cross-posted from citizenshipsolutions
by John Richardson
Wisdom of “Three Monkeys” explain why: Although there is little support for “citizenship-based taxation” repeal is difficult
The uniquely American practice of “imposing direct taxation on the citizen/residents of other nations” (“citizenship-based taxation”) has NO identifiable group of supporters (with the exception of a few academics who have never experienced it and do not understand it).
The Uniquely American practice of imposing direct taxation on the citizen/residents of other nations has large numbers of opponents (every person and/or entity affected by it). In addition to the submissions of Jackie Bugnion, “American Citizens Abroad“, “Democrats Abroad“, Bernard Schneider there is significant opposition found in the submissions of a large number of individuals. It is highly probable that the submissions come from those who are attempting compliance with the U.S. tax system.
The “imposition of direct taxation” on the “citizen/residents of other nations” evolved from “citizenship-based taxation”. “Citizenship-based taxation” was originally conceived as a “punishment” for those who attempted to leave the United States and avoid the Civil War. I repeat, it’s origins are rooted in PUNISHMENT and PENALTY and not as sound tax policy.
In 1924, the U.S. Supreme Court in Cook v. Tait upheld the U.S. practice of “citizenship-based taxation”. This means only that (assuming the validity of the decision almost 100 years later), the U.S. has the right to impose “punishment and penalty” (Justice McKenna actually said that “government by its very nature benefits its citizens”) in the form of “citizenship-based taxation”. This does NOT mean it’s a good idea to do so. Cook v. Tait should be considered in terms of (1) the evolution of citizenship and (2) the evolution of taxation.
The United States has (at least in theory) been imposing direct taxation on Americans abroad (who are mostly the citizen/residents of other
countries) for over 100 years. During this period, there has been no serious discussion about ending this unfair and destructive practice.
See the following article in the New York Times (from the Titanic era) – March 7, 1914.
The United States has “gotten away with this” for so long because there was no attempt to inform about or enforce it until the election of Barack Obama. The Obama era will be remembered for FATCA and the attempt to enforce “citizenship-based taxation”. U.S.
“citizenship-based taxation” is now being used to attack the sovereignty of other countries and transfer capital from those countries to the United States.
Because few knew about “citizenship-based” taxation, there was historically very low compliance and little or no attempt at IRS enforcement, on “nonresident Americans”.
Anecdotal evidence suggest that there is still low compliance and few attempts at IRS enforcement on “nonresident Americans”.
Why is it so difficult to get this horrible law (that is damaging to everybody except members of the “tax compliance” industry) repealed?
The wisdom of “The Three Monkeys” explains why.
“See no evil”: Few people even know about U.S.
“citizenship-based taxation”. What you can’t see you can’t know.
1. Almost NOBODY (including – some but not all – U.S. based tax
professionals) even knows that the U.S. imposes taxation based U.S.
citizenship (which is conferred by a U.S. place of birth”). It is simply unknown to the overwhelmingly majority of Americans (how could their country do something as stupid as this?). For a country where citizens are defined primarily as taxpayers (“taxation-based citizenship”), there is little attempt to educate the masses.
2. Citizenship-based taxation is NOT explicitly required anywhere in the Internal Revenue Code. It’s true. The Internal Revenue Code mandates taxing “individuals”
and taxing “nonresident aliens” (“nonresident aliens on U.S.
source income only). (This suggests that “nonresidents” are NOT required to pay tax to the USA.) It is ONLY through “Treasury regulation”, that “individual” is defined as “citizen or resident”. I kid you not. Read the Internal Revenue Code yourself.
3. Those who do know that the U.S. imposes taxation based on “citizenship” often, equate “citizenship” with “residency”. They think
“citizens are residents” and that “residents are citizens”
On April 26, 2017 at the FATCA hearings in Washington, D.C., Representative Connolly said:
“All countries tax their citizens” when he really meant “All countries tax their residents”.
