TO: THE PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM

Cover Page

**HOW THE U.S. TAX CODE ON OVERSEAS AMERICANS**

**HINDERS THE MAXIMIZATION OF U.S. TRADE &**

**ECONOMIC ACTIVITY AT HOME & ABROAD**

**Personal Submission by:**

## Patric Hale

# 6 Robertson Lane #7, Cos Cob/Greenwich, CT 06807

**Tel: (203) 861.1766; email: <pbhale@att.net>**

**10 March 2005**

**Personal Background:**

I studied, lived and worked overseas for over 27 years in France,
Germany, & the UK. I hold a BA in Political Science & European History,
and MA in International Relations and Business from Schiller
International University, having studied in Aix-en-Provence, Berlin,
Strasbourg and Paris.

Professionally, I've worked for many prestigious international media
including *Institutional Investor*, *Harvard Business Review, Scientific
American, Euromoney*, and CNN. As SVP & Commercial Director for Europe
at CNN, it was my responsibility to increase distribution throughout
Central & Eastern Europe after the fall of the Wall in the early 90s,
including negotiating the contract for the redistribution of CNN in
Moscow and elsewhere in Russia. Having lived in West Berlin during the
height of the Cold War, and visited several communist countries, it was
more than a pleasure to have brought the blessings of a free press to
the region -- finally!

During my time overseas, I've been Executive Director of Republicans
Abroad and spokesperson during several Presidential elections in France
& the UK. I am a Director of American Citizens Abroad, a non-profit
bi-partisan organization whose primary purpose is to wake up the US
government to the fact that overseas Americans are a valuable asset to
US global interests and not a liability.

I am the author of a new book: *"The New American Challenge: Can Europe
Compete with the USA in the 21^st^ Century".* I moved back to the USA in
1998 and now reside in Greenwich, CT. However, my overseas affiliations
continue since I am married to a Dutch national and foresee moving back
abroad to care for my in-laws in their fading years.

This submission is a summation of my research and personal experiences
with how US tax policies do definite long-term damage to US global
interests -- precisely at the wrong time and definitely for the wrong
reasons. I have been actively lobbying Congress and numerous
administrations on this issue now for over 30 years since 1975 -- and
still live in hope that somehow they'll finally understand what should
be so obvious!

**THE PRESIDENT'S ADVISORY PANEL ON FEDERAL TAX REFORM**

**HOW THE US TAX CODE ON OVERSEAS AMERICANS**

**HINDERS THE MAXIMIZATION OF US TRADE &**

**ECONOMIC ACTIVITY AT HOME & ABROAD**

**Personal Submission by:**

**Patric Hale**

**Background:** Citizen-based taxation was instituted in 1962 for no
apparent reason other than a belief that some Hollywood type
millionaires were living it up on the Riviera without paying US taxes.
At least that seems to be the emotional explanation for maintaining the
system as unique in the industrial world. Surprisingly this myth
continues to reverberate through the halls of Congress to this day
despite ***no one*** ever having proved if it were true to begin with,
whether it is still true, or if the change in the US tax code to
citizen-based taxation has really had any effect whatsoever on how
wealthy Americans spend their time on the Riviera since! Consequently,
ALL overseas Americans are now placed at a personal and competitive
disadvantage based on a myth that somehow just will not go away
*despite* no clear-cut evidence of its having fulfilled its objective!

Concurrent with the myth of the mystical non-tax-paying millionaire is a
belief that if Americans overseas don't pay US taxes, they must not pay
taxes anywhere at all! This, too, is a HUGE myth! All Americans are
subject to the laws and tax authorities in their country of residence.
While very few countries do not have *income* taxes almost all of them
have some form of taxation for which Americans residing in those
countries continue to pay. Consequently, overseas Americans are actually
taxed THREE TIMES: First by the local country; second by the USA; and
third by the cadre of international accountants who earn a living by
charging overseas Americans to comply with the absurdities of the US tax
code because it is virtually impossible for an overseas American to file
his own tax return -- and the IRS does not even provide for electronic
filing since the process is even too complicated for them!

