Bad Economics at the BBC

The BBC doesn't seem to understand basic economic theory. That's a shame.

As further evidence I point to this overwrought article penned (electroned?) by Linda Yueh, identified as the BBC's Chief Business Correspondent. She describes Japan's most recent data on aggregate household savings as constituting "another blow" to Prime Minister Abe. Japan's net aggregate household savings turned very slightly negative according to the data.

Ms. Yueh has gotten the story exactly backwards. First it's important to understand that saving is simply deferred consumption. Saving is neither virtuous nor sinful in and of itself. A young adult could easily be quite foolish to try to save instead of borrowing to invest in a university education, for example.

The Japanese Prime Minister's entire economic program is premised on trying to get businesses and consumers to spend more on present consumption. Consequently he'd be rightly pleased that Japanese households have shifted more of their future potential consumption to the present, because that consumption is needed now to pull the Japanese economy out of its doldrums, not 20 years from now. Yueh correctly reports the disappointment in household consumption data (also down), but the shift away from savings is fantastic news, not "another blow."

Moreover, why should old people save so much? That is, Japan has an aging population (as Yueh also points out), and older people really should spend more, now, on themselves, their children and grandchildren, on charities -- anything they like. That's quite reasonable and proper.

There might be some concern that declining net overall household savings could mean a shortage of capital, but that's not at all Japan's problem. Japan has been stuck at the zero lower bound for a couple decades. Investment capital is plentiful and cheap. Yueh's own reporting bears that out since she notes that Japanese corporate balance sheets are strong, i.e. they're sitting on lots of cash.

Anyway, Prime Minister Abe ought to be delighted that Japanese households are finally reducing their hoarding of cash. That particular part of the Japanese economic story is great news. It's too bad the BBC's Chief Business Correspondent didn't grasp that reality.

Boris Johnson: Another Wealthy, Cheap F**k

Boris Johnson, Mayor of London, was born in the United States and is thus a U.S. citizen. As with every country on the planet, citizens are subject to the laws of their state of citizenship no matter where they live. For example, it is illegal under U.S. law (the Foreign Corrupt Practices Act) for U.S. citizens to commit bribery.

Last month Mayor Johnson announced to the world that he was refusing to obey U.S. tax law, specifically that he was refusing to pay U.S. personal income tax on a portion of the net gains on the sale of his home in London. Reader comments posted to the linked article are brutal, and understandably so. They boil down to this central point: it's outrageous that Boris Johnson thinks he's above the law, that he thinks he can enjoy the rights and privileges of U.S. citizenship without also living up to its obligations. And it is outrageous. Johnson has a net worth of approximately $185 million according to press reports. He's one cheap f**k if he's refusing to pay a rather modest capital gains tax. (What is it with rich people nowadays? What, modest taxes and immense wealth that would have made Julius Caesar blush aren't enough?)

Let me explore the basic facts more fully to give readers a fuller idea of just how cheap and outrageous Johnson is.

First of all, Johnson is under no obligation to keep his U.S. citizenship. He could have terminated his U.S. citizenship as early as age 21 (now age 18). When he was 21 years of age it was free of charge to apply for a U.S. Certificate of Loss of Nationality (CLN). Now it costs as much as $2350, though that's just a bottle of mediocre whiskey to Boris Johnson. It does require two visits to a U.S. consulate or embassy, though conveniently there's one in London, the city where Johnson is mayor. Why two visits? In the first visit the consular officer explains the process and ramifications of terminating one's U.S. citizenship, including the fact it's irrevocable, and assesses whether the applicant is legally competent (not drunk, for example) and renouncing voluntarily. Then the applicant is sent home in order to allow time for careful consideration. In the second visit the consular officer verifies that the applicant won't be stateless after loss of U.S. citizenship, re-verifies competence and the voluntary nature of the act, and then completes the process. Then the deed is done. The U.S. government reported that 2,999 individuals in 2013 completed this very process and terminated their U.S. citizenships.

So why has Boris Johnson kept his U.S. citizenship? He's had about 29 years to terminate it, and it's about the same effort as getting a bunion removed but far less painful. I'll offer some more detailed, informed speculation on this question in a moment. Johnson has claimed it's difficult, but no, it really isn't (as many commenters have correctly pointed out). The bottom line, self-evident answer is this: Johnson maintains his U.S. citizenship because he values the rights and privileges associated with his U.S. citizenship. He just wants to complain about one of its obligations.

Let's take a look at that specific obligation. The United States requires its citizens (and its nationals, and its permanent residents) to pay personal income tax in certain circumstances. Approximately 6% of Americans residing outside the United States owe any U.S. income tax whatsoever. That's roughly 400,000 Americans (out of about 7 million), including (this year) Boris Johnson. Under U.S. tax law the United Kingdom gets paid first. However, the U.K. doesn't tax the gains on primary residences (as defined in the U.K. tax code), even if your primary residence is more lavish than Buckingham Palace. So, Johnson's U.K. tax rate on the sale of his primary residence is zero. Had it been something other than zero, the U.S. tax code would have given him full credit for the foreign tax, dollar for dollar.

