS. While the author does a valiant job of attempting to deal with this gap in the data, there really is no way to know the 47.2% reporting net worth are a representative sample of all renouncers. The author concludes that renouncers are relatively more wealthy than the US population as a whole, but that ultra-high net worth individuals are a very small portion of renouncers (50 out of 35,790 over 13 years).
When drawing conclusions about the wealth of expatriates, it is important to consider that those who renounce are a self-selected group. In order to renounce US citizenship one needs to have a second citizenship and $2,350 to pay the administrative fee for a Certificate of Loss of Nationality (CLN). First off, what percentage of American families could scrape together $2,350 to renounce? The poorest Americans abroad are cut off from even the chance to renounce, so it’s no surprise that those who can afford the fee are wealthier than average. But this is a far cry from the Axios headline that “Wealthy people are renouncing American citizenship”.
What else can we learn about renouncers? The report includes some very interesting analysis of previously unavailable renunciation data. Because the author can match renouncers to their prior tax filings, he is able to divide the sample into three groups – “Movers” who filed using a US address at least once before renouncing (and after 1998 when available tax return data starts), “Droppers” who only filed using a non-US address, and those who never filed or have no TIN. The data show that over half of renunciations are by “Droppers,” who would be long-term emigrants or Accidental Americans, and that this group drove the post-2011 increase in renunciations. There is also a significant minority of renunciations with either no TIN nor evidence of prior US tax compliance.
Interestingly, the author shows that those with a positive US tax liability (after foreign tax credits) are marginally less likely to renounce. Clearly people are NOT renouncing to avoid paying US tax. In addition, older individuals are more likely to renounce. Both of these results are consistent with the idea that people are renouncing to simplify their lives and prepare for retirement.
In sum, the report makes it clear that those who renounce are NOT wealthy US residents moving abroad and renouncing to avoid US taxes. They are emigrants and Accidental Americans who have been caught up in the uniquely American concept of citizenship as taxation. They are simplifying their lives and escaping the excessive compliance burden that is the US tax system.