Finally, from a theoretic perspective, from its founding America has
defended the principle that the purpose of taxation is for the payment
of services provided by the government to the society in which taxpayers
live. The reason why the Boston Tea Party remains imprinted in every
American is the inherent distaste for paying taxes to an overseas
government that does NOT provide services, NOR does it provide
representation, hence the phrase "no taxation without representation"
enters into every American lawmaker's lexicon -- ***except, that is,
when it comes to overseas Americans!*** For them the US government
believes it has a right and even a duty to tax them -- including 10
years after they give up their citizenship should they choose to be so
disenfranchised -- ***without* *any representation at all!*** Indeed,
Puerto Rico has non-voting representation in Congress yet no obligation
to pay federal income tax due to their "special status", yet 30% of
their government revenue comes from the Federal Government. Where is the
Congressional outrage about Puerto Ricans? There are currently over 4
million Americans overseas scratching their collective heads at the
innate unfairness and absurdity of this situation, and wonder why
Congress in all its wisdom can't see it.

**Absurdities of the US Tax Code:** So all overseas Americans begin with
being the citizens of the only country that unilaterally imposes its tax
code simply as a function of their nationality, they also must pay local
national taxes (income and non-income), they're obliged to pay
accountants' fees to comply with US tax law, *and* they have no
representation in Congress to redress any of their grievances. One would
think that was absurd enough, but sadly it is only the beginning. The US
government in its myopic wisdom has determined that despite what the
rest of the world thinks, all global transactions are really conducted
in US dollars! Consequently, overseas Americans are responsible for
taking on ALL foreign exchange risk when filing their taxes with the US
government. As we've seen this past year when the dollar has depreciated
against the euro by some 25%, this means as far as the US government is
concerned that all overseas Americans earning income in euros actually
received a 25% *raise* in income and it applies the tax code
accordingly. This absurdity should be obvious to all. Sadly, it doesn't
stop there, for the issue of citizen-based taxation is not one of just
*earned* income, but also *un-*earned income. Consequently, a person who
bought a house for 100,000 euros two years ago when there was parity
between the currencies and sells that house this year for 100,000 euros
is now responsible, according to the IRS and US Tax Code, for a totally
fictitious \$35,000 capital gain simply because the US government
insists on imposing all foreign exchange risk onto the individual
overseas American! Then there is the issue of tax systems used overseas
that are not comparable to any in the USA so the IRS and the US Tax Code
refuses to even take them into consideration. For instance, value-added
taxes are used extensively in Europe (and are being considered in the
US). A substantial portion of government revenues come from these taxes
and can be as high as 33% in some countries on certain goods. Since
these taxes are built into the price there is no "sales tax" as in
America, and so there is no consideration given the overseas Americans
for these additional burdens that NO American in the US has to pay. The
list of absurdities because of America's unique approach to
citizen-based taxation goes on and on and is quite literally too long to
list in the 5 pages requested by the panel. But one absurdity I'd like
to point out as a personal experience: After deciding to return to
America after 27 years in Europe -- partly because *European* taxation
was getting outrageous! -- I inquired at the IRS office at the American
Embassy in London as to when I last filed. I was told there was no way
of knowing because if as an overseas American I had no tax liability in
the previous years -- (and because English tax rates are higher than US
rates, I was NEVER going to actually have to pay US taxes; I,
nonetheless, had to fill out 4 forms cross-referencing each other to
come to "0" tax liability anyway) -- they didn't put them into the IRS
computer, but were merely stored (presumably in a closet somewhere) in
Philadelphia!! So obviously the IRS thinks it's absurd, too. Now if we
can only convince Congress, a lot of wasted time, effort, and money will
be saved by all.... (Incidentally, because of this I am now in a battle
with the Social Security Administration to acknowledge my payments to
the UK system to get credit in the USA according to a bilateral
agreement. The SSA has told me that they will only do this once I turn
65! I'm not encouraged...).

