53 thoughts on “Debate: Citizenship & Worldwide Taxation: Is It Morally Justified or Unjustified, John Richardson vs. Edward Zelinsky, Friday 17 May”

1. Some googling reveals that 21 percent of US Americans have zero savings at all, while 60 percent have less than 1000 USD:

   https://www.cnbc.com/2018/07/02/about-55-million-americans-have-no-emergency-savings.html
   https://www.cnbc.com/2019/01/23/most-americans-dont-have-the-savings-to-cover-a-1000-emergency.html

2. It’s a bit too long to post here but Nando Breiter’s comment below the debate video (see the YouTube link) is worth a read. He makes some very good points.

3. Thank you, John, for defending us in your discussion with Mr. Zelinsky. Mr. Z., I fear, hears only with his ears. He needs to hear with his heart as well. There was an awful lot of “let them eat cake” in what he had to say. I look forward to hearing him try to defend the imposition of FBAR filings on US citizens resident in other countries who have, quite literally, every cent they own in a “foreign” bank. As aggravating as it was to listen to Mr. Z, bring on debate #2!

4. Some comments at:
   https://www.youtube.com/watch?v=lo7nRpU6SDQ

   Nando Breiter
   6 hours ago
   The genuine issues US expats face are rooted in America’s heavy handed attempt to enforce taxation globally. The debate misses the point, as this one did, when it focuses on citizenship.

   What in essence is wrong with global taxation? First, a little groundwork.

   1) Taxes are levied to collectively fund the provision of services, like roads, schools, water, sewage, garbage collection, bridges, etc. Taxes have evolved to be local in nature, whether that locality is a community, state or nation, because those governmental entities provide those services. Taxes are an exchange of money for services provided for everyone living within a region. That exchange of money for a service is very similar at base to the money you pay a plumber to fix your sink.

   2) Taxes are also levied locally because they can most easily be enforced locally. Why? Because at root, local citizens understand and agree to pay for the roads, schools, water, sewage, garbage collection, bridges, police, etc in their local area. Compliance may be grudging, but enough people understand that if they revolt enmass against taxation and their water and sewage is shut off, their garbage is not collected, and the police go on strike, that would not be a good thing. Enforcement is also easier simply because everyone in a society is willing enough to cooperate. For example, US employers withdraw taxes from salaries as they are paid and report these to the government. Governments have the necessary information for enforcement at their fingertips because of this basic cooperation. A populace generally cooperates because they understand they are getting something for their money.

   3) Tax revenue is spent locally because the people within a region understand what the most pressing issues are. There are always budget constraints, so these decisions are not always easy or obvious. But if your local school building has suffered structural damage in an earthquake, and engineers come in and express doubt whether it is safe to occupy, would you want the Chinese government, to give an example, deciding how to spend the tax revenue collected within your school district? Would you want to lobby the Chinese government to plead your case? “If there is even a small tremor, this could be enough to bring the school crashing down on my children!”

   So what’s wrong with global taxation? Why on a systematic basis is it destined to be unjust, and thus to be a failure for the people it is supposed to serve?

   First and foremost because taxes collected globally will not be distributed fairly as services provided, if at all.

   In the abstract case, the administrative burden of attempting to fairly and rationally allocate tax revenue worldwide would be gargantuan, unworkable.

   Practically, in the case of the United States, it makes no attempt whatsoever to help fund the services provided to Americans overseas that are funded by tax revenue. It does not, for instance, contact the French government and propose “Hey, we know we’ve imposed significant costs on the French economy in our attempt to enforce American taxation on any ‘deemed US persons’ living on French soil. We’ve collected $455 million in taxes from them. We think it would be fair if we pay the French government 75% of that revenue to fund local services. Spend it how you see fit. Would you agree to that proposal?”

