In general V. REVENUE ESTIMATES AND ESTIMATING METHODOLOGY Estimating the revenue effects of proposed legislation to modify the tax treatment of U.S. citizens and long-term residents who relinquish their citizenship or residence ("expatriates") is inherently difficult, particularly in cases in which the decision to relinquish citizenship or residence is made, at least in part, for tax reasons. Depending upon the proposal, there may be both income and estate tax consequences to the act of relinquishing citizenship or residence. The consequences may be significantly affected by whether the assets of the citizen or resident are U.S. or foreign situs and by whether the assets are held in trust. Under all of the proposals that have been reported, it is necessary to estimate the number of individuals who will expatriate. Under some proposals, it is necessary to estimate the number of citizens who expatriate for tax avoidance purposes. Under all of the proposals, it is necessary to estimate the behavioral effect that will occur as a result of the proposal. In addition, it is necessary under certain proposals to estimate the unrealized appreciation of assets held by potential expatriates. The current levels of expatriation are well documented by the State Department. However, the current levels of expatriation for tax avoidance purposes cannot be determined with precision because it is impossible to infer taxpayers' intent in expatriating. Thus, the revenue estimates of the various proposals ultimately are based upon the best judgment of the Joint Committee staff using anecdotal evidence that is available publicly, plus tax return information obtained from the IRS, expatriation data obtained from the State Department, and other data and information available to the Joint Committee staff. Calculating a baseline Revenue estimates measure the anticipated changes in Federal receipts that result from proposed legislative changes to the Internal Revenue Code or related statutes. The reference point for a revenue estimate is the revenue baseline, which projects Federal receipts assuming that present law remains unchanged. Thus, in its simplest form, a revenue estimate measures projected Federal receipts under a proposed change in law minus the projected Federal receipts under present law. If this formula yields a negative result, the proposal is a revenue loser. If the formula yields a positive result, the proposal is a revenue raiser. In order to determine the present-law baseline with respect to proposals to alter the tax treatment of expatriation, the Joint Committee staff received information from the State Department relating to the number of U.S. citizens who relinquish citizenship each year and the number of long-term U.S. residents who change their residence. More difficult determinations that are relevant for calculating the baseline include the levels of income, unrealized appreciation of assets, location of assets (i.e., U.S. or foreign), the wealth of those who are expatriating under present law, the tax effects of expatriation, and the reasons for expatriation. Individuals may receive any of several tax benefits from expatriation, assuming they relocate to a low-tax environment. First, they remove some or all of their entrepreneurial and investment income from current U.S. taxation. Second, they are able to recognize some or all of their unrealized gains at relatively low cost. Third, they largely insulate themselves from U.S. estate tax liability. Shortly after release of the Administration's Fiscal Year 1996 Budget, the Joint Committee staff received information from the staff of the Treasury Department concerning U.S. citizens or lawful permanent residents who had relinquished, or appeared to be in the process of relinquishing, citizenship or residence. This information was updated by subsequent information provided by the IRS and the Treasury Department. The subsequent information provided by the Treasury Department contained tax liability information for individuals who had expatriated in 1993 or 1994 according to State Department information and whose names could be matched to the IRS Individual Income Tax Return Master File. Of the 697 individuals who expatriated in 1993, the Treasury Department was able to match 13 names to the Individual Income Tax Return Master File with tax liability information for certain of the years 1989-1992. Of these 13 matches, seven had tax liability in any year less than $10,000. The total tax liability for all years matched was approximately $20 million. The information matched to those who had expatriated in 1994 showed a higher total tax liability for all years matched. However, it is unclear how the information that was matched would relate to information for all individuals who had expatriated during the 1993-1994 period. In addition, the information relating to tax liability provides no information as to an individual's wealth and, to the extent only one or two years of tax liability is shown, may show no information as to what an expatriating individual's tax liability would be if the individual did not expatriate. The Joint Committee staff found the Treasury Department information useful, but not determinative, in analyzing the potential effect of any of the proposals on fiscal year budget receipts. In addition, the Joint Committee staff asked the State Department to match names appearing on the Forbes 400 list of the wealthiest people in the United States with (1) the names of people who had been publicly reported to have expatriated and (2) State Department data on individuals who had actually relinquished U.S. citizenship during 1994 and 1995. The Forbes 400 list was utilized because it was the only information of which the Joint Committee staff was aware that provided a measure of the net wealth of individuals. In addition, a number of the individuals listed in the Forbes 400 list have been identified publicly as having expatriated or being in the process of expatriating and the Joint Committee staff wanted to verify the extent to which the reported information was accurate. A present-law baseline was formed by extrapolating available information on expatriation to fiscal years 1995-2005. This extrapolation included judgments about the representativeness of the tax information, the potential numbers of expatriates, and the application of present law. Expatriation is assumed to be cyclical, affected by numerous factors, and the number of potential expatriates is limited. In addition, potential erosion of U.S. estate tax liabilities was omitted from consideration because of the inherent difficulty in predicting mortality and estate tax consequences. The published reports of expatriation allegedly for tax avoidance purposes that predated the Administration proposal, the Administration proposal itself, and the reports (and in some cases solicitations) that ensued have altered the individual and institutional (e.g., State Department and IRS) awareness of expatriation, regardless of whether the Administration proposal or something similar is enacted. The Joint Committee staff made the assumption that such publicity has not altered the present-law baseline because it is not clear how the parties involved