In lieu of original content, here is an excerpt from Angelo Nikolakakis’ “Civil Law and Common Law Perspectives: A View from the Left”, in Guglielmo Maisto, Residence of individuals under tax treaties and European Community law (IBFD, 2010). Beginning at page 81 (footnotes omitted):
Generally, non-residents are either not entitled or not in a practical position to enjoy the same public benefits as residents. Why then should they bear similar — or more onerous — income tax burdens as residents (all the while focusing the question on domestic sources), putting aside source-country opportunism? Presumably, in the current state of international fiscal affairs and relations, many non-residents enjoy public benefits, and in principle are liable to bear the burdens of tax liability, in other countries — namely their countries of residence. If source countries occupy the entire tax base on a particular item (say, by taxing non-residents at a high rate such as 50%), then the revenue-raising capacities of residence countries that provide foreign tax credit relief will be compromised considerably. In extreme cases, we would observe the source countries gaining all tax revenues from the relevant sources and the residence countries bearing a disproportionate share of the burdens of providing public or social benefits but without the corresponding revenues. Arguably this is an unsustainable state of international fiscal relations, except between countries where the imbalances are reciprocal and offsetting, at least over some reasonable period of time, such that the “two wrongs make a right”
It is submitted that it would be more appropriate to try to get it right in the first place, by trying to ensure as much as practically possible that residents and non-residents are taxed in a manner that is commensurate with their enjoyment of public or social benefits. There is a practical element to this proposition (as reflected in the example above involving the extreme case), but also a more normative element. It is submitted that the residence determination should be approached as a proxy for a membership determination — who are the members of the relevant community or civilized society? In principle, it must be the members of a community that bear the costs and other burdens of the benefits of that membership, based on reasonable cost-sharing and distribution agreements. Moreover, in most cases it is the factual residents who are effectively in a position to, and do in fact, benefit from the relevant public goods and services, such that it is both practical and appropriate as a normative matter to expect membership to be determined along those lines.
What Nikolakakis refers to above as a “source country” is not one’s country of citizenship, but rather the country where an item of income arises — such as interest on a bond or a dividend on a stock. His argument elides the fact that the source country itself incurs costs in that equation, at minimum by providing the legal system that allows the paying company to exist in the first place. However, his underlying principle is one with which it is difficult to disagree: the payment of tax should have some relationship to the enjoyment of benefit from that tax. He goes on to make an interesting point about the ethical dimensions of this principle:
In some societies, this inevitable practical state of affairs is supported and regulated by appeals to notions such as the duty of solidarity reflected in Art. 53 of the Italian Constitution, and it is perhaps at that level that one might observe the greatest degree of trend as between civil law and common law countries, with the former tending to focus, in their public and legal rhetoric, more on a person’s duty of solidarity (and similar concepttions) and the latter tending to focus more on a person’s individual rights. On the other hand, there is the curious case of the United States, characterized by strong rhetorical appears to the individual rights to “life, liberty and the pursuit of happiness”, while being one of the few countries that conditions its fiscal regime on citizenship, and even on the renunciation of citizenship. Arguably, to tax former citizens as citizens is to assert waht may be described as an irrevocable duty of solidarity. It is to say: “You are and will remain a member of this society whether or not you like it”. This does not sound very consistent with the notion of liberty. Individuals should be free to terminate their membership in a particular society, both physically and fiscally, but while they remain within that membership, they must be cognisant of their duties.
Whether one approaches the questions surrounding the detemrination of an individual’s residence from a civil law or common law perspective — or from a left-wing or right-wing perspective — the fact of the matter is that somebody has to pay for the public goods and services provided by each civilized society. These costs must be shared on some reasonable basis and it is submitted that it is as appropriate between societies as it is within them for these costs to be distributed between categories of persons as a function of benefits enjoyed. Thus, it seems appropriate to determine membership using the proxy of personal physical presence and quite inappropriate to depart too far from that standard. Further, charges on non-members should be commensurate with their lesser enjoyment of public benefits and the recognition that they have duties to their own communities. Ultimately, the fiscal residence determination is not just about taxation; it is about membership in civilized society.
On the whole, Nikolakakis’ argument resembles what Isaac Brock Society participants have long pointed out: every dollar that the IRS manages to steal or intimidate out of us is a dollar that is not circulated in the economy of the places where we actually live, and thus results in a direct decrease in tax revenue to our governments. At the margins, this drain may indeed result in our governments having to spend even more money on us in the form of social assistance. Effectively, the IRS is demanding that the countries we live in subsidise the U.S. budget — and what boggles the mind is that country after country is signing up for this raw deal, thinking only of the alleged fat-cat tax evaders in their own countries whom they could catch through information exchange, and completely overlooking the corresponding drain out of their own economies when they agree to aid the U.S. in imposing citizenship-based taxation.
Here on this blog of ours we have two hundred participants, who no doubt bring with them 200 (or more) different political perspectives. Regardless, I’m sure we’re all aware that homelanders generally stereotype outlanders who complain about paying U.S. taxes as heartless right-wing fat-cats; they picture us whining about our tax dollars funding “welfare programs for the undeserving” while we sip champagne on our private jets and head to our vacation homes in the Caribbean. Indeed, it’s on this basis that U.S. politicians (and increasingly, French politicians too) argue for the taxation of outlanders. So it is interesting to see a cogent left-wing argument against the U.S.’ unique practise of global citizenship-based taxation.