   We expats KNOW that the US government is not providing any tangible service in exchange for the taxes we are required to pay. If we are required to pay US taxes as expats under a separate set of regulations that apply only to us, one helpful service would be clear instructions how to complete our horribly complex tax forms – and the US doesn’t even provide that to us! Instead it requires us, by default, to pay international tax specialists, who also struggle to understand US expat tax requirements. Instead of clear instructions and unambiguous policy, the United States places us under an avalanche of legal compliance risk year after year.

   What is this legal compliance risk? Well, if you are going to attempt to enforce US taxation globally, you need a significant degree of dictatorial leverage, because the local populations, businesses and governments – the ones that are called foreign by the US – will not enforce US tax laws for you.

   That dictatorial leverage includes fines that are vastly more severe than many felonies. The maximum sentence for involuntary homicide, killing someone with your car because you are driving drunk, is 12 – 16 months in the US. The maximum penalty for a willful violation of FBAR compliance is 10 years in prison and a $500,000 fine. Under IRS statues, a willful violation includes not knowing you had to file FBARs when you should have. Each year FBARs are not filed count as a separate violation. So for 10 years of not filling out a form, that maximum penalty is 5 million dollars and a 100 years in prison. The IRS examining officer is allowed to fine someone in excess of their foreign bank balances. These fines are not decided by a court after a conviction by a jury. They are determined by an IRS employee acting as judge and jury, and the “US person” being fined has no right to argue their case, or have an attorney do so on their behalf before the punishment is decided. If an American expat wants to contest an FBAR penalty, he or she needs to have the financial resources to do so in a US court of law.

   The IRS now also has the right to revoke the passport of a US citizen if they are more than $52,000 in debt to the IRS. A simple FBAR oversight, if the IRS examining officer decides it is willful because, well, ignorance of the law is no excuse, could easily exceed that amount. Such a revocation could easily render a US citizen settled in another country functionally stateless. Other countries don’t gift citizenship to Americans just because they show up.

   The United States also threatens to impose massive fines on any foreign financial institution that does not provide the financial data of any “US person” holding an account with that institution, and has enforced its position that other countries should violate their own financial privacy laws by confiscating the correspondent accounts of foreign financial institutions, bankrupting at least one in the process. The hundreds of millions of dollars the US seized in its effort to have bankers violate their own country’s privacy laws, which could have landed them in prison, was not necessary that of any US person.

   Because of the cost and risk of dealing with US persons, our local banks either refuse all services outright or limit what they provide to a simple payment account. As part of their due diligence process, banks must ensure that an American does not have effective control over an account, even if it is not in their name. In such a case, the bank would still risk a very punitive US fine.

   I’ve only discussed FBAR at any length, but there are plenty of other complex requirements ridden with severe penalties that only US expats are subject to as individuals. The 5471, for instance, puts an overseas American business owner under the same regulatory and compliance regime as a massive US corporation with multiple subsidiaries overseas. The repatriation and GILTI taxes miraculously transfer income from a “foreign” business entity ( ie an expat’s local business providing local services ) onto an expats individual tax return. The Internal Revenue Code provides a very straightforward and common sense definition of income. The courts have consistently rejected efforts by US taxpayers to distort that common sense definition of income to reduce income tax. How is it that the IRS can get away with such a blatant distortion of the meaning of income when US taxpayers have not been allowed the same? Our system of taxation depends on a factual accounting of income, so this is not a trivial matter.

   Because of the attitude of “American exceptionalism”, someone who has never lived outside of America might think “So what? We’re entitled to do as we please. We’re Americans.” Well, put the shoe on the other foot and see how it fits.

   Say the EU passed legislation that authorizes a heritage tax. Assume the EU has sufficient leverage through its dominance in world financial markets to force US financial entities and US governmental institutions to enforce its heritage tax … such that Mr Zelinsky lost his mortgage, lost his pension because of EU taxation, could no longer effectively own property and had to transfer it all to into his wife’s or children’s names, and was also demoted at work, or fired, because his university did not want to take the risk of being legally exposed to an EU taxation regime. You see the EU has to make it extremely punitive for it to be enforced outside of the EU, and of course it is allowed to do so because of EU exceptionalism.

