— Lee (@ozmerica) June 1, 2020
On May 30, 2020 the following question appeared on Quora and prompted some interesting answers and discussion:
As a defender of American “freedom”, how do you justify the fact that US citizens have to pay taxes to the US even if they live and work abroad (even if they have never been to the US but got their citizenship through their parents)?
I along with others attempted to answer the question. Here is my answer.
Some of the most interesting analysis comes from the comments to the answers. See the following answer and comment. I have turned David Johnstone’s comment into a post.
One of the answers to the question included the suggestion that:
If someone lives and works abroad as an American citizen, he or she must be enjoying SOME benefits or they would logically renounce their US citizenship instead of paying US taxes. That would be a good solution for anyone facing this question. Just go!
David Johnstone responds to this answer with the following comment:
1) enjoying one’s citizenship is a human right: see Universal Declaration of Human Rights articles 13 and 15.
2) the US has a law called the Jackson-Vanik Act of 1974 that imposes sanctions on countries that impose unreasonable restrictions (exit taxes) on the rights of their citizens to emigrate to other countries.
3) the renunciation fee which used to be free was raised to $450 and then $2,350, along with an exit tax for assets over $2 million (the amount was the same as the estate tax threshold when it was enacted in 2004, but has never been updated).
4) the US thus violates the Jackson-Vanik Act that it applies only to other countries.
5) since a very large number of US citizens abroad are poor and middle class (think of all the citizens in Mexico of Mexican origin for example), contrary to popular belief, the $2,350 renunciation fee, which doesn’t include accountants fees for the tax filings or the cost of travel to and from the nearest consulate, presents a real hardship, which some decide to go through with anyway in order to maintain their local bank accounts.
6) one must have another citizenship before one can renounce.
7) not everyone with another citizenship is even allowed to renounce (e.g., conserved individuals).
8) by law, the State Department must charge cost, but no more than cost, for its services. So none of the “services” available to citizens abroad are free, with the exception of voting (and even then, Americans born abroad are not eligible to vote in many states). As an aside, the renunciation fee of $2,350 violates this law, because according to the State Department, the cost to process a renunciation amounts to $21 or so.
9) if a citizen is repatriated, as recently happened to some citizens abroad during the coronavirus pandemic in progress, they must pay the US government back for the cost of the repatriation.
10) points 8) and 9) show that there are no “services” that the citizen receives for citizenship, with the exception of the possibility to vote (which right is not universal for citizens abroad).
11) there is this assumption that Americans living abroad only live abroad for a short period of time. However, according to the Federal Voting Assistance Program’s Overseas Population Analysis, of the 6 million or so US citizens living abroad, the average time elapsed since those citizens last lived abroad was 14 years ago. In that time, they will be as likely as stateside Americans or immigrants to receive local unemployment, disability, retirement, or welfare benefits, all of which are punitively taxed by the US. If the percentage of US citizens abroad receiving foreign social security or equivalent benefits is similar to the percentage of US residents receiving US social security income, then at least 1 million of the 6 million US citizens abroad receive income that is punitively taxed by the US solely due to the foreign residence of the taxpayer. When one factors in exchange rate fluctuations, taxation of phantom gains, and discrepancies in the date at which an income is taxed by one’s country of residence and the US, one can easily be subject to double, triple, or quadruple taxation (when paying in, when the savings or other income accrues, including currency fluctuations, then when it is taken out).
12) aside from being taxed at a higher rate than US residents with US-source income on almost all categories of foreign income that is not earned during the current period (unemployment, disability, retirement, welfare income, etc.), the US actively discriminates against its own citizens living abroad compared to resident citizens by effectively disallowing or penalizing anyone who opens a small foreign business (think your French baker), making it too costly for foreign (via FATCA) and US banks (via the Patriot Act) to provide banking, mortgage, and investment services to Americans abroad, while waiving or reducing money laundering rules for foreigners investing in the US, especially in real estate.
13) the US even tries to impose its laws on anyone merely associated with Americans abroad: spouses and business partners see that their accounts and finances must be declared to the US, even if they have never lived there.
14) the amount of banking and financial information required to be reported by US persons abroad, or by their banks, would be unconstitutional if required for US accounts.
15) the US does not reciprocate on its FATCA obligations, thus becoming the fastest growing tax haven in the world for foreigners’ money, while effectively shutting out non-resident US citizens from the same accounts.
I could go on and on about how the US not only doesn’t provide services to its citizens living abroad but actively discriminates against them for doing so, violates the laws it imposes on other nations, and violates the human rights declarations and treaties that it has ratified.
The assertion that one can just renounce if one is not happy is not only wrong, but it shows how little the person making such a statement must value his or her own citizenship. It is akin to asking someone whose candidate lost or proposition failed why they don’t just renounce or move away if they are unhappy with the outcome of the election, rather than lobbying for the best or a different outcome in the future.
Finally, how would you respond or how would you feel if Greece, China, India, Israel, or the UK just started taxing US residents with descent from those countries because they are considered to be citizens or have a right to return to live in those countries? Alternatively, how would you react if the US decided to carry out the logic of citizenship based taxation to its logical conclusion, and simply decide that since Canada, Mexico, or any of the other countries I just listed may tax their citizens living and working in the US, it would stop taxing US residents without US citizenship (ie, Canadians living and working in the US would only pay taxes to Canada, but not to the US)?
Thanks to David Johnstone for his detailed response.