U.S. should scale back tax imperialism

(breakingviews.com) -- President Barack Obama wants the world to forget about his predecessor's unilateral approach in international affairs. But imperialistic U.S. tendencies haven't slowed in at least one important area: taxation.

The U.S. is already unusual in taxing its citizens on their worldwide income, even if they live or work elsewhere. Tax treaties and complex rules help reduce the cash burden -- the same income is not supposed to be taxed in two countries -- but compliance is often a nightmare.

Now the government is trying to increase tax revenue from its globe-trotting citizenry. Recent proposals would tax more instruments, including equity swaps. The U.S. government is also trying hard to get more from U.S.-based global companies -- while Japan and the U.K. are going in the opposite direction.

The U.S. is asking foreigners to help chase tax dodgers. It is expanding the reach of the "qualified intermediary" system, which enlists foreign financial institutions to make sure Americans report all their income to the Internal Revenue Service.

In the face of all this pressure, some Americans abroad might want to shake off the taxman by surrendering their U.S. citizenship. But a relatively new exit tax can be costly for high earners, and doesn't even provide a full escape. Some assets and subsequent gifts can still be taxed. Not even dying far from home is enough to outrun the long arm of the IRS. Overseas inheritors of U.S. securities can be hit with inheritance tax.

The U.S. claims the moral high ground on taxes. But to some foreigners, the combination of a crusade against foreign tax havens and the insistence that overseas companies help with American tax collection shows "breathtaking moral duplicity". Those were the words used by Wegelin & Co., a Swiss private bank, as it bid adieu to its U.S. customers.

Not everyone would go that far. But Julius Baer, another Swiss bank, said it can live without U.S. clients and the UK's Lloyds has started ditching some of its American customers. Brazil has included the U.S. states of Delaware and Wyoming as tax havens, because of their low costs and even lower disclosure requirements. Luxembourg's prime minister has joined in, calling for the two to be put on the OECD tax blacklist.

As yet, these are isolated complaints. But if Obama keeps on his tax crusade -- without attacking domestic abuses -- he could face a damaging global backlash.