No, They’re Not Tax Dodgers

August 29, 2014

  • The rising cost of kissing America goodbye
  • Not enough inflation for these central bankers…
  • Gun grabbers in retreat… but what about gunmaker share prices?
  • President has no strategy, but crude traders do
  • The vanishing oil tanker… who really pays corporate income taxes… the money-I-can-afford-to-lose investment account… and more!

   Looking to expatriate? You have two weeks to get your act together and avoid a fee increase.

Maybe we should back up a bit: During the first half of 2014, a total of 1,577 Americans surrendered their citizenship. Assuming that pace keeps up for the second half, 2014 will exceed the record set last year.

We’ve spotlighted these numbers regularly in Addison Wiggin’s Apogee Advisory for three years. Along the way, politicians started noticing the trend too. “Tax dodgers!” they cried, citing uber-rich Americans who’ve expatriated, like Tina Turner and Facebook co-founder Eduardo Saverin.

   By last October, we figured out it was ordinary Americans of ordinary means driving the trend.

The evidence is anecdotal — the feds don’t disclose the net worth of people who turn in their U.S. passports — but it’s compelling.

Search mainstream media sources and you find many stories like those of Daniel Kuettel, a software developer living near Zurich who gave up his U.S. citizenship in 2012. He feared he could not get a mortgage, because many Swiss banks want nothing to do with U.S. citizens. “It was a really difficult decision,” he told The Wall Street Journal.

Blame it on the Foreign Account Tax Compliance Act — a 2010 law whose worst provisions kicked in on July 1 of this year. Without going into hair-pulling detail, these provisions effectively require foreign banks to comply with IRS reporting requirements for their U.S. customers. Many banks are sensibly opting to drop their U.S. customers.

   Even if they can find a bank, Americans living overseas need accounting services costing $2,000 a year to comply with the law’s other requirements, according to Zurich-based U.S. tax lawyer Matthew Ledvina.

That’s manageable if you’re Tina Turner or Eduardo Saverin. For many others, not so much. Expatriation starts looking attractive under those circumstances.

And it’s surprisingly affordable if you’re of modest means. The wealthy have to pay an “exit tax” — forking over a capital gains tax on the appreciated value of everything they own as if they sold it.

But if your net worth is under $2 million and your average income tax liability the previous five years is under $157,000, you’re home free — except for a $450 renunciation fee.

   But in two more weeks, that fee explodes more than fivefold.


A sharp-eyed reader over at Ed Steer’s Gold and Silver Daily spotted the notice that went up yesterday on the State Department’s website…


The new fee kicks in Sept. 12 — two weeks from today.

We’ll try to look on the bright side: What you lose in the fee you make up a year, considering those $2,000 in annual accounting costs for a typical U.S. citizen living overseas…

   Stocks are adrift this morning, the major indexes showing little change. The S&P 500 hovers three points below 2,000.

The big economic number of the day is the Commerce Department’s “income and spend” report, and it reveals an increasingly tightfisted typical American. Personal incomes grew 0.2% in July, a slower pace than June and May… while consumer spending fell 0.1%, the first drop in six months.

This report also includes “core PCE” — the Federal Reserve’s favorite measure of inflation. It registers a 1.5% year-over-year increase, nowhere near the Fed’s 2% target. As always, any resemblance to your own cost of living is purely coincidental.

   The European Central Bank can’t get the inflation level it desires either. Figures released overnight show 0.3% inflation in the eurozone in July, down from 0.4% in June.

The buzz is that ECB president Mario Draghi will launch his own version of quantitative easing/money printing late this year or early next. “There is a report out that the ECB has hired BlackRock Inc., the world’s largest money manager, to advise on developing a program to buy bonds,” writes our friend Chuck Butler at EverBank World Markets.

“Sounds like the ECB is serious about this, right? Like they are greasing the tracks to QE. Or… could it be a diversion to make the markets think he’s on the verge of implementing QE, just to give him more time to see if the eurozone economy can shake itself out of these doldrums? If I were a betting man (and I’m not), I would bet on the latter of the two.”

As Chuck points out, it’s not as if QE has brought about the desired effects in the U.S. and Japan. Heh…

In the meantime, the euro fetches $1.31 as we write. That’s seven straight weeks of decline, and nearly a one-year low.

   Gold’s drift downward is now in its second day. The bid at last check is $1,288.

   “The gun bubble is finally popping,” writes Greg Guenthner in today’s Rude Awakening.

Bloomberg reports criminal background checks for gun purchases are down nearly 4% from last year. “Part of the reason,” says Greg, “is the subsiding fear of new gun control legislation. Despite several high-profile mass shootings taking place over the past few years, lawmakers have not passed any laws that could potentially devastate the American gun industry.

“Gunmakers are sitting on huge stockpiles of rifles that were at one point nearly impossible to come by.


