Thanks very much to “Abused Expat” for finding an summarizing this article:
Legal scholar agreestaxation of US citizens abroad not justifiable on basis that #americansabroad receive benefits renounceuscitizenship.wordpress.com/2013/01/05/coo…
— U.S. Citizen Abroad (@USCitizenAbroad) January 10, 2013
— U.S. Citizen Abroad (@USCitizenAbroad) January 10, 2013
Do you think that “citizenship” and “domicile” are the same thing? Do you think that “citizenship” is such an easy issue that it justifies “citizenship-based taxation”?
What follows is the comment of Abused Expat here.
As a follow up to this excellent post, it is worth reading the article by Edward A. Zelinsky, University of Iowa Law Review, 2010
“Citizenship and Worldwide Taxation: Citizenship as an Administrable Proxy for Domicile”
The author’s Bio (seems to be an insider in policy making circles):
In his article, Zelinsky argues in favor of citizenship-based taxation because it is convenient for the state to administer and that the concepts of “citizenship” and “domicile” are close enough to be used interchangeably in order to justify it. Therefore, there is no significant difference between citizenship-based taxation and residency/domicile-based taxation (IMHO, a fallacy). Zelinsky makes his argument in this way because according to him, it is clear among scholars that Cook vs. Tait’s underlying “presumption that government by its very nature benefits the citizen and his property wherever found,”no longer holds water!
It doesn’t take a rocket scientist (or Law Professor) to figure out that ex-pats don’t use the Homeland’s highways, bridges, dams, power grid, fire, police, courts, hospitals, schools, Medicare, Medicaid, unemployment insurance, food stamps, etc. because they are not physically present to use them. So why should they be required to pay for such things?
Page 1289 of Zelinsky’s article states:
“ABSTRACT: The United States’ worldwide taxation of its citizens is less different from international, residence-based norms than is widely believed and is sensible as a matter of tax policy. An individual’s citizenship is an administrable, if sometimes overly broad, proxy for his domicile, his permanent home. Both citizenship and domicile measure an individual’s permanent allegiance rather than his immediate physical presence. Because citizenship and domicile resemble each other, and because other nations often define residence for tax purposes as domicile, the U.S. system of citizenship-based taxation typically reaches the same results as the residence based systems of these other nations, but reaches these results more efficiently by avoiding factually complex inquiries about domicile.
In contrast, the traditional justification of U.S. citizenship-based taxation, the putative benefits of such citizenship, is not persuasive. In this context, three models of U.S. citizenship are relevant, namely, the minimalist model, the psychological model, and the Tiebout / purchase model. None of these models justifies the worldwide taxation of U.S. citizens on a benefits basis. Rather, such taxation is persuasive because of administrative considerations, i.e., the close resemblance of domicile and citizenship that makes the latter an administrable proxy for the former.”
Pages 1308-1312 go into detail about Cook vs. Tait and the three models of citizenship benefits, none of which, the author acknowledges, justifies citizenship-based taxation. In short, the author almost casually shoots down Cook vs. Tait’s underlying “presumption that government by its very nature benefits the citizen and his property wherever found.”
Page 1314 states:
“Governmentally furnished benefits are a traditional consideration for tax policy and, as we have seen, is the rationale of Cook. However, upon examination, the benefits rationale for citizenship-based taxation proves unpersuasive, both in theory and in practice. The most significant civil and social benefits extended by the U.S. polity are tied to U.S. residence, not to U.S. citizenship.”
Page 1320 states:
“However meritorious these arguments for the Code’s current rules may (or may not) be, the net result of those rules is a pattern of differential taxation of nonresident citizens, which in practice undermines the argument for worldwide taxation of U.S. citizens on the basis of the putative benefits of citizenship.”
