We've spotted the surge.

Photographer: Ulrich Baumgarten/getty images

Americans Are Not Abandoning the U.S.

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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Americans are renouncing their citizenship in record numbers!

Or so we’ve been told. Lots of partisan reasons have been cited for this, including the silly implication that some Americans are trying to flee from a black, Muslim, Kenyan-born U.S. president. But the truth is these sensationalistic headlines reflect the sort of misleading math and misuse of statistics that I constantly rail against.

Let’s look at the claim to see if a little context and some data can help explain this purported exodus.

First, like all good misleading political tropes, it starts with a kernel of truth. In recent years, more Americans have voluntarily given up their passports than the year before. The regular spasm of news about Americans fleeing the U.S. is courtesy of the Federal Register’s Quarterly Publication of Individuals, Who Have Chosen to Expatriate.

The reason for the increase isn’t because of who now is or might become president, but something much more mundane: Annoying paperwork. The U.S. is one of only two countries in the world -- the other is tiny Eritrea -- that taxes people based on citizenship, rather than residency. This means overseas Americans must file two tax returns -- one to their nation of residence, and one to the U.S.

This is due to the Foreign Account Tax Compliance Act (FATCA), 2010 legislation that was created to detect, discourage and penalize offshore tax evasion by U.S. citizens, including those living abroad. The Washington Post reports that “The law requires foreign banks to report whether their clients are U.S. citizens. The penalty for not complying is stiff: a 30 percent withholding from the proceeds of the bank’s financial transactions in the United States. That has caused plenty of consternation among foreign firms, some of which have reportedly closed accounts belonging to Americans as a result.”

The BBC notes that as a result, “ordinary Americans abroad are being denied access to basic banking facilities; banks would rather refuse US citizens’ custom than run the risk of hefty penalties.”

Not surprisingly, this has caused problems for Americans living overseas. Expats are have had bank accounts closed, been denied credit cards and had difficulty obtaining mortgages to buy property. Then there are the complications of overseas tax filings, which often require professional and expensive assistance.

Now for the context: According to the U.S. State Department, about 8.7 million Americans live abroad. Many work for U.S. companies with operations overseas. Others are employed by foreign companies, while others are studying or working for non-governmental organizations.

A certain percentage of those Americans find their significant other during this period and stay overseas. Or maybe they just like living in Paris. Who wouldn’t? It suddenly becomes apparent that the U.S. expat is unlikely to return anytime soon. For some of them, dropping U.S. citizenship is a matter of practicality, nothing else.

With 8.7 million Americans living abroad, how often does this occur? No doubt, often enough. But do the math: A few thousand out of many millions is a statistical blip.

This kind of “denominator blindness” is a common failing of the reports that Americans are racing to escape from President Barack Obama or the prospect that Donald Trump will be the next president. To show how much this has been blown out of proportion, do an internet search for the phrase “Americans give up citizenship in record numbers.” It returns 39 million results in less than a second.

Some in the news media are guilty of making this into a much bigger issue than it is, again due to the way they present the numbers. Yes, it is technically accurate to say, as Forbes recently did, that “Americans renouncing U.S. citizenship has gone up, up 560% from its Bush administration high.” Yet, consider the longer term: Between 1962 and 2012, the numbers of American renouncing their citizenship typically ranged between 500 and 1,500 a year. The increases began after FATCA went into effect.

Let’s look closer at the actual numbers: 4,279 Americans gave up their citizenship in 2015 versus about 1,000 before the FATCA was adopted. That might seem like a big increase in raw numbers. However, note the actual percentages: Before the law, 0.011 percent of all Americans living overseas gave up their citizenship. That’s gone all the way up to 0.049 percent. Just as an aside: I am not adjusting for U.S. population growth from about 190 million 1960 to 320 million today.

Each year, an infinitesimal percent of all American expats renounce their citizenship. The percentage is even smaller in the context of the total U.S. population.

So don’t be fooled by changes in numerators that seem large. You need to consider the denominators to understand what’s going on.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net