   Mr Zelinsky is listening to a podcast. An EU official is saying “I don’t understand what the problem is. Anyone of European descent has received tremendous benefits from our cultural and intellectual heritage.”

   In such a case, Mr Zelinsky should say “It has nothing to do with European heritage! This is all hogwash! Global taxation is systematically flawed. I’m not receiving any tangible benefit from EU taxation, there is no exchange of service for money paid. And the EU’s efforts to impose taxation on other countries are dictatorial – have to be or they couldn’t get away with it. The EU is both confiscating money from me without providing services in return, I’m paying for those services with my already ample US based taxation, and to top it all off, the EU is undermining my ability to support myself and my family because of the severely punitive character of extraterritorial enforcement.”

5. Some comments at:
   https://www.youtube.com/watch?v=lo7nRpU6SDQ
   FG:
   Should have been longer. Zelinsky ignores all the practical problems, all he cares about is the theory. Plus, they ignored the banking issues caused by FATCA, not to mention the scaremongering of the compliance industry. Zelinsky seems to think we’re all extremely wealthy. He refuses to acknowledge the reality that there are many Americans abroad who can not afford the Renunciation Fee nor the Cost of Compliance. And even for those of us who can, why should we have to?

   Mike Breen
   12 hours ago (edited)
   Many of the people you are hounding for taxation, Mt Zelinsky, do not have US passports and never did, some don’t even have social security numbers. For those that do, why are they the only people on earth that need to renounce their citizenship to live in peace in other nations without outrageous reporting and punitive taxation under an obscene penalties?

   You make much of the $106,000 “tax free” as if this was some sort of massive bonus. How would you like Poland to be giving you a $106,000 allowance before you send money to Poland, while at the same time your Polish tax return costs $1000.00 dollars and Poland taxes your local pension in to oblivion?

   Zelinsky is the poster child for the ignorance, arrogance and prejudice in the USA that has lead to the world laughing at claims to be some sort of beacon of freedom. Russians are free to get out in the world, Chinese too, but US citizens are effectively punished for it and have been made in financial pariahs that only fools marry, employ, go in to business with or have as clients in their financial institutions.

   Shame on you and those like you, Zelinsky.

6. Poor JR trying to convince a flat world believer that the world is really round. Either Mr Z was playing games with us in his kitchen or forgot his tools since the toolbox that he brought to the discussion was empty. Count me out of round two. The first one was too painful for my senses .
   Please bring back Michael Kirsch . At least, he made some sense,no matter how abstract.

   @Zla’od
   ” I thought Prof. Zelinsky did well and made many good points…”
   Were we watching the same thing ?

7. Don’t think of him as an enemy. Think of him as a representative of a different way of thinking.

8. “Why doesn’t he get a 106,000 USD exemption? Because he doesn’t live overseas and wouldn’t have to worry about double taxation (unless he somehow becomes subject to the CBT of some other country).”

   He does, actually. He took it to court, and lost. He works (or worked) in Manhattan but lived in Conn. He worked at home a day or two a week. New York and Conn. both taxed him for the days he worked at home.

9. “Why doesn’t he get a 106,000 USD exemption? Because he doesn’t live overseas and wouldn’t have to worry about double taxation (unless he somehow becomes subject to the CBT of some other country).”

   He does, actually. He took it to court, and lost. He works (or worked) in Manhattan but lived in Conn. He worked at home a day or two a week. New York and Conn. both taxed him for the days he worked at home.

   The decision is here:

   https://www.dta.ny.gov/pdf/archive/Decisions/817065.dec.pdf

   The facts as gleaned from the decision:

   Professor Zelinsky was a resident of Connecticut (where he was subject to taxation as a resident) who was employed in New York State (New York source income). He was also subject to full taxation on the same income in New York State. His salary was sourced from New York State (which was taxed in New York because it was New York source salary and was from his teaching at a New York City law school.