“In the final analysis, the benefits rationale for citizenship-based taxation is unpersuasive. That rationale has been part of our constitutional tradition since Cook. However, it does not survive scrutiny in light of the minimal legal benefits associated with U.S. citizenship; the absence of a convincing link between the psychological utility of citizenship and worldwide taxation; the lack of mobility among nations [thanks to the Exit Tax], which precludes active shopping among alternative citizenships; and the divergent tax prices the Code currently assesses different citizens for the same benefits of citizenship.”
Page 1321 states:
“…a nonresident U.S. citizen receives the bulk of her social and civil rights from the nation in which she resides, not from the United States.”
From the conclusion on page 1348, the author reinforces that the argument of “presumption” in Cook vs. Tait fails to hold water:
“The received wisdom about federal taxes and U.S. citizenship—the benefits of U.S. citizenship justify worldwide taxation of such citizen’s income and assets—is unpersuasive. The legal rights associated with U.S. citizenship are minimal. The psychological benefits of U.S. citizenship are significant for most of us, but, as a logical matter, do not justify the worldwide taxation of nonresident U.S. citizens. In theory, the Tiebout model justifies the worldwide taxation of U.S. citizens under a love-it-or-leave-it theory: Any U.S. citizen who finds the tax cost of U.S. citizenship inordinate can expatriate. In practice, however, U.S. citizens typically lack the mobility between nations necessary to make expatriation a practical alternative [Exit Tax is barrier to mobility]. Moreover, the Code taxes different U.S. citizens differently for the same benefits of U.S. citizenship.”
“While the traditional benefits rationale for the worldwide taxation of U.S. citizens is not compelling, such taxation can be justified in terms of administrability. An individual’s U.S. citizenship is an bjective, enforceable proxy for his U.S. domicile.” [The only argument that can be made is that citizenship-based taxation is convenient for the State—but is it convenient for Expats? But they don’t matter because they have no representation in Congress anyway]
“Both the benefits and ability-to-pay justifications for taxation point to worldwide taxation by the nation in which an individual resides. The country in which an individual lives provides his basic social and civil rights. Moreover, the nation of residence is typically best positioned to aggregate and assess an individual’s worldwide income and assets and to enforce its tax laws against him.”
“However, residence is typically a fact-intensive inquiry, often manipulable by the taxpayer, frequently difficult for the tax collector to enforce. When residence is defined as domicile, citizenship serves as an administrable marker for such domicile, since both citizenship and domicile focus upon permanent political allegiance rather than immediate physical presence. From this vantage, U.S. citizenship-based taxation resembles other nations’ residence-based taxation when those other nations define residence as domicile, and the U.S. system of citizenship-based worldwide taxation is not the outlier it is often thought to be. [This argument is very weak. It does not define domicile, which in the simplest of terms would be “the center of a person’s life.”] Moreover, such global citizenship-based taxation reaches similar results more efficiently by obviating the need for factually intensive inquiries into domiciliary residence.”
“For many reasons, a legal rule may persist after its initial rationale has ceased to be compelling. One good reason for the persistence of an old rule is that it serves a new, if as yet unrecognized, function. The United States’ traditional policy of taxing its citizens on their worldwide incomes and assets is such a rule. The traditional benefits rationale for citizenship-based taxation has ceased to be compelling. [Cook vs. Tait appears ripe for challenge] However, by serving as an administrable proxy for an individual’s domicile, citizenship-based taxation makes sense in the twenty-first century.” [An argument only a totalitarian State could uphold]
Although Zelinsky argues in favor of citizenship-based taxation, his article is well worth reading because it confirms how weak the argument for citizenship-based taxation really is.
Therefore, one cannot help but conclude that Cook vs. Tait is really vulnerable if challenged, particularly when one adds to the equation the liabilities/dangers of having US citizenship (complicated reporting, draconian fines, double taxation, exit tax trap etc) presently being experienced by ex-pats.
One question though, is Cook vs. Tait the only thing propping up citizenship-based taxation? Is there something else such as JFK signing a law about taxing ex-pats?