Even more hilariously hypocritical than the 1974 Jackson–Vanik Amendment — which slaps trade sanctions on countries imposing unreasonable barriers to emigration of their citizens — I bring you 26 USC § 891: “Doubling of rates of tax on citizens and corporations of certain foreign countries”, a law originally passed in 1934 and still in effect today:
Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this section) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of subchapter B).
I’d love to see Homelanders get their taxes doubled every year until they stop spouting their ridiculous ultra-nationalist justifications for taxing those of us who don’t live in their damn country and imposing discriminatory burdens on our ability to save for retirement. Sadly, § 891 only applies to “foreign” countries.
The history and motivations of this amusing little provision are a bit hard to trace. The year of its enactment falls into the “information Dark Age” — the decades after 1923 for which the U.S.’ Mickey Mouse copyright laws have prevented any material from entering the public domain, and for which the transaction costs of locating the owners of published works and obtaining their permission is so high that most books and newspapers from those years have not been digitised and made searchable for casual armchair Internet researchers to find, and are often out-of-print and unavailable in libraries either.
The Treasury regulations are just a restatement of the law. The annotated version of the law is not so helpful either, telling us only that it was re-enacted as part of the Internal Revenue Code of 1954. Fortunately, there’s a brief summary of its origins in Mitchell Carroll’s 1946 paper “Tax Inducements to Foreign Trade”, which Duke University Law School helpfully scanned and put online as part of their ongoing initiative to promote open access to legal scholarship.
In the 1920’s France began to subject American corporations with subsidiaries in France to a double tax on dividends, that is, first by withholding at source from dividends paid by the French subsidiary to the American parent, and then by direct assessment against the parent when the income was redistributed in “the United States. There was no basis in our law for prevailing upon the French Government to forego this form of double taxation. Hence, the efforts of a group of officials sent to France in May, 1930, to persuade the French Government to give up the second tax on a unilateral basis were fruitless. It was necessary to enter into negotiations for a bilateral treaty with France in which the French administration might find some reciprocal concessions under our law. These negotiations continued through the summer and an agreement was reached on all but a few points.
As the author mentioned in a footnote, he was part of the U.S. delegation that went to the France to conduct the negotiations on that treaty.
After a long interval, the treaty was concluded on the basis of the American proposals, and was signed on April 27, 1932. It was promptly ratified by the United States, but France did not ratify it until after Congress had enacted Section 103, I.R.C. This section, in substance, authorizes the President to double the rate of American tax (but subject to a maximum rate of 80 percent) in the case of the-citizens and corporations of a foreign country which subjects American citizens and corporations to discriminatory or extraterritorial taxes. This provision envisaged particularly the second application of the French tax on dividends distributed by the American parent of a French subsidiary, because it was extraterritorial — being levied on income distributed in the United States by an American corporation, and discriminatory — inasmuch as French law specifically precluded the double taxation of dividends distributed by a French company out of income received in the same year in the form of dividends from a French subsidiary.
A bit of further digging reveals that Section 103 was enacted on May 10, 1934 as part of the Revenue Act of 1934 (H.R. 7835, Public Law No. 216, 48 Stat. 680). In other words, this little law was passed just a decade after the judiciary proclaimed in Cook v. Tait, to the general assent of nationalists and socialists alike, that the U.S. government “by its very nature benefits the citizen and his property wherever found”.
The Congressional Record for 1934 is available online for the benefit of the citizen wherever found, no thanks at all to the U.S. government, but rather to the Internet Archive, which scanned it themselves and made it available for download as a 1.9 gigabyte PDF file. Unfortunately, in its nearly four thousand pages there’s very little commentary about Section 103 of the 1934 Act (which was actually numbered Section 104 until one of the preceding sections got deleted in the final version of the Act). The only speech I could find comes from Frederick Vinson (D-KY), who would go on to become Secretary of the Treasury and then Chief Justice under Harry Truman. He stated (page 2607):
I want to develop one item in the bill—that is, present section 104—which deals with taxes that may be levied against the income of foreign individuals or foreign corporations, when it is determined that discriminatory taxes have been levied by such nation against our citizens and our corporations. This provision was proposed by me in an effort to secure fair treatment for American industry abroad.
My friends, there are nations throughout this world who are not particularly friendly to Uncle Sam in a business way, and when they get an opportunity to dig into the pocketbook of his citizens, whether individual or corporate, they have not hesitated so to do. There is one country, France, that is not satisfied with taxing the income of American individuals and American corporations as they tax their own citizens: they are not satisfied with getting a tax upon the income that is actually derived in their own country; but when the American parent company of that subsidiary declares dividends, they place a corporate tax upon these dividends, derived from whatever source.
