Clinton Seeks to Close Tax Loophole for the Rich : Revenues: Proposed law would prevent the super-wealthy from renouncing citizenship to avoid levies. Officials hope to raise $2.6 billion.

Alarmed by a small but growing exodus of super-rich Americans, the Clinton Administration proposed on Monday to eliminate a loophole that allows wealthy individuals to avoid millions--and sometimes billions--of dollars in taxes by renouncing their U.S. citizenship.

Administration officials said about two dozen millionaires and billionaires each year renounce their citizenship to avoid taxes on the sale of major assets such as corporations they founded or stocks they have held for many years that have sharply appreciated in value and would otherwise be subject to heavy capital gains levies. Closing the loophole, officials said, would raise about $2.4 billion in new tax revenue over five years.

Under the new law, Americans who renounce their citizenship will have to pay taxes on long-held assets immediately, to eliminate any tax advantages of the move.

In addition, the Administration is proposing a separate provision to close another loophole that could allow wealthy Americans who renounce their citizenship to transfer some of their assets to children who still live in the United States at low tax rates through special trust funds.

The White House kept the proposed change, retroactive to Feb. 6 if passed by Congress, a closely guarded secret until Monday to prevent a last-minute surge in the exodus.

Officials said the plan is targeted at the jet-setting rich who try to have it both ways--they renounce their citizenship yet keep their homes and families in the United States.

As long as they do not physically stay in the country more than 183 days a year, these wealthy individuals can claim to be foreign visitors. Treasury officials said Monday that in some cases, individuals could avoid hundreds of millions of dollars in taxes on massive family fortunes by using the loophole.

The Treasury said that in 1994, 858 Americans renounced or abandoned their U.S. citizenship, up from 571 in 1990.

But only a few of the richest would be subject to the proposed law, since an individual’s first $600,000 in unrealized gains would be exempt from the tax change. At that exemption level, such a law would be unlikely to affect anyone who has a net worth of less than $5 million, officials said.

The Administration did not officially identify the handful of individuals who have taken advantage of the loophole in the past year or two. But in background briefings, they pointed reporters to recent press reports about some super-rich people who have renounced their citizenship for tax purposes and said that the reports were accurate.

One person who was singled out was Kenneth Dart--a secretive investor and heir to a $1-billion family fortune from a drinking cup business--who was profiled in the Wall Street Journal last year after he renounced his U.S. citizenship and took up residence in Belize.

Treasury officials also handed out a Forbes magazine article on the trend among the rich to renounce their citizenship that named several billionaires and multimillionaires as well. One was John Dorrance III, a Campbell Soup heir who also has a $1-billion-plus fortune. He has switched his residence to Ireland.

“The aim is to make sure that individuals who amassed great wealth through the opportunities and protections offered by the American system face their tax responsibilities,” the department said in a statement.

Oddly, the problem has developed despite the relatively low U.S. tax rates, compared with most other major industrialized nations. But Treasury officials said citizenship has become a tax issue because the United States is one of the few nations that taxes people based on citizenship, rather than on actual residence.

In most European countries, governments can’t tax an individual unless that person lives in the country. That gives the rich the ability to escape taxes while retaining their passport and citizenship--simply by moving elsewhere.

Tax experts call that the Bjorn Borg clause--after the tennis star of the 1970s who fled Sweden in order to avoid that country’s extraordinary tax rates. That European loophole has been enticing Americans, and some of the super-rich are switching from U.S. to European passports.

Indeed, some rich Americans are now engaging in a double or triple switch--they renounce their U.S. citizenship, take up European citizenship, but live part time in a Caribbean tax haven. Forbes quoted one woman who became a Norwegian citizen in 1994, and then moved from Ft. Lauderdale, Fla., to Nassau in the Bahamas.

Administration officials said Monday that they believe they can win bipartisan support for the measure, and doubt that Republicans will oppose it as a tax hike on the rich.

At the other end of the income scale, the Administration is taking two steps to restrict eligibility for the earned-income tax credit, a program designed to supplement the income of the working poor.

Families with two children are eligible for at least a partial credit until income surpasses $26,673. The cutoff is $9,230 for childless taxpayers.

Beginning in 1996, taxpayers with more than $2,500 in interest and dividend income also will be denied a credit, even if they meet all the other requirements.

Also, only resident foreign nationals authorized to work in the United States and with valid Social Security numbers will be eligible for the credit. Non-resident foreign nationals will be ineligible.

The changes in the earned-income credit program should raise $3.3 billion through 2000.