**America's Economic Future:** America's economic future lies in its
political leaders understanding that we live in a global economy in ways
we have *never* *known* in the past. It means, as President Bush stated
in his "State of the Union" address, that our future security as a
nation lies more in what happens in the world around us than ever
before. In this regard, our *economic* security is far more vital to our
future than our *military* security, though this issue is sadly muted by
our current involvement in Iraq. Nonetheless, the announcement of a
record trade deficit of \$617.7 Billion, 5% of US GDP, should be a
clarion wake-up call to our political leaders that something is not
right in how we interface with the rest of the world. According to
classic economic theory on trade, with a floating currency trade should
eventually regain its balance as terms of trade find equilibrium through
the effect of currency exchange. That, unfortunately, only works in a
trade environment where commodities are the major items of trade and are
price-sensitive. Sadly Ricardo never heard of the term "value-added
marketing" in the 18^th^ Century when he came up with the classic theory
of trade, which is how most business in the world is now run. This means
importers in the USA are increasingly using differentiation strategies
to add value to their products to become *less* price/exchange rate
sensitive. *Example*: A Mercedes car imported to the USA has increased
in price because of the \$/euro exchange rate, but US consumers are
primarily interested *in the car* because of the successful effects of
Mercedes' marketing and *not* the price. As a result, Germany actually
gets *more* dollars out of America because of the current exchange rate
instead of less, thus further aggravating our trade deficit..
Consequently, relying on classic economic theory today is simply another
absurdity that America simply can't afford.

America's economic future must lie in its export policies or it is clear
our country will become a pauper nation within a generation at the
current trend. This brings us back to the current tax code for overseas
Americans. As it stands today it is a ***dis***incentive -- and a large
one -- for companies to employ Americans to leave our shores and sell
American products overseas. Data from the Commerce Department recently
showed that the number of US citizens employed by US-owned multinational
companies has been cut in half in the past two decades. Indeed, that was
my personal experience at CNN; I was one of only 6 Americans executives
in London -- *and I was hired as a local national because they didn't
want to take on the added expense of another expat!* In addition,
America's future is more and more dependent on small- and medium-sized
enterprises (SMEs) as the growth engine of our economy *and* for its
export future. According to US International Trade Administration, 97%
of exporting firms are SMEs, and their increase as a percentage of total
exports is much greater than MNCs. Consequently, stimulating SMEs to
hire Americans to move overseas -- instead of taking an occasional
flight - to sell American products should be a ***primary*** national
***economic*** security issue. Yet the current tax code on overseas
Americans simply acts as an export *barrier* and tax for SMEs wanting to
sell more American products abroad. Consequently, they're left with the
choice of either licensing or working through foreign sales reps to sell
their products, both avenues generating a lowered return than having
their own active sales forces and it provides no control on America's
economic future. Consider what this would be like in the context of our
military national security: How successful would America be in
liberating and establishing democratic institutions in Iraq and
elsewhere if we merely paid the French, Germans, Russians, and Chinese
to implement our policies? Yet that is precisely what we are doing with
our *economic* security because the US tax code imposes an unnecessary
and absurd export tax on American companies that want to employ
Americans overseas to sell American products. Virtually NONE of
America's major trading competitors impose this on their own citizens
abroad (see page 7). How can this be in any national interest of the
United States at all?

**Summation**: President Bush has called for a "level playing field" in
international trade; we must start at home by eliminating the
impediments we impose on ourselves *that none of our competitors do!*
First and foremost is eliminating the citizen-based tax system: Its
implementation was based on a false premise; its continuance remains
based on this false premise; its administration is fraught with
absurdities; its net revenue pales in insignificance compared to
America's trade deficits; it is inherently un-American in its political
concept since it is as regally imposed in the same manner that King
George III on overseas Americans without any recourse or redress through
representation; and it acts as a huge hindrance to boosting American
exports through SMEs which are critical to our national economic
security in the future! All the while America has opened itself up to
foreigners to come to our country and increasingly take money out of the
country through our "free" trade. Incidentally, in *every* case with
respect to our major trading partners, their foreigners operating in the
USA actually pay *fewer taxes* in America than they would in their home
country, giving them a double incentive to keep selling in America. I'm
sure there are some reasons to recommend continuance of the
citizen-based tax system -- but in 30 years I have yet to understand ONE
that made any real sense to anybody!

The bottom-line of this presentation is quite simple: **Tax Less --
Export More**. The supposed loss of revenue to Treasury of this simple
strategy would be far offset by increased exports and decreased deficit.
Let's do the math: Current tax revenue from overseas Americans is \$3
billion annually; that equates to less than 0.5% of the current trade
deficit. But each \$1 billion in new exports equates to 20,000 domestic
jobs *and tax revenue to Treasury*, (and happy voters!). Consequently,
most rational business people and policy-makers would look at this
equation and say: "Instead of imposing *disadvantages* on overseas
Americans, why don't we turn them into an *advantage* instead since that
way everyone wins?" Why is this not obvious?

