freedom fries

Last September, not for the first time in my life, I walked out of a job. But for the first time in my life, I didn't have follow-on employment. And not only that, for the first time ever I did not have to worry about health insurance.

At around the same time, cruising my favorite American political blogs, I stumbled on several videos of Sarah Palin ranting away at her campaign stops. It made for amusing watching and always gave me a chuckle to hear her decrying Obama's "socialism" and explaining "socialist" countries as places of less "freedom".

At one stop: "...and government kind of moving into the role as the other half of our family, making decisions for us. Now, they do this in other countries where the people are not free." Her audience went along for the ride, bleating its approval.

No worries about what happens if I get sick. That's freedom.

"wha' happening?"

I have gotten a few panicked emails from American friends these last days which give me the impression that somehow the US media is once again disasterizing the wrong situation (while probably ignoring, or at least whitewashing, the real disaster unfolding daily in the Middle East).

What seems to be going on, through the lens of these fear-filled missives, is that American news outlets are reporting some kind of governmental collapse / slash / humanitarian nightmare unfolding in Iceland. (Correct me if I'm wrong.)

In fact what is happening is entirely welcome from the perspective of most Icelanders, and from the perspective of anyone who understands Parliamentary systems of government. (Check that out on Wikipedia, yo.) The governmental coalition of two parties, one of which ran this place into the ground over the last decade, and the other of which tends to wander around issues like Reagan Democrats playing shuffleboard, finally ended their uncomfortable marriage. We had been waiting for this for months, as all confidence in leadership here had evaporated: it was not one but a whole team of Brownies doing "a heckuva job". That coalition collapsed on Monday.

That left the President of Iceland to pick an interim governing coalition, until May, when we'll have new and early elections for Alþingi (Parliament), probably combined with a referendum on joining the EU. The Prez picked the Democrat-shuffleboarders (Samfylkingin), plus the Left-Greens (Vinstri-Græn), a badly named party whose popularity has taken off in the wake of the "October Surprise", leaving out in the cold, for the first time in 18 years, the local equivalent of the Republicans (Sjálfstæðisflokkur).

So it's nothing more than a peaceful transition of political power, in a country where the tradition of representative government was already 1,000 years old in 1930. My worry remains, however, and that is from which corner(s) the true competent leadership will emerge, leadership that can help this country pull itself together and rebuild for a bright future. That part remains to be seen.

open letter

January 25, 2009

President Barack Obama
1600 Pennsylvania Ave NW
Washington DC 20500
United States

Dear President Obama:

First, allow me to congratulate you on your election and on a beautiful inauguration. This is an historic time and I am hopeful for the future. For the first time in my adult life, the United States has chosen a leader who can help the country recognize and confront the serious challenges it faces. Although I have been a supporter of yours ever since your October 2006 appearance on On Point with Tom Ashbrook, my residency here in Iceland ruled out my being on the ground as a campaign volunteer. I am pleased that I could at least contribute financially to your election campaign. It is not an exaggeration to say that once more I feel proud to be an American, and this goes double for an American living abroad. In many ways, we serve as front-line ambassadors of the United States out in the world. We feel on a daily basis and through our personal interactions the attitudes of those around us towards America, and the change of attitude here in Iceland is palpable.

I write to you about an issue of great importance to me and to many of the 7 million American citizens who live and work outside of the United States. As you might know, the United States is one of a very few nations that taxes its citizens on their worldwide income, and is the only industrialized nation to do so. When my Icelandic colleagues move overseas for an education or to live and work (as is quite common here), they pay no income tax to Iceland during their residency abroad, paying that tax only to the country of their residence. The same goes for the citizens of all OECD countries apart from the United States.

America’s collection of taxes on the worldwide income of its citizens, as it has done since the Revenue Act of 1913, might be perpetuated as an attempt to catch “high rollers” but in reality, it has now become a middle-class problem. The Foreign-Earned Income Exclusion (that stood at $85,700 for the 2007 tax year) was originally designed in the 1970s to shelter the majority of Americans abroad from dual taxation, but was only in 2005 indexed to inflation. One author comments: “The FEIE mirrors the flaw [of] the Alternative Minimum Tax: designed to protect all but the very wealthiest tier of expatriates, it now fails to protect the middle class taxpayers and lets them fend with the tax system as if they were all one of those wealthiest few.” (Reference 1)

Even those Americans abroad who know they fall below the FEIE exclusion are obligated to file taxes with the IRS each year. The filing process represents a significant burden in both time and money. Each year, following a weekend spent filing taxes for the Icelandic authorities, I spend the better part of a second weekend preparing my tax information for a tax preparer back in the US. After converting all paychecks, Icelandic income taxes, pension payments, bank interest, and capital gains from local currency into dollars, I mail him spreadsheets full of data. We then go back and forth through several iterations to clarify all of the items. At the end of the process, he mails me a stack of IRS forms and supporting documents running to 35 pages, and a bill for $200. I sign and mail the filing to the IRS, and thank him for not charging me more.

