Liberty and justice for all United States persons abroad

The Isaac Brock Society

Posted on by Posted in Issues regarding US persons abroad 15 Comments

Excellent paper discussing citizenship-based taxation by Professor Avi-Yonah:

The Case Against Taxing Citizens:

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.

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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.

 

15 thoughts on “Cook v. Tait 4: Taxation of #americansabroad based on US culture 150 years ago! Time warp or what!”

  1. USCitAbroad,

    A very interesting read, particularly because Prof. Yonah took on both Zelinsky and Kirsch, who was mentioned by Zelinsky, but I have not yet read anything by him. 

    This is a great thread and really gets to the root cause of the nightmare ex-pats are caught up in.

    Lets keep the discussion going. 

  2. When the US first created an income tax in 1861, it was 3% on worldwide income of residents, and 5% on US income of nonresident citizens. So nonresident citizens had a higher tax rate, but the tax only applied to US income. In 1864, nonresident citizens started being taxed the same way as residents, on worldwide income and with the same rates. In 1866, nonresident foreigners started being taxed, on US income only. Later, the US income tax was deemed unconstitutional and returned after the 16th amendment, but the system of taxation based on both citizenship and residence never changed again.

    Some people say that taxation based on citizenship is an anachronism given today’s globalized world. I go farther and say that it was never justified, because people have always moved between countries, even in ancient times. Already in 1923, a team of experts wrote a report to the League of Nations about this subject:

    The question thus arises: Where shall a man be taxed? Whatever principle we lay down, it is plain that, if every state or every tax authority followed the same principle, it would be easy to avoid double taxation. The complications arise from the fact that one state follows one principle, and that another state follows an opposite or conflicting principle. Let us discuss the different principles that have actually been employed.

    The oldest principle is that of citizenship or political allegiance. Originally only the citizen of the state or the burgess of the town had any obligation to the government under which he lived. But it soon happened that commercial relations developed, until in modern times the actual population of any state or community is by no means limited to citizens. To tax only the citizen and to exempt the stranger, whether the stranger be from another state or only from another city, would plainly be inadmissible. Political allegiance in thin sense is nowhere today made the basis of taxation. Yet when political allegiance involves a positive rather than a negative attitude, it is still followed, at all events in international relations. While the stranger is not exempted, the citizen living abroad is frequently held responsible to his country. Political fealty cannot be so easily abandoned; political rights involve political duties. Among them is certainly the duty to pay taxes.

    In modern times, however, the force of political allegiance has been considerably weakened. The political ties of a nonresident to the mother country may often be merely nominal. His life may be spent abroad and his real interests may be indissolubly bound up with his new home, while his loyalty to the old country may have almost completely disappeared. In many cases, indeed, the new home will also become the place of a new political allegiance. But it is well known that in some countries the political bond cannot be dissolved even by permanent emigration; while it frequently happens that the immigrant has no desire to ally himself politically with what is socially and commercially his real home. In the modern age of the international migration of persons as well as of capital, political allegiance no longer forms an adequate test of individual fiscal obligation. It is fast breaking down in practice, and it is clearly insufficient in theory.

  3. The paper, “The Case against Taxing Citizens”, written by Prof. Avi-Yonah is easy to read and only 13 pages long. I’d love to print it, roll it up and whack US legislators on the noggins with it. Thanks for giving this important missive a separate posting. I think it would be a good arrow for Shadow Raider to include in his quiver.

  5. @AbusedExpat

    YOU have been a major motivator for this series of posts – a personal thanks to you and please keep up your great work – perhaps locating the Kirsch paper

  6. Pingback: The Isaac Brock Society - Cook v. Tait 5: Citizenship-based taxation was NEVER justied

  7. re this portion of the quote from Professor Avi-Jonah above: ….”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.”… from The Case Against Taxing Citizens

    In Canada and perhaps Mexico, significant numbers will be the ‘border babies’ and ‘accidentals’. And then there is the huge category of those born to a US parent/s abroad, and those who may have been born in the US, but emigrated as minors and babes in arms – with the rest of their family decades ago. In these cases, (which it seems most articles do not address) there was no ‘abandonment’ of US residency. The persons in question were minors who could not form any intent, make a recognized choice, or implement any decision to ‘abandon’ US residency.

