Interesting article by by Jessica Dorfmann in the Harvard International Review. On the whole it is a very good article. After describing many of the specific hardships of U.S. citizenship abroad, It closes by saying:
At its core, citizenship based taxation makes it harder for American citizens to live and thrive outside of the United States. This is a significant obstacle to the freedom of Americans to emigrate abroad in an increasingly globalized world. The United States has also implemented barriers to renouncing American citizenship. Citizens with a total net worth of over $2M USD, or a high income, must pay a 15% “exit tax” on the capital gains of their worldwide assets. And there’s been discussion about increasing the cost – when Facebook co-founder Eduardo Saverin relinquished his U.S. citizenship in 2011, U.S. Senator Chuck Schumer proposed increasing the exit tax rate to 30% and banning Saverin from returning to the United States for life. The U.S. Department of the Treasury also publishes, on a quarterly basis, the names of American citizens who have relinquished their citizenship, a practice used to “name and shame” renouncers. The Economist has dubbed these obstacles “America’s Berlin Wall”. It is no wonder that American expatriates frequently report feeling frustrated, harassed, and persecuted – the United States system has been built to punish them for merely residing outside of its borders.
The United States needs to get with the times and abolish citizenship-based taxation. The policy is tremendously unfair and detrimental to Americans living abroad, and it serves to anger and alienate citizens, many of whom have a lot to contribute to the United States in terms of international experience and skills. It is ironic that a citizenship so widely desired has come to feel like a burden for so many.
What I find most interesting is the Ms. Dorfmann’s description of how U.S. citizenship-based taxation works.
In general, citizens pay the difference between their domestic taxes and what they would have been taxed in the US – so, if a citizen’s domestic taxes are higher than what they would owe in the US, they pay no additional taxes.
With respect to the author, this is incorrect and minimizes the insidious and evil nature of U.S. citizenship based taxation. A more accurate description of U.S. citizenship-based taxation is:
1. First the U.S. citizen abroad is taxed, in the same way, as any Homeland American (which means that virtually all financial aspects of the Expats life are considered to be “foreign” with all the horror this entails); and then
2. The U.S. citizen abroad is giving limited credit for some of the the taxes that he/she has paid to his country of residence. (For example, the huge amount of VAT and HST type of sales taxes are not creditable.)
U.S. Citizens abroad are also able to exclude a certain amount of earned income from their U.S. tax base (which is an advantage only in countries that have lower tax rates than the U.S. has).
If citizenship-based taxation isn’t bad enough, U.S. tax rules assume the dominance of the U.S. tax system over the tax system of the the country of residence.
So, although I certainly agree with Ms. Dorfmann’s conclusions (it’s time to abolish citizenship-based taxation), the reality of citizenship-based taxation is far worse than her article suggests!