As Goes The “Fairness Of Taxation”, So Goes Civilization: It’s Time To Consider The “Fair Tax”

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Introduction

I was recently introduced to the “Fair Tax“. My introduction to the “Fair Tax” was enhanced by the opportunity to host Jim Bennet and Steve Hayes as guests on my podcast. I encourage people to listen to these podcasts here, here and here. You will appreciate the character and commitment of Mr. Bennet and Mr. Hayes.

In simple terms, the “Fair Tax” would replace Subtitle A (Income Tax), Subtitle B (Estate and Gift Tax) and Subtitle C (Employment Tax) of the Internal Revenue Code. These Subtitles would be replaced with one National Sales Tax (currently proposed to be 23%). A general description of how the Fair Tax is envisioned to work is available here. Because the U.S. would no longer be trying to exercise tax jurisdiction outside the United States, it would no longer have to be concerned with the complex rules of international tax, no longer have GILTI and Subpart F rules and U.S. citizens would be free to live outside the U.S. without having the problems of having to comply with two tax systems.

(Notice this means that the U.S. would be taxing ONLY domestic consumption. The U.S. would no longer be taxing income driven by events outside the United States. Because the U.S. would be taxing activity ONLY in the U.S., it would have a “territorial tax system“.)

The purpose of this post is to argue that the adoption of the “Fair Tax” is both better tax policy, but also tax policy that is consistent with the nurturing and growth of a nation that believes in (to borrow the language of Ronald Reagan) the “freedom and dignity” of all Americans. By “all” Americans, I mean Americans who live inside the United States and those who live outside the United States.

As Goes Taxation So Goes Civilization

It is a mistake to think that the architecture of a country’s tax system is only about taxation and the raising of revenue. While including the raising of revenue, tax systems are used for many purposes which include: facilitating retirement planning (IRAs and 401Ks), encouraging and discouraging behaviour (disallowing foreign tax credits when taxes are paid to “bad” governments), the collection of information about people’s activities (FBAR, FATCA, Form 3520, etc.), the creation of “synthetic felonies” (FBAR penalties) and more. As the great tax historian Charles Adams wrote in his book “For Good and Evil: The Impact of Taxes on the Course of Civilization“, the rise and fall of civilizations is linked to the kind of tax policies employed.

It is amazing how much US taxation has evolved in the last one hundred years. Could it be that the history of American civilization could be written as the history of taxation?*

Speaking of American civilization

President Reagan’s 1981 inaugural address included two important points which would find agreement among almost all Americans:

So, as we begin, let us take inventory. We are a nation that has a government–not the other way around. And this makes us special among the nations of the Earth. Our Government has no power except that granted it by the people. It is time to check and reverse the growth of government which shows signs of having grown beyond the consent of the governed.

and three paragraphs later:

If we look to the answer as to why, for so many years, we achieved so much, prospered as no other people on Earth, it was because here, in this land, we unleashed the energy and individual genius of man to a greater extent than has ever been done before. Freedom and the dignity of the individual have been more available and assured here than in any other place on Earth. The price for this freedom at times has been high, but we have never been unwilling to pay that price.


Americans are ruled by the Internal Revenue Code

I have heard many tax professionals say:

“The United States taxes only one thing! Everything.”

The Internal Revenue Code is taxation by the federal government. To that we must add the state governments and some municipal governments. Because the USA employs citizenship as the principal criterion for “tax residency”, it’s reasonable to say that, US citizenship is the world’s only true:

“Taxation-based citizenship.”

Americans are ruled by taxation. But, (unlike every other country in the world) the United States does NOT allow its citizens to move from the United States, establish tax residency in other countries and cease to be a U.S. tax resident. One of SEAT‘s founding members, Dr. Laura Snyder suggests that US tax law now criminalizes those who emigrate from America. This is because the US employs “citizenship taxation“. When a U.S. citizen moves from the United States to another country:

– that individual continues to a U.S. tax resident and subject to U.S. worldwide taxation; and

– that individual is likely to become subject to a form of U.S. taxation that is more punitive and penalty laden than that imposed on U.S. residents. (In fact, all US residents need do to understand their fate is to look to how the United States treats its citizens abroad!)

But, back to the U.S. “Homeland” …

Why the United States should redefine US taxation by abolishing Income and Transfer taxes and replace them with the “Fair(ness) Tax”

Jim Bennet, Steve Hayes and all the supporters of the “Fair Tax” organization make the case in terms of the numbers. I would like to suggest that the adoption of the Fair Tax would be an investment in restoring what President Reagan referred to as “the freedom and dignity” of the individual. It would be the first step in restoring the United States to a country which is “a nation that has a government — not the other way around”.

The “Fair Tax” would benefit “We The People” in (at least) the following ways:

1. The income tax system requires individuals to spend incredible amounts of time in attempting to navigate the US tax system. Under the “Fair Tax” system individuals would spend little time on their taxes. (This is particularly shocking given that roughly 50% of Americans pay no income taxes.)

2. The income tax system requires individuals to spend large amounts of money on tax compliance. Under the Fair Tax system individuals would spend little or no money. This would provide particular relief for Americans abroad who frequently spend thousands of dollars filing U.S. tax returns (often to show they don’t owe any money).