In other words, the U.S. population and Congress actually believe the United States has “residence-based taxation”! Well, everybody knows that “U.S. residents” are subject to U.S. taxation. But few know (and it would never occur to them), that U.S. citizens who establish residence in another country, are still required to pay taxes to the United States!
“Hear no evil”: Those who know about “citizenship-based taxation” don’t know how CBT actually operates – by subjecting people who live in a “foreign country” to the Internal Revenue Code – as though they live in the United States.
4. “Citizenship-based taxation” is discussed ONLY by academics. I have yet to see A SINGLE paper written by a U.S. based “academic” who understands or even mentions the “Alphabet Soup” list of problems faced by Americans abroad which include: FBAR, FATCA, CBT, PFIC, CFC and Forms 5471, 8621, 8938, 3520/3520A, etc. At most they have some “vague idea” that “citizenship” should include the requirement to pay U.S.
taxes. They do NOT discuss this issue in practical terms that hint at what it really means.
In other words: Those who know of or advocate citizenship-based taxation simply do not understand the problems that it causes.
5. Those who support or tolerate “citizenship-based taxation”, see the problem in terms of Americans leaving the United States (if they have the “wherewithall”) and NOT as Americans leaving the United States and then having becoming subject to BOTH the U.S. tax system and the tax system of their country of residence. In many cases they don’t even seem to understand that all countries require you to pay tax if you live there! In other words, they see this as a “mobility issue” and NOT as “trying to live your life issue outside the USA issue”.
(This is why it is ESSENTIAL that this deplorable state of affairs NOT be described as “citizenship-based, taxation” but be described as “taxing the residents of other
6. “Expatriate taxation” is a narrow and highly specialized area of practice. It is complex and has a long “learning curve”. It is therefore not surprising that many U.S. based tax professionals do NOT understand its practical implications. Many of them do not have the skills to inform and advise Americans abroad.
“Speak no evil”: It is almost impossible to get anybody to “listen to” and “speak about” the problem. It is hard to get the attention of Congress
7. Those impacted by CBT (“Homelanders abroad” and the “citizen/residents” of other nations) do not have political representation in the United States. (Of course it is questionable whether Homeland Americans have political representation either. Such is the reality of a two-party system that dominates the political process.) For the most part, legislative change in the USA is accomplished ONLY through “lobbying” and “money”.
Bottom line – U.S. legislators fall into two
First, those who don’t know what CBT is – that the U.S.
is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”; and
Second, those who are not “paid to care” whether the U.S. is imposing taxation on “Homelanders abroad” and the “citizen/residents of other countries”.
8. The U.S. political system makes it difficult to pass any law. This means that it is both hard to pass new laws and hard to get rid of old bad laws.
9. Congress and Treasury are completely indifferent to “Homelanders abroad” and the “citizen/residents” of other countries. (Indifference being one of the worst forms of abuse.) Therefore, when Congress makes a law or Treasury makes a regulation there is NO consideration given to the effects on persons outside the United States. This indifference would be reasonable if U.S. tax laws did NOT have “extra-territorial application”. But, the indifference is unreasonable when U.S. tax laws do have “extra-territorial application”.
10. The “tax compliance community” is uniquely positioned to advocate for the repeal of “citizenship-based taxation”. Yet it does not do so.
(The repeal of “citizenship-based taxation” would hurt their business
interests.) I am not aware of any tax professionals who have or are actively lobbying for (not even letters to House Ways and Means in 2013 and Senate Finance in 2015) for a move to “residence-based taxation”.
Perhaps “clients” should pressure their “tax professionals” to lobby (either individually and/or through their professional associations) for the repeal of U.S. “extra-territorial taxation”.
Is a Congressional change in the law really needed?
11. The Internal Revenue Code authorizes and requires a large number of Treasury Regulations. I believe it is possible for Treasury to end “citizenship-based taxation” by simple regulation.
Meanwhile the only rational response to this deplorable state of affairs is captured in the thought that:
“All roads lead to renunciation!”