What is the argument for a residential or territorial tax system, as opposed to a citizenship-based tax system?
Please accept in advance my apologies for any feathers I might ruffle with my politically agnostic real world observations below. While some may call my observations cynical, I am attempting to answer this as an observer of the world as it is; not how it was; or how we wish it to be. In other words, I will try to be the little boy who pointed out that the Emperor has no clothes.Given that the only real citizenship-based taxation (“CBT) regime is the US (apologies to those few remaining expat Eritreans who may pay a few % to their country for a clearance certificate), I will interpret the question to be whether there is any realistic chance that the US will abandon its current CBT basis for a residence based tax (“RBT”) regime .
There are several perspectives here to consider.
Group 1) US politicians;
Group 2) Americans who are not Golden Geese (1%ers) and will live in the US;
Group 3) Non-Golden Geese “Accidental Americans” who do not (and may never have) lived in the US, but who live, work, and will die in another taxing jurisdiction;
Group 4) Current or former US Golden Geese who may already be abroad or who could easily do so.
Group 1 Perspective: The main goal of a US politician is to get and stay elected. They may do this because they are genuinely motivated to help society; are power hungry; or because they honestly believe that they are saving the country from “the other party”. Whatever the motivation, successful politicians quickly learn that they achieve election/re-election by having the American electorate PERCEIVE that they are doing everything possible to maximize the net (after IRS budget) tax revenue collected in a long-term manner. Being perceived to be maximizing tax revenue makes the voters believe that the politicians will pay for the entitlement programs that have been promised by prior generations of politicians.
One thing to remember is that in the US political world “long-term” is considered the next election cycle (i.e. every 2 years!). Therefore real long-term planning falls victim to urgent attempts to get or remain in power.
CBT (vs. RBT) is very attractive to American politicians because:
A) CBT allows politicians to waive the flags of patriotism and to play to the populist underlying prejudices of the vast majority of American voters that the “unpatriotic, undeserving, opportunistic, ungrateful, parasitic rich” who were given the great gift of citizenship in the “greatest country in the history of man” are not paying their “fair share”.
Politicians also want to keep the concept of “What is a fair share?” undefined and vague. That is why they will not stick with “legal tax liability” as the definition of “fair share” but rather will talk about additional undefined “moral tax liability”. By using imprecise and ambiguous language, they are able to allow the electorate to form their own opinions as to what they each feel is “fair” or “patriotic” or “moral”.
It also allows for the electorate to place their own value on their country’s citizenship and its value to those Americans who live abroad. As an illustration, there are still a large number of American voters who take it as a given, that an American who is born and raised in Thailand (who is American through a parent) will be able to instantly call upon the US Marine Corp to stage a full-blown rescue should they get kidnapped in the remote jungle;
B) CBT allows American politicians to continue to peddle the “offshore evasion treasure” myth. In short, “You the voters don’t have to take entitlement cuts or pay more taxes, because there is all this ‘offshore’ money that will pay for everything”. The politicians gloss over a) that much of that money that is offshore (read: “outside the US”) is not subject to US tax or is after US tax net profits and b) even if you recover that portion which is US tax evasion it is a one time cash injection, not an on-going stream of tax revenue.
Since it is virtually impossible to determine the amount that could reasonably considered the proceeds of tax evasion, politicians fall over themselves with the wildness of their estimates (Did I say 1 trillion?…I meant 7 Page on trillion….no, No here’s a report that says 21 trillion!). With CBT, politicians are able to vastly increase the number of estimated tax evading “pirates” out there who are hiding treasure;
C) In the late 1990’s, US politicians discovered that they had the financial leverage to impose the enforcement of US tax laws onto financial institutions abroad. This is a by-product of the US dollar being the current dominant world reserve currency and the fact that US equity markets have such a large market share. No financial institution wants to lose access to US dollar trade or the US markets for its entire client base. Denial of such access would be financial suicide. It was recognition of this power that prompted the US to create the Qualified Intermediary Regime (Qualified intermediary).
When UBS was found to have criminally breached its QI agreement, US politicians were able to use the resulting outrage to pass even tougher legislation called ‘FATCA’ (Foreign Account Tax Compliance Act). The overwhelming nature of this fiscal power was most pointedly demonstrated when the US forced Vladimir Putin to sign on all Russian financial institutions to Page on fatca….in the middle of the Crimean crisis! Against such devastating financial retribution, one could not reasonably expect other governments, like Canada, to “resist US imperialism”;
D) Since “long-term” means, until the next Presidential or mid-term election, these politicians do not have to worry about whether the US will damage itself on a longer time horizon by using CBT.
They are able to engage in a “patriotism auction” by each claiming to be doing even more than the last, in making sure that the Golden Geese be hunted down; forced to pay up; and prevented from leaving the US tax regime by renouncing the world’s greatest citizenship.
With all of the compliance cost being pushed onto the financial institutions or the individual taxpayers, it doesn’t matter that revenues collected may be relatively small. In fact, small collections allows the politicians to call for even more draconian legislation. It also provides a nice little cover story of ‘those tax dodging scoundrels’ being the reason behind why the US has an ongoing budget deficit (not the fact that we might just govern poorly);
E) CBT allows the US to include non-residents who in any other jurisdiction would not be subject to that nation’s tax regime. If Russell B. Long (i.e. Kingfish Huey’s son) was alive today, he would modify his famous saying to “Don’t tax you; Don’t tax me; Tax the fellow behind the offshore tree!” In short, with CBT, US politicians are able to vastly extend the revenue and scapegoating net without upsetting the voters who affect them directly. Since there is not a “Senator for the rest of the World” or “Representative for Ex-pats”, there is little to no political cost to CBT.