3. The income tax system cannot be fully understood by anybody – I mean anybody. The Fair Tax system is easily understandable by everybody. Shouldn’t individuals be governed by laws that are clear? Shouldn’t individuals understand what they are required to do? “The hardest thing in the world to understand is the income tax.”

4. Individuals should have the right to see the exact text of proposed amendments to existing tax laws AND what the proposed text means in the context of the existing law. Amendments to the Internal Revenue Code are often even more incomprehensible than the statute that is the subject of amendment. An example example of this principle in its omission is H.R. 6057 “Tax Simplification For Americans Abroad Act.”

5. The current income tax system, while incomprehensible, is extremely penalty laden. It causes fear, anxiety and causes people to act in irrational ways. “When government fears the people, there is liberty. “When the people fear the government, there is tyranny.” (In 2020 large numbers of Americans abroad received $10,000 penalties for allegedly having filed late 3520As. Obviously the penalties were levied on those who were trying hardest to comply with incomprehensible US laws. A more detailed discussion of the great “3520A Penalty Fundraiser” is here.

6. Abolishing the income tax and replacing it with the Fair Tax would make the United States a more attractive place for companies (domestic and foreign) to do business.

7. Abolishing the income tax and replacing it with the Fair Tax would make it easier for American companies to do business outside the United States. They would no longer be subject to the incredibly complex US tax and regulatory regime (including PFIC, Subpart F, GILTI, etc.)

8. Abolishing the income tax and replacing it with the Fair Tax would allow individual US citizens the freedom to move from the United States if they choose. The current income tax system, which defines tax residency in terms of citizenship, has (1) depreciated the value of US citizenship by (2) making it impossible for U.S. citizens to move from the United States and establish a life in another country.

9. As it currently stands the US income tax system discourages well advised people from immigrating to the United States. It also encourages Green holders to leave the United States before they become “long term residents”.

10. Abolishing the income tax and replacing it with the Fair Tax would mean that US companies would be “free” to carry on business outside of American with a competitive advantage!! Subject to the provisions of rules of International Tax (generally codified by tax treaties) they would be subject to taxation in the countries where the income is earned. Taxes are a cost to corporations. The “Fair Tax” would that America would no longer need to ask foreign countries to increase taxes on their own corporations to remove the competitive advantage they have because of taxation that is lower than American taxation. The U.S. would no longer need Pillar 2.

As goes taxation, so goes civilization. Ending the US income tax system and replacing it with the “Fair Tax” system would be a huge investment in restoring “freedom and the dignity of the individual”. It would therefore be a wonderful investment in the future of America and the longevity of the American civilization!

Bottom Line: The “Fair Tax” Will Mean A “Fair(er) Life” For Americans At Home And Abroad

John Richardson – Follow me on Twitter @Expatriationlaw

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*Appendix – Then And Now: “The Revenue Act of 1921” as excerpted from one of my earlier posts.

Taxation was much simpler in the 1920s.

See the Revenue Act of 1921 and read it here.

Or here.

For those who want a PDF version for your library of “Great Books”:

RevenueAct1921

RevenueAct1921

The 2021 U.S. tax return was much simpler:

f1040–1921

Highlights of the Revenue Act of 1921 include:

– first and foremost, it is only 238 pages in total with the Act itself composed of 205 pages (Could it be read in a morning?)

– it is divided into 14 Titles

– “Income Tax” is in Title 2

– Title II is only 87 pages

– Title XIII contains the “General Administrative Provisions” which are only 24 pages and include: a requirement of compliance with “regulations in S. 1300, Penalty provisions (there is mention of a $10,000 penalty even then), the creation of a “Tax Simplification Board” in S. 1357 and more.

– Title XIV contains the “General Provisions” which seem to be only two pages. The “General Provisions” include

– There is an Appendix on page 203 describing individual  tax rates are found here.
Title II deals with the “Taxation of Individuals” S. 210 specifically reads:

‘That, in lieu of the tax imposed by section 210 of the Revenue Act of 1918, there shall be levied, collected, and paid for each taxable year upon the net income of every individual a normal tax of 8 per centum of the amount of the net income in excess of the credits provided in section 216: Provided, that in the case of a citizen or resident of the United States the rate upon the first $4,000 of such excess amount shall be 4 per centum.’

Note that $4000 was an enormous amount of money in 1924. This means that most people did NOT pay Federal Income Tax anyway. (Of course today many don’t pay Federal Income Tax either.)

S. 210 of the Revenue Act does not specifically say that a citizen abroad is subject to taxation. Therefore, we look to the relevant regulation which Regulation 62 from the IRS Commissioner” rel=”noopener” target=”_blank”>is

Regulation 62 from the IRS Commissioner which provides in part:

3: ‘Citizens of the United States except those entitled to the benefits of section 262, * * * wherever resident, are liable to the tax. It makes no difference that they may own no assets within the United States and may receive no income from sources within the United States. Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States. Every nonresident alien individual is liable to the tax on his income from sources within the United States.’

Clearly U.S. citizens were taxable under the Revenue Act of 1921. But, (some things never change), the question was:
what is a citizen?

Article 4 or Regulation 262 comes to the rescue.

4. A citizen is defined as follows: “An individual born in the United States subject to its jurisdiction, of either citizen or alien parents, who has long since moved to a different country and established a domicile there, but who has neither been naturalized in or taken an oath of allegiance to that or any other foreign country, is still a citizen of the United States.”

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