   Problem: New York (state of source) and Connecticut (state of residence) want to tax the whole amount of his salary. He objected to the fact that he was subject to full taxation on 100% of the income in both jurisdictions.

   His problem was two-fold:

   1. Connecticut treated 100% of his salary as taxable by Connectcut and did not allow a tax credit for tax paid to New York (the source state); and

   2. New York treated 100% of his salary as taxable by New York. In other words, New York did not take the postion that the income should be allocated between New York and Connecticut based ONLY on the days he was physically present in New York.

   Therefore, he was subject to double taxation on the same income. This is EXACTLY the same position a U.S. citizen abroad would find himself in with respect to salary earned outside the United States. Under the Internal Revenue Code (unlike the State of Connecticut), the U.S. would allow a tax credit for taxes paid abroad against U.S. taxes owing.

   In Zelinsky’s case Connecticut did NOT allow a tax credit against the New York tax paid. Note that this is what distinguishes his situation from the way Americans abroad are treated (usually) under the Internal Revenue Code. So, what he argued was that the source jurisdiction (New York) should agree that the portion of the income attributed to days he was working in Connecticut should not be subject to New York tax. (This is a bit like Moodys Gartner recently arguing that the Government of Canada should forgo taxation on transtion tax income that was taxed by the United States. Whether made by Moodys or Zelinsky, the argument that the source jurisdiction should allocate taxing rights to the residence jurisdiction is a bit rich.)

   He appealed the New York assessment of 100% of income taxed by New York on the basis that he only was physically present in New York X% of the time and therefore only X% of the salary should be treated as New York income.

   The issue framed as follows – page 1:

   Whether application of the “convenience of the employer” test set forth in the regulations at 20 NYCRR 132.18(a) properly subjected petitioners’ entire New York source income to taxation without any apportionment of such income between New York and Connecticut was
   violative of the Due Process Clause or the fair apportionment standard of the Commerce Clause
   of the United States Constitution.

   The problem of double taxation as follows – page 19 of decision:

   In fact, it was Connecticut’s taxing scheme which created the threat of double taxation. The New York convenience rule existed in regulations at least as early as its inclusion in Manual
   67 (1967) where language identical to the current 20 NYCRR 132.18 is found in 20 NYCRR
   former 131.16, some 24 years prior to the enactment of the Connecticut income tax in 1991. As
   stated above, the New York taxing scheme afforded a credit to residents that earned income in
   another state and paid income tax to both that state and New York. Although Connecticut
   certainly was aware of the convenience rule and the credit afforded by New York when it enacted
   its personal income tax in 1991, it did not provide its residents a credit for taxes paid to another
   jurisdiction, thereby setting the stage for the threat of double taxation. … However, the fact that Connecticut did not provide the credit to its residents does not transform the convenience rule into an
   unconstitutional reach across state lines to tax income earned as a result of services performed in that state. On the contrary, it was a permissible taxation of New York source income for which no basis for allocation was established.

   Anyway, Mr. Zelinsky lost as he should have lost. The significance of the case is that it shows that when double taxation is applied to him, he is quick to object. Too bad, he isn’t quite as quick to object to double taxation imposed by the United States on Americans abroad.

10. “This is EXACTLY the same position a U.S. citizen abroad would find himself in with respect to salary earned outside the United States. Under the Internal Revenue Code (unlike the State of Connecticut), the U.S. would allow a tax credit for taxes paid abroad against U.S. taxes owing.”

    Doesn’t that result in Zelinsky being double-taxed and a U.S. citizen abroad not being double-taxed? Because the U.S. citizen abroad is allowed credit for tax already paid?

11. “This is EXACTLY the same position a U.S. citizen abroad would find himself in with respect to salary earned outside the United States. Under the Internal Revenue Code (unlike the State of Connecticut), the U.S. would allow a tax credit for taxes paid abroad against U.S. taxes owing.”