For all of these reasons, there is a great amount of political capital in maintaining CBT and only loss in going through the effort to implement RBT. There was some small pre-mid-term mention of considering such a change as part of one party’s platform. This was a blatant attempt to try an get some votes from Americans abroad. However, post-election all one hears is ‘crickets’ about change;
Group 2 Perspective: During an election cycle, American voters are inundated with a wide variety of issues (Terrorism, Afghan war, ISIS, China, Economy, Unemployment, Ferguson, Who is Scarlett Johansson supporting?) that take up their attention span. Furthermore these are Americans who would also be taxpayers under a RBT system, so a CBT system has no additional impact on their own US tax liability.
American politicians understand that for the most part voters will never take the time or effort to consider the viewpoint of Americans abroad who are impacted by CBT. If you doubt this, then I suggest you read the comments section on any article dealing with this topic. If they think about this at all, they are in support of CBT because they believe in the offshore treasure story, or that only ingrates or traitors would ever consider living outside of the greatest country in the world. As for those, who would renounce their US citizenship, most of this group would spit venom at them.
If you look at voting behaviour, you will find a great deal of support for any effort perceived to be targeting tax evasion or making others pay more. Consistently voters feel that they pay too much tax and that others are not paying “their fair share”. Exploiting these underlying prejudices is what passes for political insight in the US on both sides of the aisle;
Group 3 Perspective: This is the group that suffers under a CBT system. They are the collateral damage caused by the US politicians efforts to gain and maintain their positions. While some engaged in wilful blindness about their US citizenship and resulting tax liability, many were truly misinformed on both counts. They are rightly angry about the impact of CBT enforcement legislation like FATCA and the truly draconian cost of “making it right”.
However, as a practical matter even when roused (as some are) they are too small in organized numbers to ever get the attention of, or change the minds of, significant enough numbers of Group 2 Americans. For this reason, US politicians have no incentive to do away with CBT and this group is left to dealing with its impact on their lives;
Group 4 Perspective: Golden Geese tend to be much less bound to the US to make and maintain their wealth as a result of globalization’s ‘flattening effects’. There is also a greater chance that increasing numbers will have some experience of life outside of the US and many may form the opinion that while the US has many virtues it also has some significant problems. Likewise they may have also seen that they could live and thrive outside of the US.
Finally, this group recognizes the reality that the US tax revenue model is extraordinarily reliant upon them for a huge portion of the total personal tax revenue. With an aging population meeting underfunded entitlement programs they recognize that no matter who occupies the White House or controls the houses of Congress, they will be required to contribute more and more of their income and wealth to all levels of the US government.
For those who want to at least give themselves the option of being able to leave the US tax system behind, they recognize that overcoming CBT is a bigger hurdle for them than for Golden Geese of other countries who are leaving the tax regime of their birth. It is a hurdle, but with proper advice and execution it is a surmountable hurdle.
As recognition of the inevitable increased future tax burden prompts them to recognize that they have options, it is pretty easy to predict that the number of Golden Geese bailing out of the US tax system, will continue to increase. It is also fairly certain that the first reaction of US politicians will be to increase the cost of departure. Of course, they have done this before and every time the numbers of departing Golden Geese has multiplied as a result (i.e. Get out before it becomes even worse!). There is no reason to doubt that this action and reaction will continue to occur in the future.
Given all of these perspectives it is time to summarize my conclusions. First, I do not think there is any realistic chance that the US will abandon its current CBT basis for a residence based tax (“RBT”) regime. I applaud those Americans abroad who are lobbying for this change, but I just don’t see it happening.
Second, the Americans abroad will continue to suffer under CBT until they take action or action is taken against them. Unfortunately, taking action that will help their situation means coming to terms with bringing themselves into compliance with their existing US tax and filing obligations. Once this is done, then they can chose to either sever their future liability or pay for the cost of on-going compliance. Not taking action, will inevitably result in the US finding them and applying the full force of tax, interest and penalties. For those who plan to die before the US finds them, they should realize that they are simply passing this problem to their executors and heirs.
With regards to US Golden Geese, they will each need to decide whether they will continue to absorb the ever-increasing tax liability on them for the benefit of not having to change their current American life situation. Some will stay. Some will decide to give themselves the ability to leave but stay for now. Some will leave. While the Golden Geese are small in number relative to non-Golden Geese (i.e. the 99%), because the tax revenue system relies on them for over 1/3rd of the total revenue collected, any significant increase in the number of American Golden Geese who decide to leave will have a MAJOR long-term impact on US tax collections. However, since this impact will not become apparent within a 2 year election cycle, American voters will continue to listen to American politicians who dismiss this reality.
In short. CBT is not going anywhere. Americans abroad will suffer the cost and impact of a CBT vs. RBT system. Golden Geese will continue to leave. The US will suffer as a result but because this has truly a long-term vs. election cycle horizon, American voters and politicians will ignore it.
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