Toward A Movement For Residence-based Taxation For Americans Abroad

Part I – Pure Residency-based Taxation vs. Citizenship-based Taxation With A Carve Out

This is a continuation of my post on May 29, 2021 titled “Toward A Definition Of Residence-based Taxation For Americans Abroad“.

In that post I noted that different persons/groups have different ideas of what is meant by residence-based taxation. That someone tells you that they support residence-based taxation does not tell you what they mean. There are different definitions of residence-based taxation. I strongly believe that people must embrace a definition of residence-based taxation that means that US citizens are NOT – because of their US citizenship – subject to the Internal Revenue Code. In other words, the goal should reflect the view that:

The United States should not be imposing taxation and should not be permitted to impose tax on the non-US source income received by people who are tax residents of other countries and do NOT reside in the United States!

Notice that this says that they US will not be “permitted”. The word “permitted” implies that (according to the law) US citizenship is not a sufficient condition for being governed by the Internal Revenue Code.

Generally a tax code must address the questions of:

1. WHAT income is subject to US taxation regardless of who you are?

It is entirely reasonable that (regardless of residence) all income sourced in the United States should be subject to US taxation.

2. WHO is subject to taxation on income that that is sourced outside the United States?

It is entirely reasonable that individuals who are residents of the United States, be subject to income received from non-US sources. It is not reasonable that people with no residential connection to the United States be subject to taxation on non-US source income.

It is reasonable to define this objective (non-residents not subject to tax on non-US source income) as “residence-based taxation”. So far so good. But, (as identified in the previous post), there are at least two possibilities for how “residence-based taxation” can be achieved.

What exactly is meant by RBT (residence-based taxation)? Two (at least) possibilities:

There are at least two possibilities for how US citizens living outside the United States would not be subject to US taxation on their non-US income.

Possibility 1. Pure Residency-based Taxation: US citizens living outside the United States should not be part of the US tax base at all. The Internal Revenue should be amended to say that ONLY those who are US residents are subject to US worldwide taxation (pure RBT);

Possibility 2. Citizenship-based Taxation With A Carve Out: US citizens living outside the United States continue to be part of the US tax base. But, the Internal Revenue Code should be written to say that the non-US income of US citizens living abroad should be excluded from income taxed by the United States (citizenship-based taxation with a carve out).

There is a VAST difference between these two definitions of residence-based taxation. They might look the same to certain people. They might lead to the same outcome for certain people. But, make no mistake they are VERY different.

Possibility 1: Pure Residency-based taxation solves the problems experienced by all individuals and groups. This is because under pure residency-based taxation people are never subject to US taxation simply because they are US citizens.

Possibility 2: Citizenship-based taxation with a carve out means that that people ARE always subject to US taxation (remain in the US tax system) because of their US citizenship. In certain circumstances, certain groups of people will, subject to certain limitations be exempt from US taxation on non-US source income. Notice how each of the following examples of citizenship-based taxation with a carve out, creates winners and losers. Notice how each of these proposals will be attractive to one group of people and not attractive to other groups of people. Notice how each of these examples has the effect of dividing and conquering Americans abroad so that unity of purpose is hard to achieve!

Examples of citizenship-based taxation with carve outs include:

The FEIE (Foreign Earned Income Exclusion found in S. 911 of the Internal Revenue Code). It allows US citizens to exclude a limited type and quantum of non-US source income from taxation.

Beneficiaries: Only those Americans abroad whose primary source of income is employment (and very limited self-employment) income.

Representative Holding’s 2018 Tax Fairness For Americans Abroad Act. This was a massive expansion of the FEIE.

Beneficiaries: This would have increased the amount and kinds of non-US source income eligible to be excluded from US taxation. But, it in no way reduced the reporting requirements and penalty regime.

The IRS 2019 “Relief Procedures For Former Citizens Program“. This is essentially an amnesty program allowing for certain specific people (those who relinquished US citizenship after March 18, 2019, with a net worth of less than 2 million USD and an cumulative US tax liability of less than $25,000 …)

Beneficiaries: Clearly aimed at benefitting the group of accidental Americans.

Individuals who renounce US citizenship and are NOT “covered expatriates and are therefore NOT subject to the paying US exit taxes.

