One Possible Benefit of the Royal Wedding
By David Henderson
I woke this morning at 4 a.m. PDT and, as is my wont, turned on ESPN. But the woman on ESPN was saying that many people were watching the royal wedding. Ooh, I thought, I forgot. So I turned to ABC and watched it for a while as I did my bicycle exercise. The worst part: a black U.S. minister, Michael Curry, who took full advantage of his 15 minutes of fame; he seemed to forget at times that the wedding wasn’t about his agenda and his views. (Although I loved Ben E. King’s “Stand by Me” that followed.)
As regular readers of this blog know, I tend to be a glass-half-full person. So here’s my optimistic take. When the new bride, Meghan Markle, finds out that she and her husband must file U.S. taxes every year and, if their U.S. tax liability exceeds their British tax liability, must pay the difference to the IRS, she will start lobbying for a long-overdue change to the U.S. tax law. Other long-suffering Americans who live abroad have pushed for this for years, but the push will gain renewed energy from Ms. Markle and from many of the American celebrities who attended.
Signs of change in an old English castle: Today’s wedding of Prince Harry and Meghan Markle nudges the British royal family into a new era.
So reads the little New York Times headline that just showed up on my phone.
My question, though, is “Will the wedding of Prince Harry and Meghan Markle nudge the U.S. government into a new era?” Grover Norquist and Patrick Gleason write:
This system of citizen-based taxation (CBT) is practically unique to the U.S., with only one other nation, Eritrea, sharing the same approach. In fact, it is a 150-year-old relic that started with an effort to tax Civil War draft dodgers who had fled to Canada.
You might think that since U.S. income taxes tend to be lower than taxes in foreign countries where most Americans living abroad live, the effect is small: it means the annual hassle of paying an account to do a 1040 form showing that the American abroad owes zero. So the American abroad pays somewhere between $200 and $2,000, depending on complexity, for a CPA to do the form.
But two things about that. First, it’s probably closer to $800 than to $200 and, for many people abroad, that’s not tiny. Second, whether they pay more depends strongly on the particulars of the foreign tax code and the U.S. tax code. Last summer I was talking to neighbors (neighbours?) at my cottage in Canada–she is an American ex pat and he is a natural-born citizen of Canada. They were venting about these facts and she was understandably hesitant to renounce her U.S. citizenship. I made the point above–it’s a hassle but it’s small. On the contrary, her husband said, the capital gains tax screws them. In Canada, you are taxed on 50% of your capital gains. That’s not the same as having 50% of your marginal tax rate apply to your capital gains, even though it sounds the same. Why? Enter the U.S. tax system. The United States has a lower tax rate on the full capital gain. So how do the U.S. tax authorities look at your capital gains in Canada when you file the U.S. 1040? You have to pay that lower tax rate on your whole capital gain. So if you’re in the 33% bracket in Canada and you have capital gains, your tax is 16.5% of the gain. But then when you go to file for the United States, your tax rate, if you’re in the top capital gains bracket, is 20%. He pointed out that some years he is in that bracket. (He owns a business and his income varies a lot from year to year.) The difference is 3.5 percentage points. So on a $40,000 capital gain, he will pay to the U.S. feds an additional 3.5% times $40K, which equals $1,400. Huge? No, but not tiny either.
There is one way that the U.S. government could respond to Ms. Markle’s and others’ entreaties: pass a special bill that exempts the royals but no others. Let’s hope they don’t settle for that.
Commenter BC has graciously offered the following link that goes into these issues more and addresses some of the concerns I would have for Ms. Markle.