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Surrendering American Citizenship

A handsome pocket-sized booklet containing the Declaration of Independence and the U.S. Constitution arrived unexpectedly in my mail last week, courtesy of the Cato Institute.

Someone in the group’s marketing department sent me this well-targeted membership solicitation. I don’t fly an American flag or otherwise make a habit of wrapping myself in Old Glory, but I am, in my own way, deeply attached to this country. I believe that, for all its failings, the United States makes the world far freer, safer and more prosperous than it would otherwise be.

I set aside the Cato Institute’s membership pitch for later action and slipped the booklet into my briefcase next to my U.S. passport. And I pondered whether a time might come when I would willingly surrender that passport and sever my connections to this country.

I don’t think I could do it, and I suppose most people around me feel pretty much the same way. This is not a country that produces a lot of emigrants. Certainly the 10 million or so illegal U.S. residents would, for the most part, endure nearly anything to have the citizenship that I generally take for granted.

But this is changing, at least a little. An increasing, though still small, number of Americans are renouncing their citizenship, including one former Marine who told her story to The New York Times.

Her decision was not based on politics; it was driven by taxes. As a Swiss-based business executive who had been living abroad for 20 years, the woman, who spoke anonymously, was still required to pay U.S. tax on her income. Almost all other economically advanced countries impose income taxes only on their residents, but the United States taxes its citizens regardless of where in the world they reside.

The former Marine told The Times, “I loved my time in the Marines, and the U.S. is still a great country, but having lived here 20 years and having to pay and file while seeing other countries’ nationals not having to do that, I just think it’s grossly unfair.” Another, now-former U.S. citizen told Time magazine that he had not wanted to give up his citizenship but “saw no other choice.” He said, “My family and friends think I am a traitor. But the financial burden was killing me.”

In the fourth quarter of 2009, 502 Americans living abroad handed in their passports, twice the number for all of 2008, but still only a very small fraction of the estimated 5.2 million Americans the State Department believes are living abroad. According to The Wall Street Journal, most of those who renounce connections with the United States are U.S. permanent residents, with roots in other places, rather than citizens. But some are citizens who choose to put their American identities behind them.

In addition to taxes, Americans living abroad have found that their citizenship creates other regulatory issues and attracts red tape. “Every time I turn around, I get smacked in the face with some new restriction as a result of being a U.S. citizen abroad,” one frustrated expat told Time.

American expatriates have been particularly hard-hit by banking regulations that place disclosure requirements on foreign bank accounts held by Americans. The regulations are intended to prevent tax evasion, but have the effect of making banking an endless hassle. Some foreign banks, overwhelmed by the extra paperwork required for American-held accounts, have turned away American customers simply because of their nationality.

For those who choose to stick with American banks, anti-terrorism measures can be problematic. Daniel Flynn, an American who lives in Belgium, said that, despite the fact that he has “continually maintained federal voting residence,” he received a notice from his U.S.-based bank. “They said that the new anti-terrorism rules required them to close our account because of our address outside the U.S,” Flynn wrote in a letter quoted by the Americans Abroad Caucus in correspondence with the Treasury Department.

But, perhaps the most surprising thing is that the benefits of American citizenship are no longer self-evident. Timothy Burns, a tax lawyer at the Withers law firm in Hong Kong, told The Wall Street Journal, “Fifteen or 20 years ago there was a big rush to make sure your kids became U.S. citizens, for access to U.S. schools for example. Now we're seeing just the opposite.” Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva, told The New York Times, “What we have seen is a substantial change in mentality among the overseas community in the past two years. Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”

I have personally, on one occasion, counseled a naturalized American living abroad to consider renouncing his citizenship, since his most significant family ties and business interests are at his long-time foreign residence. (This client chose to retain his citizenship, at least for now, even though it may cost his family a lot of money in future income and estate taxes.)

The tax incentives to give up U.S. citizenship or permanent residency are strong enough that Congress has imposed special tax rules on departing Americans since 2004. The rules currently apply to individuals with a net worth greater than $2 million or average annual income tax over the previous five years of $139,000 or more.

As I noted last week, talent is mobile. One of America’s greatest strengths has been its ability to attract many of the world’s hardest-working and most creative people to build their lives here and, in the process, to build this country. I find it worrisome that, lately, we are spending so much energy to keep outsiders out and insiders in. Americans, especially, should have every reason to want to keep their passports and their Constitution close at hand.

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