Beneficiaries: US citizens who have a net worth of less than 2 million USD and are not regarded as examples of significant tax revenue loss if they renounce.

Individuals who relinquish US citizenship and would be “covered expatriates” but are able to escape the 877A Exit Tax because they are dual citizens from birth

Beneficiaries: Those US citizens who were fortunate to been born as a citizen of another country and born a US citizen.

The ACA proposal as of May 2021 that would apply ONLY to those US citizens overseas who have been or become compliant with US tax rules

Beneficiaries: US citizens living abroad who have been filing US taxes.

It’s critical to understand that:

Citizenship-based taxation with a “carve out” by creating winners and losers means that Overseas Americans will NOT unify. Many will support the option that benefits them even when it hurts (or at least doesn’t help) their neighbour. This results in a situation where it is very hard to unify Americans abroad in support of the common cause of ending citizenship-based taxation. This is true even though:

Part II – Toward A Movement Toward Pure Residency-based Taxation

On June 2, 2021 a number of individuals participated in a discussion about the absolute urgency of ending the US citizenship-based tax regime and moving to a residence-based tax regime.

In that call there was a wide ranging discussion that reflected strong support for the following basic principles:

1. The injustice and immorality of the US citizenship-based tax regime will come to an end. What we don’t know is when.

As Dr. King famously said:

We shall overcome because the arc of the moral universe is long but it bends toward justice.”

2. A necessary condition for change is the belief that change is possible.

As Henry Ford once said:

Whether you think you can, or you think you can’t–you’re right.”

3. The reality is that ending the citizenship tax regime requires a strong army of individuals to facilitate the bending of the arc!!!!!!!!

It is a mistake to rely solely on groups or others to achieve this goal. Groups are helpful. But at the end of the day there must be a perception and the reality of massive individual support.

4. A clear goal is needed. That clear goal is ending citizenship-based taxation and NOT ending FATCA. Even if FATCA were to end the rules of citizenship-based taxation would remain.

5. Democrats abroad believes that the overseas vote delivered the Presidency to Joe Biden and Democrats therefore believe that the overseas vote has the potential for huge impact!

“You organized 200,000 people in 190 countries! You were the margin of victory in places like #Arizona and #Georgia…As I like to say, this ain’t your grandmama’s DNC. Democrats Abroad figures prominently in our plan.” -#DNC Chair @harrisonjaime speaking to #DemsAbroad.

Therefore, Democrats Abroad would believe that the overseas vote can influence the result of the next election!

6. Individuals must join together, on the ground, on the retail level to achieve the goal of “Pure residency-based taxation”.

As has been said by many …

It’s amazing what can be accomplished if we don’t care who gets the credit!

7. The Democrats are clearly on the warpath to make the situation far worse for Americans abroad! This situation is urgent!

As was said by Benjamin Franklin …

We must, indeed, all hang together or, most assuredly, we shall all hang separately“.

Pure residence-based taxation is the is the only goal that will unify people to hang together so that they do NOT hang separately!!

More to come …

John Richardson – Follow me on Twitter @Expatriationlaw

3 thoughts on “Toward A Movement For Residence-based Taxation For Americans Abroad

  1. Juan Valdez

    Great! There should be careful consideration in taking matters to the corruptible courts as a tool. Injunctions might be possible. Also, aligning with First Amendment orgs such as the Institute for Justice might be helpful.

  2. Juan Valdez

    There is growing evidence Congress is implementing laws targeting citizens abroad for shear hate. The laws interfere with fundamental rights and therefore strict scrutiny should apply in a court. The case should made be citizens abroad are suspect classification. Also, a case can also be on animus. “Invidious, deep seated prejudice.”

  3. Juan Valdez

    Any citizen abroad organization that hopes to challenge CBT must be willing to take legal recourse. I would recommend that be the first action out of the block. Dems deep seated hatred against Americans abroad is decades old. They keep a lot of the anger off the chamber floor so it is not recorded. Keeping citizens abroad CBT issues off the table is no accident.

    We must also come to grips the media and academia service the govt. They are not our side because going against the establishment could be career ending.

    The war crime of war of aggression against citizens abroad is something Americans abroad must acknowledge. Congress is committed to carry the war without remorse.


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