Let’s talk about tax baby!

It was a nice afternoon. I was in my penultimate class of the day-Investments. I do not remember what the lesson was about that day, but I do remember my professor being upset about taxes.

My professor is German, married to an American woman, currently living and working in the UAE. He has a green card which made him eligible for all the goodies America has to offer, including (or should that be especially?) taxes.

Oh taxes. A wise person once said

There are only two things man is certain of: death and taxes

Back to my professor, there was no reason for him to be upset. He was living in a fabulous country that provided him with one of the best things a person could ask for- tax free income. But he also held a green card which meant he had to pay taxes to America. Yes, America taxes it’s citizens and green card holders living abroad, on money earned outside of America. Crazy right?

My professor had helped to write a finance textbook, making it more relatable to the region. When one spends all that time on a project, one expects to be rewarded right? For the sake of this story, let’s say he  was paid $100. Whoop hundred whole dollars!

Knock knock

Who’s there?

It’s the tax collector

It’s the tax collector who?

Give us your money, all of it

The company that recruited him to write the book was based in the UK and apparently that made his contract subject to 20% tax from the UK authorities. My professor had no idea of this at the time he signed the contract so he was understandably not pleased.

Well $80 left. That’s not too shabby.

Ding dong

Who’s there?

It’s the IRS

It’s the IRS who?

Open the door NOW and give us all your money or you are going to jail sucker.

Of course our buddies at the IRS could not be left out and so they came and took $40(if memory serves me correctly). Quick maths here: $100-$20-$40=$40. Now $40 seems to me to be less than half of what he was paid. You can understand why he was upset on this beautiful afternoon. He had to pay a huge sum of money he worked hard for to a country he hadn’t lived in for 12 years. He couldn’t give up his green card because of the possibility that he and his family might one day move back to the USA. He actually has it better than others. What if he lived in a country that did tax people’s income? Then he would have had to pay taxes on his income twice. “*clutches pearls*

Why doesn’t he just refuse to pay the taxes you ask? Oh because the IRS does not play. Not at all. This same professor wasn’t done with his tax woes. He recounted an incident when he received a telephone call from a guy at the IRS informing him that he was being investigated for tax evasion for the tune of $80,000. He had been paying his taxes and so was thrown into a state of confusion and fear. He cooperated fully with the IRS, running around like a headless chicken trying to salvage this unfortunate situation he mysteriously found himself in. After a long period of stress in which he lost half his body weight and all his hair (I might be exaggerating a little), the IRS agent concluded my professor wasn’t owing them anything after all and ended the investigation without so much as an apology.

In short, think of the IRS as Liam Neeson in Taken, except that they are much worse. At the IRS induction ceremony, right after they are given their eyeglasses and calculators, they have to recite the IRS motto which goes thus:

If you pay your taxes now

That will be the end of it

I will not look for you

I will not pursue you

But if you don’t

I will look for you

I will find you

and I will make you wish you were dead.

The USA is not the only country with a wacky tax system. In 2012, the president of France Francois Hollande unveiled a legalised theft system of charging 75% tax on income of over one million euros. I guess it is easier to tax people than to just put on a mask, put a gun to their heads and ask for their money. Thankfully this ill thought plan died out quickly and quietly.

Another daft tax is the TV license tax which is collected in the United Kingdom. On the tv licensing website, it says You need to be covered by a TV Licence if you watch or record programmes as they’re being shown on TV or live on an online TV service. This is the case whether you use a TV, computer, tablet, mobile phone, games console, digital box, DVD/VHS recorder or any other device. So after buying your television, you have to pay to use it. Wonderful. The tax is used to fund the British Broadcasting Commission (BBC), because God forbid it funds itself like other channels.

Inheritance tax (aka death tax) is perhaps the most vulgar of them all. Having to pay tax on money that has already been taxed is just wrong.  A woman works hard for 50 years, saves and invests her money. She pays 40% tax on all that she earns and when she dies she leaves behind a fortune of $1,000,000 to her 4 children. Now she has paid her taxes dutifully when alive, of course the taxman has no business with her money now that she is dead. Wrong. This money that she has left to her children will be taxed, sometimes up to 40%. How preposterous is that? This has been abolished in a number of countries but is still being enforced in the United Kingdom.

People are beginning to revolt against this madness and the simplest way to do so is by renouncing their citizenship. According to Forbes magazine, a record number of people renounced their American citizenship in 2014, 221% up from the previous year. Due to the increased demand for renunciations, the fee has been raised from $450 to $2,350. If you don’t want to be an American anymore, it’s gonna cost you. There is also a public register of people who have chosen to expatriate, I guess so people can throw rotten tomatoes at them. It may seem weird to you that people would willingly give up something thousands are clamouring for. People are marrying their sisters in a bid to get an American passport and others are giving it up all willy nilly. Well there comes a time when the pain of being an American overweighs the benefits, for some people it is just not worth it anymore and I cannot say I blame them.

When Hollande introduced the sadistic 75% tax rate, a bunch of people threw their French passports in La Seine and swam to safety. Bernaud Arnault, the richest French man, obtained a Belgian passport and Gerard Depardieu is now Russian.

Others find tax havens to make their homes. Unlike the USA, most countries collect taxes from people resident in the country and do not tax citizens who live and earn money elsewhere. So if your country’s tax rate is too high, you can move to a country with a lower tax rate and then you only have to pay the tax of the country in which you are a resident. A popular choice with wealthy Brits is Monaco. A number of British billionaires claim Monaco as their country of residence, but still work in Britain, thanks to a loophole. By doing this, they are able to pay lower taxes. But don’t you dare suggest that they are tax exiles, absolutely not, they just moved to Monaco for the privacy of course.

This article and this one highlight the best tax free countries to live in. Some of them are.

1) United Arab Emirates (Dubai to some). I love this place.

2) Monaco: home of the rich and famous; of playboys and sport cars

3) Bahamas

4)Bermuda

5)Andorra

Now before you pack up your bags and run off to the Bahamas screaming “suck it America!”, be sure to read up about the requirements for residency in those places, lest you find yourself running from a frying pan to a volcano (this made sense in my head. Okay it didn’t but I typed it anyway). You can also read this article to clear up some misconceptions you may have about renouncing your American passport.

I do believe people should pay taxes of course. Taxes are an important source of revenue for the government. They help to pay for social amenities and nice vacations but for the love of God do not punish people for earning a living.

Glossary

IRS: Internal Revenue Service. The U.S government agency responsible for tax collection and tax law enforcement. http://www.irs.gov/

On the IRS website there s a tax guide for U.S citizens and resident aliens (whatever that means) living abroad. Find it here.

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