Taxation and Representation, Take 3

Bureau of Economics

Saving money is hard for lots of people.  It certainly is something that nowhere near enough Americans devote time or money to.  In other societies, saving is done mostly by the government or through fixed pensions.  In the case of Switzerland there is a three legged approach, where you, the government, and your employer all contribute to retirement.

In America, we have 401k plans, IRAs of various sorts, educational savings accounts, medical savings accounts, social security, and then private saving.  Many of the *SAs and things like 529 plans require speculation, and indicate a government that is hell bent on taking your money should you NOT get sick, or should you need less education than you planned.  Social security is a very small suppliment as compared to actual costs of living, and health care remains problematic.

If you’re like most people, you probably have a little money in mutual funds.  At some point, if you have children, you might even open for them a custodial account.  As it turns out, neither of these options are available to expatriates due to the way they are regulated.  That is- they are regulated by the states and if you don’t live in one, many brokerages will not know what regulatory framework to apply (and thus protect themselves with).  While this sounds like a negative situation, it can have some advantages: there exist professional fund managers whose primary purpose is to maintain a balanced portfolio for individuals, given a set of goals.  Mutual funds charge money.  These guys charge money.  So long as they know what they’re doing, you’re getting about the same service, only your portfolio is kept balanced and the stocks are at least somewhat vetted, which is something many people neglect over time.  And you don’t need to be an expatriate to take advantage of the service.  You just need to have some funds.

Most Americans place their primary savings into their houses.  This is advantagious from a tax perspective.  If you live outside the country, doing so (a) may not offer you those same advantages and (b) may tie you to a locale in which you do not wish to live (either the current international location or some place in America).  This in turn can keep people from setting down roots in a community, which itself is probably bad.

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Taxation and Representation, Take 2

Voting in California is perhaps one of the closest experiences one can have to true democracy in America.  Anything of substantial importance is presented to voters as a ballet initiative.  And this is true for cities and counties within the state as well.  I remember in November of 1992 voting on whether or not Officer Robert Geary should be able to bring his puppet Brendan O’Smarty in his patrol car.  In 1988, my first year in California, the citizens rejected the abusive behaviors of insurance companies and voted themselves a rate cut.

When we left California for Switzerland I knew that as an American I would be able to vote for President and for Congress.  What was less clear to me was whether I could vote as a Californian.  As it turns out I could continue to vote in the California elections, just as I had in the past, but there is a catch: California would like their share of my income.  And so I wondered: is this fair?  I came to the conclusion that it was.

I wanted to continue to be part of the community in which I had immersed myself in 1998, but California has a justifiable concern that only those who are actually impacted by their choices of laws should have a say.  Otherwise, since I’m not there, I could vote any which way with no consequence to myself or my family.  I miss California, and it saddens me that I can’t be a part of the solution to the many problems Californians face.  And those problems are substantial: the transportation network is failing, electricity and water supply is short, the education system remains strapped, and pollution remains a challenge.

Part of the reason for this blog is to share some of the experiences I’ve had in Switzerland so others might be able to apply them.  I was in particular thinking about my friends in California.

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Taxation and Representation

Janet Flanner, Expatriate in ParisMany people have asked me what it’s like living in Switzerland, and how life differs from that of outside the United States. Some of the big differences are how one interacts with the U.S. government itself, and with the States. Let’s discuss two examples over the next few days and whether or not they are fair, the first one being everyone’s favorite subject, taxes.

Here’s one way things don’t change: no matter where you live in the world, if you are a U.S. citizen who receives any sort of income above a very minimal amount, you have to file a tax return. U.S. stands alone in this nearly unique way among other governments. In most other cases you only file taxes (if required at all) in the country in which you reside. However, just because one has to fill out paperwork doesn’t mean one ends up paying the same taxes one would pay as a resident.

The U.S. philosophy is basically this: if you’re paying taxes somewhere else, and you’re not actually working in America, then you can reduce your tax burden by the amount paid. That means that if you never travel to America and the tax rate is higher than what you would pay as a U.S. resident, you pay nothing. On the other hand, if you do visit and work during that visit, then that money is subject to tax. And if the American tax rate is higher than the country in which you reside, you end up paying the difference. It’s more complicated than that (there are housing credits, limits on those credits, an income exclusion, etc), but that’s the jist.

Is any of this easy? No. The amount of paperwork expatriates often have to complete for taxes can measure into the kilograms, just for simple returns. In addition, different tax systems may cause substantial amounts of confusion due to when obligations occur, and when tax bills are finalized, requiring substantial revision over time. And don’t even get me started if you have a more complex situation, like say stock options, whose value has to be accounted for between the time they were granted and the amount of time you’ve spent in the states.

Is this fair? It says that as a U.S. citizen you still have a societal obligation no matter where you live. If you are a citizen and have never lived in the U.S., it may seem unfair. But the government is supposed to be there to protect you if you get into trouble; and you also get to vote for your senator, congressman, and in the presidential race. Certainly to me this seems fair. Citizenship has its responsibilities. In Switzerland, for instance, male citizens must serve in the armed service. It would be unfair if expatriates had to pay a higher rate than other citizens. Depending on your point of view, that has in part taken place, but not to the point that it has impacted me personally.

The IRS has attempted to simplify things somewhat, and you can see their attempt here.

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