“Those who have wanted to purchase assault rifles and other firearms have already done so,” says Greg. “With demand receding and supplies piling up, I suspect gunmakers (and their respective shares) will have a lot of trouble impressing investors over the next several quarters.”

   Crude prices are rising modestly, if for no other reason than traders don’t want to be “short” going into a holiday weekend when no one knows which end is up in Ukraine or the Middle East.

A Wall Street Journal alert crossed your editor’s iPad shortly after the close yesterday: “Obama Says U.S. Developing Strategy, Military Options to Counter Islamic State.”

I talked back to my iPad: “Now?! Three weeks after you already became the fourth consecutive president to drop bombs on Iraq?”

In any event, the president let on that he doesn’t plan to expand the bombing to Cambodia — er, excuse me, Syria — just yet. Thus, a barrel of West Texas Intermediate is higher than it was a few days ago, but still much lower than a few weeks ago — $95.14.

   Staying with Iraq and oil for a moment… How exactly do you lose track of a tanker hauling $100 million in crude?

A month ago, we mentioned a tanker called the United Kalavrvta showed up off Galveston, Texas. It was loaded with crude from the Kurdistan Regional Government in northern Iraq.

This was a problem because in the eyes of the U.S. government, Iraq is still a united country with the same borders the British and French drew 100 years ago. Iraq’s central government in Baghdad does not look kindly on the ethnic Kurds selling oil freelance, so it sued in U.S. courts — where it’s been tied up all this month.

On Monday, the court threw out an order to seize the cargo; seems the order is invalid because the tanker is now 60 miles offshore.

Now the tanker has disappeared from satellite tracking. From Reuters: “The AIS ship tracking system used by the U.S. Coast Guard and Reuters on Thursday showed no known position for the United Kalavrvta, which was carrying 1 million barrels of crude and 95% full when it went dark.”

The United Kalavrvta as seen from U.S. Coast Guard aircraft… well, before it disappeared…

The Coast Guard speculates the ship might have turned off its beacon, sailed beyond reach of tracking antennas or maybe the antennas are out of service.

“However,” the wire service counters, “dozens of vessels were visible on Thursday in the Galveston Offshore Lightering Area, where the Kurdish tanker was last seen.”

   “All this fretting about corporate taxes is silly,” a reader writes on one of this week’s hot topics in the mailbag.

“It seems to me that either the shareholders pay because of smaller earnings or consumers pay due to higher prices. Taxes are a cost of doing business and therefore a deductible expense. Corporations are merely the middleman between the IRS and the ultimate payer. I’d love to hear differently from a CPA.”

The 5: We concur, and we also go along with your challenge. Anyone?

   “I had a laugh at the ‘do the opposite of what I do’ guy,” writes one of our regulars in response to the fellow yesterday who said the reason commodity plays are down is that he invested in them.

“I have thought that for many years, when I am about to make a trade, to do the opposite of what I was intending to do. Never tried it that way, but sure is tempting. Of course, I just put on a trade going against the current trend of the summer. Whew, we will see what happens.

“You see, I have this small tax-deferred account, an ‘I don’t care what happens account,’ for experimental reasons. Maybe our friend should try that. It’s the ‘my money I can lose account,’ and I can just take big risk for the fun of it. The joy is that at end of the year, I don’t have to do all that fancy income tax reporting. We will see where the account is in 10 years — well, maybe. This is my play account, not my investing account. And the government gives me an instant 25% return up to a certain dollar amount each year.

“Really, it is not my plan to lose all the money, I hope it works out, being 60. I can at least get a bit of a return from Uncle Sam each year for the next 10 years before I have to start paying some of it back. But hey, then I will be so poor with no income that he will never recoup from me. Ahh, but he may get it from my heirs. But (there it is) it is free money to them, so who cares at that point?”

The 5: We like your approach!

Happy Labor Day,

Dave Gonigam
The 5 Min. Forecast

P.S. We wish a hale and hearty farewell (of sorts) to Chris Campbell of our research team. Among many hats Chris has worn capably around the office is editor of our Saturday wrap-up 5 Things You Need to Know… and my backup on the weekday 5 when I’m busy in all-day meetings exploring new investment ideas with the Agora Financial brain trust.

Chris’ desk will remain next to mine… but he’s moving on to become managing editor of a totally revamped and refreshed Laissez Faire Today. It debuts on Tuesday. If you like The 5, I know you’ll like the new-and-improved Laissez Faire Today. If you don’t get it already, you can sign up for daily email delivery right here.

My colleague Brian Maher will take over the Saturday 5 edition, starting tomorrow. The weekday 5 won’t publish on Monday, seeing as U.S. markets are closed for Labor Day and Canadian markets for Labour Day… but we’ll be back to our regular thing on Tuesday.


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