I am a US citizen who took a 3-year postdoctoral fellowship at a Canadian university, so I experienced the character of international taxes first hand.
One of the first things that you learn in such a situation is that international people are completely screwed by the US and Canadian tax codes and the tax treaty. People who say otherwise are simply part of the 99% of the people who have never tried to prepare an international tax return.
Here are a number of ways in which the US government is unfair to international people:
1) Although I had only 4 types of income (canadian salary, capital gains on US stocks, dividends on US stocks, and royalties from a mineral interest), I could not find an international tax accountant willing to do my taxes for less than $2K/year. Furthermore, for $2K/year I could find no accountant who could CORRECTLY fill out a US tax return, so I was stuck trying to decipher the US-Canada tax treaty myself. This wasted at least a month of my time. (The time could have been drastically reduced if the IRS and CRA would get together and publish a modest number of examples of correctly filed mock tax returns.)
2) The current system for alleviating double taxation is to allow a foreign tax credit in one country for taxes paid in the other country. This assures that the tax rate you pay is the MAXIMUM of the rates in both countries. However,
Oakley Frogskins, this MORE COSTLY than paying the maximum of a full US return and a full Canadian return, because the maximum rate is the MAXIMUM IN EACH CATEGORY. Note that typically max(a,b) + max(c,d) max(a+c, b+d).
3) The individual states of the US don’t all recognize the US-Canada tax treaty. For example, if I move to California then they’ll tax me annually on any earnings accruing inside my tax-deferred Canadian retirement account, the equivalent of an IRA in the US.
4) The tax treaty protects US citizens from Canadian taxation inside their IRA’s unless they don’t realize that they must fill out the right paperwork to tell Canada that they don’t actually want to pay tax on their IRA. IF YOU ARE A SINGLE DAY LATE filing this Kofkaesk treaty election then you are out of luck, and Canada will tax your IRA until you leave.
5) The tax codes differ on definitions of things. For example, a US company XYZ may spin off a subsidiary ABC, so that the shareholders of XYZ receive some shares of ABC. In the USA this is a tax-free event, but if you’re a US citizen in Canada you may be taxed as if you received a dividend, which is taxed twice as harshly as a Capital gain. (If the Company is Canadian then it will generally structure the transaction in archane ways to for favorable treatment under the Canadian tax code, but a US company’s accountants don’t always understand the the particular hoops they have to jump through to satisfy Canadian regulations.)
6) Canada imposes an exit tax when you leave the country, so that you can be taxed on a capital gain when you haven’t even sold any stock. To make matters worse, Canada considers the basis of the stock to be the market price when you entered Canada, not the purchase price. So you can get taxed on a “gain” when you have actually lost money. The tax treaty allows you to also consider the stock to be sold for US purposes if Canada is imposing a positive tax, but this doesn’t alleviate double taxation in many circumstances, and it wrecks your tax planning if the stocks accrued before entering Canada.
President Obama should stop acting like companies who are already taxed overseas on their income should also be taxed in the US on the foreign income. And he should certainly stop acting like the US is at all fair to internationals.
Furthermore, President Obama should stop treating corporations like individuals. It’s really an accounting fiction to say that companies pay tax. In the end it is real people that pay tax. Taxing corporations is simply a way to keep the electorate from noticing the full cost of US taxes.