    Doesn’t that result in Zelinsky being double-taxed and a U.S. citizen abroad not being double-taxed? Because the U.S. citizen abroad is allowed credit for tax already paid?

    It would seem so yes. Because Conn (unlike the Internal Revenue Code) didn’t offer a tax credit on tax paid in the source jurisdiction, he first paid tax in New York (source jurisdiction). He then included the same income on the Conn return – but Conn wouldn’t allow a tax credit for tax paid in New York. (At least this is what I understand the case to be saying).

    I don’t think Zelinsky is being hypocritical. Remember that his postion seems to be with respect to Americans abroad that they should get tax credits for taxes paid in the source jursidction (abroad). But Conn simply doesn’t allow that (good reason to not live in Conn perhaps).

    Because Conn did NOT allow him the tax credit he went back to NY to argue that NY should not have taxed him 100% on the New York income because he was not in NY all the time. His argument was that NY and CONN should apportion the salary for tax purposes. This is in effect a way to try to get NY to give the tax credit that Conn wouldn’t give. But, this is of course ridiculous for a number of reasons that are described in the decision.

12. I don’t believe USP overseas get credit for overseas SALT paid.

13. No they don’t. But they do in general get credits for foreign income tax paid on salaries (which is what the issue was in the Zelinksy thing).

14. What is SALT?

15. State and Local Tax. I believe U.S. Persons now get a $US10K exemption where before TCJA it used to be unlimited which is bad for people in high taxing U.S. states, and bad for high taxing states as before they could just raise state taxes and residents would be no worse off as they could deduct state and local taxes paid from federal tax liability. TCJA SALT limitation is good for people in low taxing U.S. states as they will now provide less federal tax subsidy to those in higher taxing states. SALT deductions would be exemptions against Salary income. So it is not a pure USP overseas get FEIE, they don’t get other deductions including SALT, VAT, and….

    Speaking about exemptions that U.S. persons tax resident overseas can NOT benefit from: no home mortgage deduction against salary income, as U.S. residents get. This is a big one.

    Of course there is some housing deduction, which I have not figured out as I thought that was primarily for expats companies send overseas. We know Holding’s bill will achieve scoring via elimination of FEIE and housing deductions to help make it revenue neutral.

    One of our enemies is the complexity of it all, as the double tax overlay is unfathomable to most including professors, press, and politicians. With http://www.FixTheTaxTreaty.org we decided to focus on the inequity of U.S. double taxation of superannuation, and to drive that point with hopes that once that may be addressed other inequities may be addressed as well.

16. Genius in the Holding Bill would be to take the FEIE and housing deduction off the table, so we don’t have those such as Zelinsky overfocusing on them with declaration that US Persons overseas get a tax loophole, when if fact with all things considered, they get a U.S. tax sinkhole.

    For Round II this may be raised: that FEIE and Housing deductions are rejected by U.S. persons living overseas and Holding’s bill as these are not a benefit to the vast majority living overseas, especially the ~92% who live in equal or higher taxing countries. That may cause one of Zelinsky’s “coaches” to get derailed.

    On a roll today: mega emphasis may be put on the fact that the “benefit” of the passport costs are widely different based on the country one is resident in, then how is that equitable. I think that is a strong point, yet Zelinsky may just agree changes in the application of the U.S. taxation need to be made. JR made this point in one of his many articles, and hinted at it when he said to just have a passport tax (to make it more equitable, understandable, and with much less burden of the Gordian knot tax compliance and expense in time and money).

    One of Zelinsky’s weak points is the detail and application of the double tax overlay. Round II would help here by allowing the debate to get more into it. Some attrition is involved in it all, and more rounds would help the debate move off of the sound bytes.

17. The double taxation isn’t so much on income. It’s on so much more, complex and impossible to understand all of the ramifications. Just for starters it’s on the sale of a principal residence in Canada. Then on the impugned earnings of a tax free savings account, RESP, or RDSP.

