Interesting commentary on citizenship-based taxation from Shadow Raider at the Isaac Brock Society and from Badger.
First from Shadow Raider:
I would like to correct the common misconception that CBT is somehow antiquated, and that other “industrialized” countries have “moved away” from this model. No. All other countries, with very few exceptions, have never implemented CBT. It has nothing to do with being industrialized or modern. Other countries rejected CBT because they though it was unfair, already centuries ago.
The first country to create an income tax in modern times was Great Britain in 1799. The British parliament adopted the principle of territoriality, later evolved into RBT, on the basis of justice. Later British writers confirmed this principle, and rejected CBT as unjustified:
Judge C. B. Kelley, in an 1876 Tax Court judgment, which he said was momentous because it involved “most important principles of great weight as affecting the law of England, and I may almost say as affecting the international law of the world,” declared support for the principle of nontaxation of nonresidents in no uncertain terms: “I must say … that in the first place the great principle of the law of England in relation to taxation is, that taxation shall only be imposed on persons or things actually within this country.”
A typical defense of this principle was the view of Charles Tennant (1872): “… why should the subject contribute to the support of the Government out of a revenue derived from a foreign country? … On no ground of policy or principle of justice can such proposition be maintained.”
As the noted economist C. F. Bastable (1892) also osberved, “Where a citizen emigrates with all his property … it is plain that he is only amenable to the laws of his adopted country; there is no power on the part of his native land to levy taxes on him and no justice in doing so,” and “the income tax should be levied by the country of residence.” The injustice was evidently by reference to the principle that taxation should reflect accrual of benefits rather than ability to pay, and the benefits, if you were abroad, were assumed to be negligible. The inability to collect income taxes from nonresident citizens, although noted by Bastable, appears to have been a far lesser consideration than this sense of what was just.
(Income Taxation and International Mobility, Jagdish N. Bhagwati, John Douglas Wilson, 1989.)Even the United States adopted RBT when it created an income tax for the first time, in 1861. US citizens abroad were only taxed on US income. Then some people started leaving the country to escape the Civil War that had just begun, as it happens in any country under a civil war. In the minds of congressmen at the time, these people were traitors and had to be punished, and Congress had the perverse idea of implementing this punishment through taxes. So, in 1864, the income tax law was changed to subject every US citizen to the same system regardless of where they lived. That’s when CBT started. The entire income tax was suspended between 1895 and 1913, but the international aspect never changed. CBT did not start in 1913.
When other European countries started creating an income tax, they copied the same model from the UK. Later, as European colonies became independent, they copied the tax system from their parent countries, and other countries copied it from their neighbors. As a result, practically the entire world rejected CBT.
There were a few exceptions. Mexico copied CBT from neighbor US when it created its income tax in 1929, and the Philippines copied the US tax code when it became independent from the US in 1946. Later, both of them realized the unfairness and impracticality of CBT, and abolished it in 1980 and 1997, respectively.
Various highly authoritarian regimes also implemented CBT as a means of maintaining control over those who wanted to leave the country. The Soviet Union, Bulgaria, Vietnam and Myanmar adopted CBT, and later abolished it as the country became more open or democratic. Eritrea also adopted CBT when it became independent in 1993, and still applies it. The Eritrean government is a typical example of a tyranny as it has never implemented its constitution or held any national elections.
In sum, CBT has nothing to do with being antiquated or pre-industrialized. The few countries that ever adopted it did so as a punishment, illegitimate control, or as an inadvertent copying mistake that was later fixed. I repeat: the vast majority of countries, developed or not, never used CBT because they easily recognized that it would be unfair.
Now from Badger:
Exciting event!
I never thought I would have a deep motivation or interest in attending an event centered on comparative systems of taxation. Or to have read the work of presenters on the topic. Until recently, I had never read a tax journal article in my life.
How life has changed!
Among the highlights I am hoping for, is to hear someone live, in front of an audience on Canadian sovereign soil, defend and debate one of the oft cited CBT justifications – from *’Cook vs. Tait’ http://www.law.cornell.edu/supremecourt/text/265/47 – to a group that will include those directly affected; some duals, Canadian citizen ex-USPs, Canadian citizens, and Canadian permanent residents – rather than the same argument restricted to the more usual audience of compliance and enforcement professionals, or US based tax and law academics and homelanders on US soil.
I am looking forward to hearing a USP standing inside Canada’s borders, describe in detail any actual ROBUST and INCONTROVERTIBLE evidence that supports the extraterritorial US claim as to the extensive ‘benefits’ reputedly received from the US during decades of living in Canada – and thereby to be extraterritorially taxed, penalized and controlled for a lifetime and beyond, merely because of a random accident of a US birthplace or parentage, and very limited or no US residency. No free lunch was received; during US residency, any US services would have been paid for in full via the US taxes levied on and paid by adult parents.
What can be presented that would ethically support the lifelong (and beyond) US extraterritorial taxation, penalization and ownership the US asserts over my life in Canada and my Canadian family’s savings – and that of any theoretically qualifying children (who would then also have been cursed with receiving such a generous unwelcome ‘benefit’ as punitive US taxation and penalization of their Canadian RESP as a ‘taxable foreign trust’)?
* from ‘Cook vs. Tait’:
265 U.S. 47 (44 S.Ct. 444, 68 L.Ed. 895)
COOK v. TAIT, Collector of Internal Revenue.