    There should never be an ‘exit tax’ applied in those cases since they did not ‘abandon’ US residency and are not recognized in US law as having the capacity to make a choice regarding citizenship and are not independent agents who can implement any such choice.

    They should not even have to prove 5 years compliance with US tax obligations. This should also apply to those who have been deemed incompetent to renounce or relinquish. If you cannot form the intent to renounce due to an insufficient capacity to understand the concept and consequences of citizenship, then you cannot form the intent to ‘abandon’ US residency, or understand (or comply with) the concept or obligations of US taxation.

  8. Citizenship-based taxation is evil and must be brought to an end. Cook vs. Tait is very weak and needs to be attacked. I am presently reading the Kirsch paper and will comment on it when I finish. 

    Thank you USCitAbroad, Shadow Raider and everyone else who is participating in this series of posts. The arguments found within these academic papers (published by top universities) are what ACA, Shadow Raider and others need when dealing with members of Congress.

    The papers show that expats are not just a bunch of “whiners.” To the contrary, they have been stoically sucking up the abuse for years. But the recent Intolerable Acts like FATCA, FuBAR, Exit Tax and others have pushed expats over the edge. 

    Citizenship renunciations will continue to rise. For many, it has now become a matter of survival. 

  9. President Lincoln freed the slaves living inside the US, and at the same time established the precedent for enslaving Americans living outside the US. 

    So what started out as a punishment continues to be a punishment. 

     

  10. Reading the historical context of the US’s citizenship-based taxation tells me that this is cultural. And something that is part of the culture [usually] doesn’t die off or change easily.

  11. Taxation as retribution.  Hmmm.  Seems to me that that this fits under the rubric of cruel and unusual punishment.  Also, as a bill of attainder.  Mind you the main constitutional argument against taxation of expats is “taxation without representation”–the casus belli for the bloody revolution which resulted in the founding of the independent republic.

    But shall we focus on cruel and unusual punishment:  If it is not cruel what is happening to expats (I argue that it is), it is certainly unusual.  In other words, if no other country in the world exercises taxation of expats as a means of punishing those who leave their country, then it is an unusual punishment to say the least.  Of course there are other examples of penalizing expats: East Germany was said to kidnap its expats living in West Germany.  It is a bill of attainder because it seeks to legislate punishment against a certain person or classes of persons.

    Most successful empires reward their expats with land or tax exemptions not available to other colonial subjects (think of the early Roman Empire–not the late Roman empire–there is a reason it finally fell).  The United States’ hegemony will indeed be short-lived as a result of its punishment of her expats.  Causing your most loyal devotees to despise you is the beginning of the end for most empires that collapse.  The Romans tried to use their elite citizens to tax the colonial subjects, then said to them if they could not extract enough taxes from them, then they had to come up with the money themselves.  This caused them to join with the barbarians to unite against the Empire (see podcast by Joseph R. Peden, “Inflation and the Fall of the Roman Empire”).

    The United States is run by boobs, dimwits, nincompoops, dull bulbs, math dunces, men and women who starved their brains by eating cheerios for breakfast as children (see the documentary, “Fathead”) following the Department of Agriculture’s nutritional guidelines, morons, and demagogues.  Can you say, “cutting your nose off to spite your face”?  Do they really think that taxing and thus punishing expats is the way to solve the countries problems?  Do they really think that punishing expats is the way to build an exceptional and strong America?  Well, yes, they do.  Obama has said it.  FACTA says it.

  14. Pingback: Cook v. Tait 14: It’s NOT “citizenship-based taxation”, It’s “extraterritorial taxation” | U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club

  15. Pingback: Time is the ally of leaders who placed the defence of principle ahead of the pursuit of popularity | Alliance for the Defence of Canadian Sovereignty

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