I found this paper today as I was researching another topic for the Flophouse and the title alone, Sharing The Spoils: Taxing International Human Capital Flows, intrigued me. So I had a look (Petros has probably already read it), thought it had some interesting ideas and so I offer it up to you for your reading pleasure. After all, it is Friday (the 13th no less).
For our purposes I thought the section four on Alternative Worldwide Regimes for Individual Income Taxation starting on page 25 is worth a read:
“Several alternative regimes are available to countries for taxing individuals participating in global labor markets. The United States stands out as the country with the most expansive and detailed rules on taxing citizens residing abroad as well as the only country with detailed data on those efforts…”
“The most sweeping alternative for a developing country would be to orient their tax system along the lines of the American model described above. Such a change would require altering the basis of taxation from residency to citizenship for most countries and then enforcing a system that would demand compliance from citizens residing abroad.” (they call this the “American Model”).
“Finally, for countries that already have large stocks of citizens abroad, only the American model offers the potential of tapping into those labor income streams. Effectively enforced, the American model may offer the largest ultimate gains to countries with high human capital emigrants.”
“Other obstacles to applying the American model also arise. First, without more precise estimates of the distribution of earnings for citizens abroad, revenue might be limited by overly generous exemptions or credits. Second, many citizens of rich countries working overseas have the incentive to remain tax compliant because of their intention to return home. The trade-off may be distinct for developing countries resulting in citizens giving up their citizenship if such a system is imposed. As such, the “price of citizenship” could be set too high, resulting in waves of expatriation.”
“The recent experience of the U.S. demonstrates the feasibility of efforts to tax citizens who reside abroad, and using the recent example of skilled migrants from India, the paper demonstrates that modest tax instruments yield large revenues to source countries.”
In other words, the authors of this paper seem to think the Americans are on to something and that it just might be worth the while of the Indian government to go after Indians in the U.S.
As I said before, “Tax the Diaspora” is a game any country can play….