    It is impossible for an American in Canada to have a private corporation. ( affects most professionals in private practice. ). Then there are small businesses. Above my pay grade to understand what to do with them.

18. I can’t claim to understand much about the US tax code but I do think requiring US expats to report their worldwide income to the US is tied up a lot with the taxation of US corporations, and international competitiveness, etc, as explained somewhere on the American Citizens Overseas website – and elsewhere. Because as I understand it, it was the same legislation, in 1962, that ended the unlimited exemption on foreign earnings and also brought in the CFC – SubPart F rules that caused the transition tax in the TCJA. And as soon as they got the TCJA passed, that’s when they began talking about a bill that eventually turned into the Holding Bill, to let expats stop filing. I don’t think they care at all whether ordinary people living outside the US do or don’t pay US tax on foreign income as long as they’re not trying to cheat the system.

19. TaxLinked Webinar: Issues in Citizenship-Based Taxation in the US & Beyond
    June 3rd, 12pm London time (BST)
    https://taxlinked.net/blog/may-2019/citizenship-based-tax-webinar

    This will be a panel discussion moderated by John Richardson. Other panelists are: Karen Alpert (Australia), Leonard Tuber (Israel), and Larry Stern (Israel).

    In the past, TaxLinked Webinars have been recorded and available on YouTube after the event.

    We’re asking for your questions. You could post them up on the TaxLinked website, but that requires signing up for an account. Alternatively, you can post your questions as comments on this thread and I’ll make sure they’re passed on.

20. Most USians don’t have 500$, let alone 2350$ for the worlds highest renounciation fee.
    Prof Zelinsky is an academic and obdurate. Predictable

21. Most USians don’t have 500$, let alone 2350$ for the worlds highest renounciation fee.

    “They’re hanging onto their us passports for a reason.” Wow. Talk abt Cognitive dissonance.

    Most folks would renounce , however, the fee is ridiculously high….for a reason. Penalty for leaving the us empire/plantation.

22. His paper seems to assume that domicile (distinct from residency) is a legitimate basis for taxation, and argues that citizenship is a good (or at least relatively unambiguous) proxy for domicile, which is otherwise rather subjective (the “home” one “returns” to eventually). Residency to him can be manipulated by tax-avoiders who would stay overseas just the required number of days, but stay in the US (their effective domicile) as long as they could get away with. Problems emerge in the case of dual citizens, who would then have two domiciles, but he thinks these are minor (and solvable) compared to the alternatives.

    Beyond that, Prof. Zelinsky often returns to the idea of citizenship as membership of a kind of community, with attendant rights and responsibilities, and is reluctant to acknowledge the involuntary, coercive nature of this membership, especially when combined with extraterritoriality. He seems to see some moral value in keeping expats tied to the tax system, regardless of whether this results in an effective tax system.

23. It was painful to listen to this “debate” as Prof Zelinsky appears obdurate and is a ‘true believer’ of the us empire.

    It was akin to providing an evidence-based argument with a flat Earther or a religious zealot.

    That’s what we’re up against. Again, the cognitive dissonance was outstanding. Thank you to Mr. Richardson for dealing with that individual.

24. I thought the debate was about the morality of CBT?

    Does Zelinsky think it is moral to make people who do NOT live in the US pay for the Public Goods and Services that only people who live in the US use? (roads, bridges, hospitals, fire, police, schools, parks, medicare, medicaid, welfare etc.)

    And when it comes to protection, the reality is that the USG does not and cannot protect US citizens outside the US. And any degree of protection provided, ie evacuation assistance, must be directly paid for by the evacuees.

    So where is the morality here? To use Zelinsky’s words, “I am having trouble understanding it.”

25. And the signers of the American Declaration of Independence certainly thought CBT was immoral.

    But it seems like Zelinsky never spent much time reading that document. Most likely never even looked at it.