I expend this effort and money each year for the most straightforward of cases: I am unmarried with no kids, one job, and a couple of bank accounts. In the four years I have been filing from Iceland, I have never owed a penny. From my perspective as a middle-income earner, the process is wasteful and unnecessary, not just for me but also for the IRS official on the other end of the manila envelope. The authors of a recent Vanderbilt law paper agree. They state: “U.S. citizens overseas often face a difficult task in meeting their U.S. filing obligation and computing any tax [owed]. The IRS faces a difficult and relatively unrewarding task in seeking to remedy the significant non-compliance that likely occurs.” (Ref 2) Furthermore, the level of IRS service available to us is minimal: “The IRS provides very little in the way of on-site service for U.S. citizens overseas. Currently, the IRS has overseas offices only in London, Paris, and Frankfurt.” (Ref 3)

There are other problems with the taxation of Americans abroad. In its attempt to shoehorn foreign realities into the straightjacket of a Form 1040, the process further penalizes us relative to our families and friends back in the States:

• Pension provisions: In my case, even though Icelandic law binds me to contribute between 4 and 8 percent of my pre-tax income to a personal retirement account, I cannot deduct this amount from my income as can those who contribute to a 401(k) back home.
• Other taxation regimes: There is no allowance for different taxation regimes in this broken system. Here in Iceland we pay 24.5% value-added tax (VAT) on almost everything we buy, representing a significantly higher consumption tax burden than the sales tax of any American state, yet there is no offsetting of these heavy taxes via the IRS forms, resulting in double taxation.
• Asymmetry: Nor is the system symmetrical in that the IRS will not cut me a refund check for any income taxes I pay to Iceland in excess of what I would have paid to the US: “The US taxpayer residing abroad will in no circumstance be able to collect from the US government any foreign tax paid in excess of the amount that would have been paid at home.” (Ref 4) In effect, I have all of the tax obligation of another American, but none of the upside of refunds on excess taxes paid.
• Purchasing power: Finally, the US tax system makes no allowance for differences in purchasing power. With the falling dollar of recent years, an entry-level office job in Iceland in 2007 could easily have converted to a $70,000 gross income, a number very close to the FEIE threshold.

How can we reform this system? I propose to follow the model of our Western-world friends and completely phase out the taxation of Americans living overseas over the next four years. This change would carry great long-term benefits for the United States: eliminating these taxes would encourage more Americans to work for a period overseas, something that is common practice elsewhere in the West, and something that would benefit the image of America abroad. It would also remove what is today a substantial roadblock to American companies posting their own American employees for a tour of duty in their overseas subsidiaries – activity that has fallen especially sharply in recent years in low-income-tax jurisdictions like Hong Kong. In addition, more Americans working for a time abroad would enhance those same Americans’ ability to contribute new ideas and the wisdom of their experience once they returned home.

Now that change is in the air and now that we seem to be taking stock of long-held assumptions, now would be an excellent time to phase out the taxation of the portion of Americans’ income that is earned abroad. The Blum and Singer paper referenced here below offers one proposal for doing just this. I hope that you will consider making this a priority as you look to enhance America’s participation and competitiveness abroad.

Best regards,

Jared Bibler

cc:
Senator Edward M Kennedy
Senator John Kerry
Representative Michael Capuano

Also published as an open letter on: http://icelandreport.blogspot.com/

References:
1. Parmly, American University Washington College of Law, provides an excellent background on the realities of taxation on Americans abroad: http://www.aca.ch/joomla/index.php?option=com_content&task=view&id=212&Itemid=46.
2. Blum and Singer, May 2008, Vanderbilt Journal of Transnational Law, provide one proposal for reform: http://law.vanderbilt.edu/publications/journal-of-transnational-law/download.aspx?id=3142.
3. Ibid.
4. Parmly.

smell phone

Here is a little Friday fun for y'all... I just walked into a public restroom and heard something I had never heard before in my life. There were two stalls in there, in addition to the usual complement of urinals, and in one of the shitters was a guy having a long conversation on his cell phone, apparently while simultaneously taking care of business. I wasn't there when the conversation began so I don't know if he initiated it from the throne, or simply answered an incoming call while in the midst of other activities. Either way, he carried on for a good minute after I arrived. Then he said his goodbyes and came out and washed his hands as though nothing was amiss.

