Justification for taxing #americansabroad based on 150 year old justification dating back to civil war. US time warp! renounceuscitizenship.wordpress.com/2013/01/05/coo…
— U.S. Citizen Abroad (@USCitizenAbroad) January 11, 2013
Excellent paper discussing citizenship-based taxation by Professor Avi-Yonah:
This short but well written paper completely dismantles both the Cook v. Tait rationale (Government benefits the citizen wherever the citizen is) and the Zelinsky rationale (that citizenship is a proxy for domicile). Should be read by all.
The conclusion reads as follows:
Taxation of nonresident citizens is a relic of the past that is ripe for abandonment. Historically, it stems from the outrage felt during the Civil War at draft dodgers. It has been with us ever since, even though we no longer have a draft, and even though no other country in the world (with the possible exception of Eritrea) taxes nonresident citizens. The only way we can maintain the fiction that we actually tax most of our nonresident citizens is by enacting complicated credit and exclusion provisions that are difficult to administer and are frequently ignored in practice. For someone who acquired US citizenship by being born here and has lived almost their entire life overseas, filing tax returns and complying with sections 901 and 911 must be a highly unlikely proposition even if no tax burden would likely result.
If we did not tax nonresident citizens, we could abolish section 911. We could also abolish IRC section 877, which has proven ineffective in deterring tax motivated expatriations, and simply apply the new IRC 877A (the exit tax on expatriation) to individuals abandoning US residency, like most countries do.
Finally, we could give up on the “savings clause” in our tax treaties, which we insist upon to enable us to tax nonresident citizens but which we may well have to pay a price for in treaty negotiations.
None of the traditional arguments for taxing nonresident citizens are persuasive. The benefits provided to nonresident citizens are much weaker than the benefits provided to residents (whether citizens or aliens) and are identical to the benefits provided by other countries that do not tax nonresident citizens. The ability to pay argument fails because we apply ability to pay taxation to resident aliens, thus showing that residence and not citizenship defines the relevant community for applying redistribution. And the administrability argument goes in the opposite direction: Taxation of
nonresident citizens is both unadministrable in many cases and in others imposes heavy transaction costs. Finally, abandoning taxation of nonresident citizens could lead to significant simplification benefits.
The main reason we continue to tax nonresident citizens is history‐ it’s a tradition that is 150 years old, and a significant part of American tax exceptionalism. But just as we joined the rest of the world in adopting corporate/shareholder integration, it is time for us to relinquish this part of our history and update our taxation to fit the globalized world of the 21st century, in which more and more US citizens should be able to move overseas in pursuit of economic opportunity without being incentivized to relinquish their citizenship.