American Views Abroad

 
Hyperinflation

Today, for the first time in a modern context, I read the H word. It was this article: US Heads for Recession as Foreign Investors Rush for the Exit from US Dollar Holdings. Germany has its own history of hyperinflation during the Weimar Republic days. And my (German) grandmother had her own stories to tell of those times, e.g. thieves steeling a wheelbarrow filled with money, but leaving the money. She was lucky because she worked for a British-owned insurance company which paid the employees in Pound Sterling.

It would be bad enough to watch from overseas a catastrophe like hyperinflation occurring in one's own country. But a process like this also has repercussions for American citizens living abroad. Foreign income over a certain exemption is taxable. Up to now this has been a problem of the well-to-do. Middle class Americans working overseas earn below the standard exemption and do not have to pay any taxes to the IRS.

To compute the taxable amount of foreign wages, the amount earned must be converted to dollars, and the exemption subtracted. The amount that is left is taxed at the going rate. If the dollar devalues, a person in Germany living on Hartz IV (the German welfare) would be a millionaire in American dollars, and taxed as such, although the actual income was barely enough to scrape by on. I was a millionaire once, in 1988, when I visited former Yugoslavia. I still have a few thousand Yugoslavian Dinars from those days. The currency was in a state of constant devaluation at that time. For my return trip I had reserved a bed on the night train back to Germany, but when I showed up, the bed was taken. I sent the reservation back to friends who received a refund, which was just enough to buy a coke.

The only option an American abroad has to avoid the double taxation is to renounce citizenship. It is hard for me to imagine that stateside politicians will be very concerned about Americans abroad, but that rather this group will be seen as a lucrative source of hard currency. Of course the worse the inflation is, the less real money would be owed. But the situation of taxation of a stable currency converted to a currency in free fall is completely undefined.
- posted by Fred @ 7:26 AM