will react. Some potential expatriates may be wary of the personal and professional stigma that may be attached to expatriation given the greater publicity of the issue in recent months. Others may use the recent publicity as a road map to expatriation. The Joint Committee staff also assumed that the IRS would make no additional efforts to enforce present law with regard to expatriation. Behavioral effects One of the most significant elements of the estimates of revenue effects of modifications to the tax treatment of expatriation is the assumed effect of the proposal on taxpayer behavior. For those individuals who it is assumed would expatriate during the budget period under present law, there are two possible reactions to a modification to the tax treatment of expatriation. First, the individual may decide not to expatriate and, therefore, would remain a U.S. citizen or resident. In this case, the individual would continue to pay U.S. income and estate (if applicable) taxes. In evaluating how many of the individuals who are assumed in the present-law baseline to be likely to expatriate during the budget period but would not do so as a result of the proposal, it was necessary to evaluate the tax consequences of remaining a U.S. citizen or resident relative to the tax consequences of expatriating. For example, because the Administration proposal would impose tax on unrealized gains of assets held upon expatriation, individuals with low-basis assets might be deterred from expatriating. Similarly, the potential double taxation that could occur as a result of the Administration proposal might deter an individual from expatriating. Second, the individual may decide to expatriate in any event and pay whatever taxes are owed as a result of the expatriation. Individuals who will fall into this category would include those whose expatriation is for nontax purposes in the first place. Also, under the Administration proposal, individuals with high-basis assets might conclude that the cost of expatriation is small relative to the potential exposure to U.S. estate taxes. Some have suggested that the Administration proposal might encourage some individuals who had not previously considered expatriation to do so. A factor that may also determine whether the decision to expatriate (and the revenue consequences of any proposal) is the age of the individual and the likelihood of death occurring during the period shortly after expatriation. However, as indicated earlier, this element has not been incorporated into the estimates of the present-law baseline or of the effects of any of the proposals because of the inherent difficulty in predicting mortality, wealth, and the estate tax consequences for a particular group of individuals. Potential macroeconomic effects The estimates of proposals to alter the tax treatment of expatriation do not include any changes in aggregate macroeconomic variables such as domestic investment. This assumption is consistent with the macroeconomic baseline required to be used for estimating purposes by the Joint Committee staff. It also comports with the Joint Committee staff's judgment that a proposal like the Administration's affecting a relatively small number of individuals, regardless of their wealth, would not cause a noticeable change in the overall U.S. economy. Estimates of the proposals Administration proposal The Joint Committee staff estimates that the Administration proposal would have the following effect on fiscal year budget receipts: This estimate differs from the estimate provided to the Congress during consideration of H.R. 831. In conjunction with its study of expatriation tax issues, the Joint Committee staff acquired additional information on the number and tax status of recent expatriates. In addition, the Joint Committee staff learned more about the decision required of the heterogeneous pool of potential expatriates, under this and other proposals discussed in the study. The Administration proposal would increase revenue by imposing a tax on appreciation which is effectively absent or delayed under present law. This tax is high enough to delay or deter some expatriation. Potential expatriates with sizable appreciation in self-created assets, such as businesses they started up, would find expatriation more costly under the Administration proposal. As a result, the entrepreneurial and investment income they generate on an ongoing basis would be subject to U.S. income tax. Some potential expatriates may adjust their economic activities to avoid the tax imposed under the Administration proposal, but this adjustment may be difficult to make, particularly for individuals who run their own businesses. In the longer term, four or five years after the proposal is enacted, individuals planning to expatriate at that time would have had enough of a warning to prepare properly for expatriation, so growth in revenue attributable to the Administration proposal drops off significantly. As under present law, the effect of the Administration proposal on estate tax receipts was excluded. The Administration proposal also may cause some new and accelerated expatriation. Individuals with high-basis assets but no immediate concern about the U.S. estate tax may expatriate in response to the Administration's proposal. Some of these individuals would accelerate expatriation that would have occurred in any event under present law. Others who would not have expatriated under present law may expatriate because of the Administration proposal. Individuals falling into this latter group include those who would not expatriate under present law because with the passage of time they would find it difficult for various reasons to surrender citizenship or permanent residence, but the Administration proposal stimulates them to take advantage of a high-basis "window" to expatriate at a time that they are relatively unencumbered. Individuals in this category include individuals who have recently inherited wealth or who expect to inherit wealth in the near future and individuals who have recently sold their businesses in a taxable transactions. Individuals who would expatriate in the budget window because of the Administration proposal precipitate two tax effects. These expatriates would be taxed on unrealized capital gain at the time of expatriation. Secondly, U.S. tax base would be eroded by these expatriating individuals because: (1) they would be removing subsequent capital gain they would have realized under present law from the U.S. tax base; (2) they may qualify for reduced U.S. taxation on other income because of a tax treaty; and (3) they would remove themselves from potential U.S. estate tax consequences. In the Joint Committee staff's ten-year estimate of the Administration proposal, these two countervailing effects, the tax on unrealized capital gain and the tax base erosion, largely cancel each other out. In the longer run, stimulated expatriation will reduce the revenue raised by the Administration proposal as the tax base erosion factor outweighs the revenue gain from the tax on capital gain at the time of expatriation. Senate amendment to H.R. 831 The estimate of the revenue effects of the Senate amendment to H.R. 831 is as follows: |