But it was zero, so now Johnson is subject to the U.S. income tax on the sale of his home. However, the U.S. exempts the first $250,000 ($500,000 if he files a joint tax return with his spouse) of gains on the sale of his home. And, furthermore, those gains are net of costs. If Johnson spent a small fortune renovating his whiskey cabinet in his home, the cost of that renovation would likely be a cost that could be subtracted from his gains. If all that's not enough, the U.S. will also take into full consideration all his other foreign (presumably mostly U.K.) income taxes paid on all other passive income he received. If the U.K. taxed him above U.S. rates on his gains/dividends/interest from his other investments, the U.S. tax code gives him full credit for that differential. The U.S. tax code even lets him carry forward those excess foreign tax credits up to 10 years in the future (and up to one year in the past), to offset possible future (and past) U.S. income taxes on passive income.

Oh, but wait, there's more! The U.S. tax code also grants him an annual personal exemption, standard deduction, and (if he has dependents), further deductions and credits. If the gains on his home exceeded his limit, and if he couldn't offset them with excess foreign tax credits (even from other tax years), then he can fall back to his annual income exclusions/exemptions/deductions. And, if his spouse isn't a U.S. citizen but owned 50% of the home (as is typical), he has the option to file a separate tax return (without his non-citizen spouse, also typical) and thus only be responsible for 50% of the gains. If his non-citizen children owned shares in the home, that would further dilute his U.S. tax obligations. Indeed, any legitimate ownership interest dilutes his taxable share.

No, wait, there's even more! While he owned the home the U.S. tax code provided a generous mortgage interest deduction. At the very least this deduction most likely helped Johnson accumulate ("bank") foreign tax credits in the U.S., even if (as likely) he didn't owe any U.S. income tax. In other words, the U.S. tax code heavily subsidizes home loans. I don't remember Boris Johnson complaining about that.

For the record, the maximum U.S. capital gains tax rate for 2014 is 23.8%, including the Medicare surtax. Johnson owes something less than this percentage on his net gains. How much less depends on his exact circumstances, but it will be less. Unless he did not pay the tax owed on time, in which case he could owe interest and penalties.

And now we turn to more details on why Johnson maintains his U.S. citizenship: because it's probably a really good financial deal for the most important person in the world, Boris Johnson. In particular, an individual with a net worth of $185 million (or thereabouts) obviously has a lot of financial wealth to manage and to attempt to grow in internationally tax-efficient ways. As a U.S. citizen, Johnson enjoys privileged access to Wall Street and other U.S. financial accounts, some with U.S.-U.K. tax treaty protection. Unlike foreigners, he is not subject to mandatory 30% tax withholding on his U.S. financial accounts, and thus he does not have to (in effect) provide an interest-free loan to the IRS until his exact U.S. tax liability (if any) is determined.

Some commenters have speculated that Johnson would be subject to the U.S. exit tax if he renounces U.S. citizenship. It appears not. Johnson is living in his other country of citizenship, a citizenship he has held from birth, and he has not been a U.S. resident for 10 years or more within the past 15 years, thus (it appears) he would legally qualify for a full exit tax exception. For the record, if it applies the U.S. exit tax simply requires a "settling up" on the date of expatriation: mark-to-market of your worldwide assets, then standard U.S. capital gains tax rates applied to the calculated net gains. (Your cost basis is also reset, and typically you can credit your U.S. exit tax to your foreign tax return.) You must have a net worth of at least $2 million, or have paid about $150,000 or more in U.S. income tax for the past 5 years, in order to be considered for the exit tax. You also get a $680,000 exemption. For example, if your net worth is $3 million but the cost basis on that net worth is $2.5 million, when you renounce U.S. citizenship you won't owe a dime in exit tax because the net gain ($500,000) is less than your exemption ($680,000). All that is moot, though, because Johnson appears to qualify for a full exit tax exception.

As mentioned above, Johnson could terminate his U.S. citizenship for the price of $2350 and two visits to the U.S. embassy in London. His termination would not change anything that happened in the past in terms of his tax obligations, understandably, but if U.S. citizenship were such a terrible burden he has an easy, near-immediate out. The fact he hasn't within the past 29 years speaks volumes. In short, he's a cheap f**k.

What happens if Boris Johnson doesn't pay his U.S. taxes? As basic, routine steps the IRS could place tax leins against any assets he holds in the United States. The IRS could also order financial institutions that do business with him in the United States to begin mandatory tax withholding. Meanwhile, interest and penalties will accumulate. If those steps don't result in Johnson's compliance with his tax obligations then the IRS could escalate, asking the U.S. Department of Justice to issue an arrest warrant for criminal tax evasion. An outstanding arrest warrant would effectively bar Johnson from travel to the United States (including transit) and, no doubt on advice of his attorneys, from travel to any country that could conceivably extradite him to the United States for tax evasion. (That's a shorter list of countries than the number of countries with U.S. extradition treaties, but there is a list.) Johnson's tax compliance problems could also conceivably, negatively affect U.S.-U.K. relations, at least unofficially. The IRS could suddenly become somewhat less responsive in returning HMRC's phone calls regarding particular HMRC international tax fraud investigations, for example. So much of international relations relies on mutual trust and adherence to behavioral norms. Johnson is p*ssing where he shouldn't.

All of these hypothetical compliance escalations are just that, hypothetical. My prediction is that Johnson, if he hasn't already, will quietly pay his U.S. tax bill. I do not predict that he will terminate his U.S. citizenship. He's a cheap f**k, and that's why he won't.

Update: Boris paid his U.S. tax bill.