They are not satisfied with that, but they are seeking to use as a basis for their taxation the entire income derived by that American individual or corporation, wherever earned. Now, that is intolerable; and the committee, in its wisdom, has inserted a provision that will be known as “section 104” of this bill empowering the President of the United States when he, in his discretion, ascertains and determines that discriminatory taxes have been levied against American citizens and American corporations, may increase the income tax upon individuals and corporations from that nation 50 percent of the ordinary income taxes that it would otherwise pay. This power can be used to protect American business from present discrimination and will probably help restrain foreign countries from further discriminatory levies.
Indeed, civilised countries have since restrained themselves from imposing extraterritorial taxes not only on foreign citizens but on their own citizens. Only dictatorships like Khrushchev and Brezhnev’s Soviet Union, Burma under the State Law and Order Restoration Council, and the Philippines under Ferdinand Marcos stood apart.
The House passed the Revenue Act of 1934 in a nearly-unanimous vote on February 21: there were only seven “nay” voters (all Republicans) and twenty-two non-voters (13 Democrats, 9 Republicans). Of course, the most detailed commentary about the 1934 Act was not made in floor speeches in Congress — after all, as we well know, most of Congress doesn’t even read the tax laws it passes, certainly not closely enough to be able to speak at length about them in front of their colleagues — but in committee. The 1934 Act then went to the Senate for consideration; the Senate Finance Commitee’s hearings on the 1934 Act have been scanned by Google but are not available for us to read online, despite being in the public domain as works of the U.S. government. I could only extract a few snippets using the “search” function, but two are definitely worth quoting here. From page 220:
If the United States wishes to follow the lead of foreign countries, it is not enough to give the full credit for foreign taxes. It should take steps to protect our enterprises from the imposition of taxes by foreign countries which are either discriminatory or extraterritorial in character. By extraterritorial taxes is meant those which are laid on income or property not within the jurisdiction of the foreign country but in that of the United States.
The hypocrisy of decrying other countries’ extraterritorial taxes while imposing those same taxes on Americans abroad was noted as well (p. 228):
The United States citizen residing in the same country, however, would pay in addition to the local tax imposed on estates of residents, the full American tax on the entire estate including the property having its situs in foreign countries. By adopting the principle of citizenship, the United States will thus subject its own citizens to a tax burden much greater than that imposed on foreigners. The laying of this burden is, however, in direct opposition to the administration’s policy of encouraging foreign trade.
In 1996, Minnesota-based tax attorney Derek Devgun wrote:
Perhaps because of its drastic character, no President has ever invoked this provision. At least one commentator, however, proposed that it be used in response to the United Kingdom’s threat to retaliate against California’s [worldwide combined reporting] in the mid-1980s—a dispute which, ironically from a U.S. perspective, involved allegedly discriminatory treatment by the United Kingdom of U.S. intercorporate dividend payments.
But of course, here we are eight decades after the Revenue Act of 1934 was passed, and the United States is still imposing discriminatory extraterritorial taxes on people who exercise their human right to emigrate, live, and save for retirement in foreign countries.
Hypocritical. Just like the Erirea affair. Eric, thanks for this! This is a brilliant find! This is further proof of US unilateral and arrogant behavior. They expect from us what they would not allow other countries to expect of them. Just like FATCA, just like Double Taxation.
Could the record of this 30’s legislation be used as an argument superceeding Cook v. Tait (1924)?
Bravo again Eric! And BROCK ON!
“Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, ” This is already the case: savings clause, IGAs signed in some countries. Thus the President now has the power to double tax himself.
*What a treasure of a find! Thanks for the discovery!
@Eric, great research and annotation. Very valuable find.
And, when is a ‘penalty’, such as that imposed by the FBAR, on an imaginary sum – such as the highest balance of post-tax assets in a bank account actually a ‘tax’ extorted by other means? The FBAR reportable aggregates are NOT even taxable totals. And, the FBAR is under the BSA, not part of the Internal Revenue Code. But, has the IRS turned it into a tax by trickery, threats and retroactive application of changes (when FBAR handed over from FINCEN to IRS to enforce, and new penalty instituted even for cases deemed ‘non-wilful’). And similarly, FATCA penalties are also based on assets that are mostly either post-tax, or non-taxable. The provisions of FATCA form 8938 can suspend or open up SOLs. At what point does a draconian, confiscatory and disproportionate penalty structure become indistinguishable from a tax?
@Eric, Great research. I had read section 891 before but I didn’t know its background, now I understand. There are similar provisions in other sections: 896, 901(c), 2014(h), 2108, all created in 1966. I wonder if something also happened around that time to motivate these provisions. In my list of suggestions, I suggest repealing all of them, to be consistent with the idea of dissociating citizenship and taxation.
Since this one provision is back in the news, here is the full hearing available courtesy of Hathitrust.org.
Reuters piles on with more Section 891 scaremongering
“Section 891 of the U.S. tax code, passed in 1934 but never used, allows the president to double tax rates for citizens and corporations of any country the administration considered was discriminating against U.S. companies.”
Well sure, why can’t the administration consider that a country which taxes a company equally as other companies, instead of giving an undeserved low rate, is discriminating against the equal one? As George Orwell almost said, some apples are less equal than others.