So, in the spirit of better cross-cultural understanding, I pose a survey question to my two biggest readership constituencies. Icelanders: does Jón Jónsson* do this regularly, or was this guy a special case? Americans: have you ever experienced this particular sight/sound/smell combo? Leave your answers in the comments section below, and góða helgi!

*Icelandic equivalent of Joe Sixpack

the thin blue line

This morning at 9:30 I was getting into my car in the Kópavogur wilds and I saw something amazing: a thin little blue streak of light in an otherwise black and rainy sky. It was quite a bit shocking. It didn't seem to belong. It was as if the blackness of space had been rent aside, revealing a bright world beyond, as though someone had pulled back black velvet stage curtains to reveal a painted backdrop in bright neon eggshell blue. It crept up on me, this sneaky blue crack, and when I got out of my car a few minutes later, there it was again looking down on me in downtown Reykavík. From somewhere far beyond, the light is on its way back.

reinhart and rogoff

Two American economists have a new paper out that looks at the aftermath of 21 financial crises around the world, a paper that I alluded to in my last post. (Thanks to John Mauldin and his excellent newsletter for keeping me updated on matters macroeconomic.) Their analysis has a direct bearing on the situation in Iceland today, and in fact Iceland today also stars in the paper as one of the analyzed crises.

What struck me most was the length of time it takes to recover from crises of this nature. Housing prices decline for six years on average, topping out at an average 35% loss in real value. Equity markets fall for three and a half years on average, with a 55% loss in value. Unemployment continues to rise for four years on average, and output (GDP) falls for two years on average.

During the down period, governments take on massive amounts of debt, growing that debt by an average 86% over the pre-crisis level. This is mainly due to big losses in tax revenues as income and consumption taxes fall off with the downturn in economic activity.

Iceland does play a starring role, unfortunately, as the equity markets here have lost more than 90% of their value since the downturn began in 2007. The authors single out Iceland for special mention, as this equity market loss here is the largest in any of the crises they have studied. This is due to the fact that more than 80% of the benchmark equity index was composed of the shares of the banks Kaupþing, Landsbanki, and Glitnir, all of which have been nationalized, rendering their equity shares worthless.

Iceland's loss of between 10 and 20% in real home values puts it on the milder end of the scale, until one reflects that the downturn is relatively young here and also that the housing market has almost completely shut down and so prices are static. Most of that loss in home prices is due to high inflation in the last year eating away at the real value of the properties. My guess is that when homes begin trading again, both oversupply and tight credit will lead to lower nominal prices, dragging the overall loss down further.

This paper is a good, quick read that helps put the Icelandic crisis in perspective and set expectations for how long it might take the country to recover.

39 cents

One thing I find myself struggling to explain to American friends is the effect of the collapse of the Icelandic króna on our buying power and sense of wealth. When I try to explain how it is to be here I hear responses like, "it's bad everywhere." And truly it is, in the sense of collapsing stock markets, falling house prices, and rising unemployment. Iceland has those, too: the stock market has lost 90% if its value in this crisis, according to a recent paper.

But in addition to all of this, our currency has collapsed. That means that on top of the value of assets collapsing, the value of cash itself has collapsed. Money that people had in their wallets or bank accounts is worth a fraction of what it was.

I just ran the numbers for a hypothetical investor who one year ago (1 January 2008) came to Iceland with a single dollar bill. With the dollar bill she buys Icelandic krónur and puts them in a money market fund for safekeeping. On the first of this year, 2009, she withdraws the money and changes it back into dollars. The cashier hands her 39 cents.

That sense of loss is now pervasive here. When we looked into our wallets or our savings accounts a year ago, we saw dollars and euros, or the foreign travel or foreign goods they could buy. Now we see a handful of coins.

hidden man walking

I just got back from a half-hour solo walk in the pitch blackness of late afternoon on the first of January. We are out in the country and I walked along some dirt roads here, trying not to use the flashlight. There was a little light reflected off the rain clouds from a town some ten kilometers away, and that was about enough to see the path along the road. Around me, trees and rocks loomed, and off in the distance the ghostly expanse of a giant broad snow-covered mountain. There was no sound but light raindrops on my jacket and my feet crunching on the gravel of the road. Then, however, on the way back, things got steadily eerier. It sounded as if someone was walking off over to my left, just off the road. Then he was on the other side of me, walking along, and then just behind me. But every time I stopped to listen, he stopped too.

Legend has it that for New Year's Eve a lot of hidden people come out for their own celebrations. I think I might have brushed into my doppleganger among the huldufólk, on his way back from his own festivities, walking alongside me in the vast and damp quiet of an Icelandic January night.