Recently, there has been a lot of coverage of the fact that Romney, Obama, and other politicians like Dick Durbin and Debbie Wasserman Schultz have received income from overseas (like Romney’s former Swiss bank account, and the thirty percent of President Obama’s income that comes from foreign sources). This has left the false impression with a lot of angry people that if you stash money overseas, you don’t have to pay tax on it. Wrong. You do have to pay taxes on it. The U.S., unlike many European countries, taxes its citizens on their worldwide income, regardless of where they make it. As the I.R.S. explains, “Your worldwide income is subject to U.S. income tax.” Romney, Obama, and others in fact pay such taxes on overseas income, which is listed as taxable income on their tax returns.
The empty-headed populist rage at Americans with overseas income has contributed to the passage of a law backed by the Obama administration called FATCA that makes life needlessly difficult for Americans overseas. At Reason, journalist Matt Welch, who once lived in Europe, describes how his family will be harmed by FATCA, which will result in the closure of a Swiss bank account that his wife needs because she earns Swiss francs doing “work freelance for various Swiss media outlets.” Similarly, he describes how thousands of “U.S. military veterans, dual-national citizens who haven’t lived or worked in America for decades, and panicked retirees . . . are getting bounced out of their existing Swiss accounts and denied new ones, even if they live and work in Geneva for one of the city’s many international non-governmental organizations.” As one American who works for the International Labor Organization in Switzerland noted, “Just since the beginning of the year, I have been informed by one of Switzerland’s two largest banking institutions that due to the fact that I am an American, I had to divest myself of all my investment holdings in their financial institution. Another bank agreed to accept my investments; then, just this month, on the day that I went to sign the papers, I was informed that the authority to do this had been withdrawn.”
I am a middle-class person who lives in a two-bedroom house, and I pay U.S. taxes on my income from mutual funds in Thailand and Europe, which I invested in to diversify my portfolio (to limit double taxation of the same income by two different countries, investors like me can sometimes claim a foreign tax credit, if they pay taxes on the same income to a foreign country. But since taxes on investment income are higher in the U.S. than in most of the world, even investors who claim foreign tax credits usually still end up owing taxes to the U.S. on their overseas income.).
Although investing overseas generally will generally not reduce your own taxes, it may reduce the taxes of your foreign business partners, by enabling them to avoid America’s unusually high taxes on investment income. (An illustration of these high taxes is that Mitt Romney pays more in taxes in the U.S. than he would in Canada or much of Europe.) For example, one of my relatives created an investment entity domiciled in the Cayman Islands so that his business partners will not be hammered by American red tape and high taxes (somewhat analogous to how U.S. corporations that operate elsewhere in America get incorporated in Delaware due to that State’s favorable tax and regulatory climate), even though he himself pays American taxes on his income from the entity. (Most other countries do not tax their citizens’ worldwide income — unlike the U.S.). His business partners would not have invested the money in the first place if the entity were domiciled in the U.S. The ability to charter such entities in overseas “tax havens” makes business ventures possible with people overseas who would otherwise not contribute money to business enterprises run by Americans, due to high American taxes on investment income.