**One final note:** The vast majority of overseas Americans are proud of
their heritage and proud to be the cultural driving point of American
values overseas. As noted there are currently 4 million overseas
Americans. In an environment where President Bush has thrown the
gauntlet down in the face of tyranny and despotism and called for the
democratization of the world, the country should see overseas Americans
as its natural allies and assets in this process. Indeed, we are very
much on the front lines on the War on Terror abroad since terrorists
will not ask what party affiliation we might have, but would
unhesitatingly kill us just for being American. Instead, however, we are
viewed suspiciously by our own government, where the tax code with its
unfairness and absurdities - particularly in the absence of
representation - merely sours overseas Americans who can't help but see
the innate hypocrisy between our pronouncements of American ideology and
policies of freedom, democracy, the rule or law and free markets, and
how they fall well short when applied to America's own overseas
citizens. This *must* change -- and soon! Thank you for the opportunity
to address your panel.

**AMERICA'S TAX & TRADE POLICIES**

**1962 TO PRESENT:**

***HOW MUCH RED INK IS TOO MUCH?***

**US Trade Balance 1962-2003**

***WHAT'S WRONG WITH THIS CHART?***

### Comparative Tax Policies on Expatriates by Major Trading Countries

  ------------- ---------- ------------ ------------ ------------- -------------- --------------- ------------ -------
  **Country**   **Tax on   **Tax on     **Tax on     **Tax on Cost **Tax on       **Government    **Trade      **%
                Salary**   Incentives / Benefits**   of Living     Additional     Subsidies (To   Balance 2004 GDP**
                           Bonuses**                 Allowance**   Income Earned  Individual)**   (\$ bill)**  
                                                                   Out of Home                                 
                                                                   Country**                                   

  **USA**       **Yes**    **Yes**      **Yes**      **Yes**       **Yes**        **No**          **-631.3**   **-
                                                                                                               5.4**

  **Japan**     No         No           No           No            No             Yes             159.4        3.4

  **Italy**     No         No           No           No            Complex        Gov't owned cos -18.1        \- 1.1
                                                                   formulas                                    

  **France**    No         No           No           No            Complex        Gov't owned cos -12.3        \- 0.6
                                                                   formulas                                    

  **Korea**     No         No           No           No            No             Yes             20.7         3.1

  **Germany**   No         No           No           No            A few          Few             118.5        4.4
                                                                   limitations.                                

  **Canada**    No         No           No           No            No             No              23.2         2.9

  **Sweden**    No         No           No           No            No             Few             22.6         6.7

  **UK**        No         No           No           No            Complex        Few             -43.3        \- 2.0
                                                                   formulas                                    
  ------------- ---------- ------------ ------------ ------------- -------------- --------------- ------------ -------

\-\-\--Original Message\-\-\-\--

From: pbhale@att.net
\[[[mailto:pbhale@att.net]{.underline}](mailto:pbhale@att.net)\]

Sent: Saturday, March 19, 2005 9:35 AM

To: comments@taxreformpanel.gov

Subject: Personal Submission by Patric Hale

Mr. Connie Mack

Chairman

The President\'s Advisory Panel on Federal Tax Reform

1440 New York Avenue NW

Suite 2100

Washington, DC 20220

Dear Senator Mack,

I am honored to submit to you a personal submission concerning how the
Federal Tax Code currently treats overseas Americans and how this
practice severely harms America\'s trade balance and global
competitiveness.

I lived overseas for over 27 years in Europe (France, Germany, & UK),
first as a student, then owner of my own business, and intermittently
having been an executive with Institutional Investor magazine and SVP
Commercial Director for CNN International and Turner Broadcasting.

I have been active in representing overseas Americans to members of
Congress for over 30 years now, both as former Executive Director of
Republicans Abroad and as a Director of American Citizens Abroad, of
which I am still active. I met several times over these years with Rep.
Bill Frenzel in particularly, not only because of his membership on the
Ways & Means Committee, but because my late aunt, Louise Kuderling, was
active in his election campaigns in Minnesota.

Please find attached my submission. I would welcome the opportunity of
testifying in person either in from on this committee, or a
sub-committee that we believe should be constituted specifically for the
issues of taxation of Americans overses.

Thank you for your consideration.

Kind regards,

Patric B. Hale

President

Capital Markets LLC

6 Robertson Lane #7

Cos Cob/Greenwich, CT 06807