This post appeared on the RenounceUScitizenship blog.

Should #americansabroad be taxed according to the same rules as homelanders? renounceuscitizenship.wordpress.com/2013/01/06/law…

— U.S. Citizen Abroad (@USCitizenAbroad) January 11, 2013

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I recently saw the movie Les Miserables which is based on the great French historical novel. As it is described in Wikipedia:

The story begins in 1815 in Digne, as the peasant Jean Valjean, just released from 19 years’ imprisonment in the galleys—five for stealing bread for his starving sister and her family and fourteen more for numerous escape attempts—is turned away by innkeepers because his yellow passport marks him as a former convict. He sleeps on the street, angry and bitter.

Can you imagine? Five years of imprisonment for stealing bread. The only punishment comparable in its insanity would be an FBAR penalty. Well, they say that France and the U.S. have a lot in common. What the French government of the day regarded as “equality under the law”, the poor in France regarded as oppression and unfairness. Equality is a very difficult concept to define. I think I recognize inequality when I see it. But, I don’t know of any successful attempt at defining it.

Two ships: Each called “The Good Ship Equality” – Passing in the night

Ship 1: The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.Anatole France, The Red Lily, 1894, chapter 7
French novelist (1844 – 1924)

Methodology: Apply exactly the same rules to everybody without regard to the outcome.

Clearly the definition of the “ruling class in 19th century France.

Clearly the view of Former IRS Commissioner Douglas Shulman reflected in treating U.S. citizens abroad with “offshore bank accounts” the same as “homelanders with “offshore bank accounts”. This would result in “equality” in so far as each and every person would have to report bank accounts outside the United States.

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Ship 2:  “The true interests of equality may require differentiation in treatment”

Canadian Chief Justice Brian Dickson – Big M Drug Mart – Early 1980s

Methodology: Devise rules in a way that the application of those rules will result in equal treatment with respect to the purpose of the law.

Clearly the view of McGill Professor Allison Christians and American Citizens Abroad in proposing a “same country exemption” for FBARs and Form 8938s. This would result in “equality” in so far as there would be no FBAR requirement with regard to bank accounts in your country of residence.

Assuming The Taxation of U.S. citizens abroad: Should they be taxed according to the same rules as homelanders?

I recently wrote two posts on Cook v. Tait and citizenship-based taxation. These posts focused on the the constitutional rationale for leving taxes on the income of property of U.S. citizens no matter where they live. Many U.S. citizens are also citizens of other countries (dual citizens). Therefore, as a practical matter by “taxing U.S. citizens abroad” the U.S. is taxing the citizens of other countries who reside in that other country. FATCA will put citizenship-based taxation under the microscope. Once the world wakes up to the fact that citizenship-based taxation is really a levy on the economies of other countries, there will be trouble and resistance to FATCA.

In fact as Todundsteur has suggested it is possible that citizenship-based taxation will be a casualty of FATCA. Think about. How can the U.S. have both FATCA and citizenship-based taxation. The deadly duo of citizenship-based taxation coupled with FATCA will create a society where the world must be tribute to the United States. That is NOT going to happen. (In the real world the debtor does NOT set the terms of the arrangement with the creditor.)

This post is to raise a different question.

Assuming the U.S. continues to levy taxes on the incomes of U.S. citizens abroad (and therefore residents of other countries) should the approach be that of 18th century France or 20th Century Canada? In other words, should the principle be:

1. Every U.S. citizen should be subjected to exactly the same rules; or

2. Should different rules be designed to ensure that all U.S. citizens pay tax but that the rules are reasonable for U.S. citizens abroad?

At the present time, with the exception of the Foreign Earned Income Exclusion, U.S. citizens abroad and homelanders are subject to the same rules. It’s just the the rules have a disproportionate and disabling effect on U.S. citizens abroad. The rules mean something very different to U.S. citizens abroad.

Examples:

– although all U.S. citizens are required to file FBARs it is really only U.S. citizens abroad who are affected by the requirement

– although no U.S. citizen abroad is permitted to own a PFIC as a practical matter the PFIC rules prevent U.S. citizens abroad from normal retirement planning.

I could list many more examples, but you get the idea.

Therefore, as part of considering citizenship-based taxation, one should raise the question:

Should different rules apply to U.S. citizens abroad? Shouldn’t the rules be such that U.S. citizens abroad can live normal lives, do normal retirement planning, and be ambassadors for the United States abroad?

When it comes to the taxation of U.S. citizens abroad, what should “equality under the law” mean?

U.S. citizens abroad are now forced to renounce their U.S. citizenship to protect themselves and their families.

Therefore, when it comes to U.S. citizens abroad, either:

1. They should be subject to a different set of rules – Remember that “the true interests of equality may require differentiation in treatment”.

or

2. Citizenship-based taxation should be abolished in favor of a residence based tax proposal suggested by American Citizens Abroad.

To subject U.S. citizens abroad to the same tax rules as “homelanders” is to destroy U.S. citizens abroad. Surely “equality under the law” should allow U.S. citizens abroad to live!