Tax History: Why U.S. Pursues Citizens Overseas
By
John D. McKinnon
The U.S. is the only country that taxes its citizens on their world-wide
income, no matter where they live.
OK, there’s also Eritrea. It imposes what is derisively termed a “diaspora
tax” on its citizens.
Otherwise, though, the basic rule is that countries impose their taxes on
individuals based on their residency, not their citizenship.
The case of *Eduardo Saverin*, the billionaire Facebook co-founder living
in Singapore who recently renounced his U.S. citizenship – and thus his
U.S. tax obligation on his future income and gains – has served as a
reminder of how different the rules are here.
But why is the U.S. such an outlier? And should it consider abandoning its
exceptional approach, or stick to its principles? That’s a debate that is
picking up steam this week.
The U.S. rule – not so different from war-torn Eritrea’s – has its roots in
desperate national conflict. The first U.S. income tax, enacted in 1861 in
the early months of the American Civil War, levied a 3% tax on incomes over
$800, but a 5% tax on income earned in the U.S. by “any citizen of the
United States residing abroad.”
The aim was to prevent wealthy people ducking their military and civic
obligations by fleeing the U.S. in its time of crisis. In 1864, the tax was
expanded to include income from all sources, no matter where generated.
Scholars say this happened as the proud sense of being a citizen of the
U.S. – with all its opportunities and obligations – first flowered out of
the battlefields.
That model of citizenship-based taxation has remained in the U.S. law ever
since, even as the rest of the world has gravitated to a different model,
one that simply considers where the taxpayer is living at the moment.
The concept of citizenship-based taxation never really caught on elsewhere,
as early international agreements focused on taxing based on either
residence or source of income.
The question of whether the U.S. should now switch to the residency model
has been generating more debate in recent years, particularly as the U.S.
has stepped up tax enforcement on its non-resident citizens. Americans
abroad are renouncing their citizenship in greater numbers over the last
couple of years, in part because of the increased red tape. Globally, 1,781
Americans renounced their citizenship last year, compared with 742 in 2009
and 278 in 2006, according to Treasury data.
Many say it’s time to fall in line with other countries, especially in an
age of increased globalization. “We’ve come to realize it’s the only
solution,” says Jackie Bugnion, a director of *American Citizens Abroad*,
an expat group. She says that recent tightening of U.S. tax rules for
foreign accounts is “the straw that broke the camel’s back” for a lot of
U.S. nationals abroad.
Other experts, including *Michael Kirsch* of Notre Dame law school, say
increased mobility argues for maintaining the U.S. model, not getting rid
of it.
Like it or not, Mr. Saverin’s case probably shows how the U.S. model
already is losing its grip. Until a few years ago, the U.S. simply presumed
that rich people renouncing their U.S. citizenship and moving overseas were
doing so for improper tax reasons, and made them prove otherwise in order
to escape from the IRS. But that model proved essentially unworkable
<
http://online.wsj.com/article/SB959639549306479425-search.html> – lawyers
could always find other reasons for the move – and there was at least an
argument to be made that the whole system was unfair.
So a few years ago, the U.S. adopted its own version of the system that
many residency-taxation countries use when their wealthy people leave – hit
them with an exit tax on the way out. In Mr. Saverin’s case it will amount
to hundreds of millions of dollars, as he has recently confirmed
<
http://blogs.wsj.com/deals/2012/05/17/facebook-co-founder-saverin-fires-back-at-misinformation/>
.
Some experts think his move could be just the beginning.
“I think Saverin proves the point that it now makes sense for many U.S.
citizens living permanently overseas to relinquish their passport and pay
the exit tax,” said *Reuven Avi-Yonah*, a University of Michigan professor.
The exit tax has removed the uncertainty of the old rule. Besides, he adds,
the trend in U.S. taxation is likely to be upward for years to come.
All in all, “it makes sense to bite the bullet and pay,” he said.
http://blogs.wsj.com/washwire/2012/05/18/tax-history-why-u-s-pursues-citizens-overseas/
Received on Wed Feb 24 2016 - 20:23:25 EST