No. 220.
Argued: April 15, 1924.
Decided: May 5, 1924.
opinion, McKENNA“…The taxing power of a state, it was decided, encountered at its borders the taxing power of other states and was limited by them. There was no such limitation, it was pointed out, upon the national power, and that the limitation upon the states affords, it was said, no ground for constructing a barrier around the United States, ‘shutting that government off from the exertion of powers which inherently belong to it by virtue of its sovereignty.’”
“…The contention was rejected that a citizen’s property without the limits of the United States derives no benefit from the United States. The contention, it was said, came from the confusion of thought in ‘mistaking the scope and extent of the sovereign power of the United States as a nation and its relations to its citizens and their relation to it.’ And that power in its scope and extent, it was decided, is based on the presumption that government by its very nature benefits the citizen and his property wherever found, and that opposition to it holds on to citizenship while it ‘belittles and destroys its advantages and blessings by denying the possession by government of an essential power required to make citizenship completely beneficial.’ In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete. Or, to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen. The consequence of the relations is that the native citizen who is taxed may have domicile, and the property from which his income is derived may have situs, in a foreign country and the tax be legal—the government having power to impose the tax……”
Those passages always struck me as supremely arrogant and entirely subjective. That merely asserting something without any burden of proof, stood as sufficient to justify an extraterritorial claim to the assets of generations abroad – no matter what the cost. How convenient. When I first read it, it made me want to bite that grasping extraterritorial hand – the one that didn’t feed me.
_______________________________________________________________________________________________
This series of “Cook v. Tait” posts (including the Prologue) include:
Cook v. Tait Prologue: Citizenship renunciations soaring under Obama – Renunciation as an Act of Self Defense
Cook v. Tait 1: Does Cook v. Tait really mean that citizenship-based taxation is constitutional in all cases?
Cook v. Tait 2: The presumption of government benefit
Cook v. Tait 3: Legal Scholar agrees justification in Cook v. Tait, but offers new justification for citizenship-based taxation
Cook v. Tait 4: Taxation of #Americansabroad based on US culture 150 years ago! Time warp or what!
Cook v. Tait 5: Citizenship-based taxation was never justified – League of Nations reports!
Cook v. Tait 6: Taxation of Green Card holders who reside outside the U.S.
Cook v. Tait 7: Equality: Law prohibits both rich and poor from sleeping on the park bench
Cook v. Tait 8: Does citizenship-based taxation cross the boundaries of tax justice?
Cook v. Tait 9: US may have to stop citizenship-based taxation to get #FATCA IGAs
Cook v. Tait 10: Those born outside the U.S. to U.S. citizens, may not be U.S. citizens
Cook v. Tait 11: Who should #Americansabroad be compared to for tax purposes? Even U.S. citizens are entitle to “equal protection” under the 14th amendment
Cook v. Tait 12: Afroyim v. Rusk, The 14th amendment and the forcible destruction of citizenship
Cook v. Taint 13: The U.S. can no longer be permitted to levy taxes on the residents of other countries in general and border babies in particular
Cook v. Tait 14 – Boldly Go where no taxing authority has gone before
Cook v. Tait 15 – Why did the Soviet Union, Bulgaria, Vietnam and Myanmar adopt CBT? To maintain control.
Cook v. Tait 16 – “Supreme Court’s Decision in Cook vs. Tait and Notification Requirement of Section 7701(a)(50)”
Cook v. Tait 17 – What U.S. Citizenship-based taxation really is
Cook v. Tait 18 – Americans abroad “by their very nature” benefit the U.S. government where ever they may be found
Cook v. Tait 19 – Question: How are Americans abroad taxed by the USA? Answer: It depends on what country they live in
Cook v. Tait 20 – Bernard Schneider: “The End Of Taxation Without End – A New Tax Regime For U.S. Expatriates”
U.S. Persons Abroad - Members of a Unique Tax, Form and Penalty Club 
Pingback: Cook v. Tait 14: It’s NOT “citizenship-based taxation”, It’s “extraterritorial taxation” | U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club
You have a treasure trove of good material here although it might be hard for some people to find if they don’t realize that blank scroll bar thing is actually the archive. Thanks for putting Shadow Raider’s and Badger’s excellent posts in one place, along with all those Cook vs. Tait links.
Readers should note the following comment at the Isaac Brock Society:
http://isaacbrocksociety.ca/2014/04/23/toronto-friday-may-2nd-forum-debate-on-cbt-citizenship-based-taxation-vs-rbt-residence-based-taxation/comment-page-2/#comment-1537142
and all the responses that it triggered – great discussion:
Anne Frank says
April 24, 2014 at 11:05 am
I very much hope to be able to make this event. I can’t say that I am expecting a whole lot in terms of debate since a rational defender of CBT will be pretty hard to find. Two aspects of the question do interest me:
1. Obviously CBT is the heart of the matter here. Without that, FATCA would be an annoyance – would cost billions to banks everywhere, benefit none and cost us all a few pennies more in service fees per year, but would not be noticed by many but policy wonks. While CBT is the core of it, CBT has languished for about 90 years of “don’t ask, don’t tell” benign neglect. Executives posted overseas doubtless had to deal with it, but nobody else filed, knew they had to file or, frankly, were subject to more than a bit of grumbling from the IRS if they ever moved to the US and started to file tax returns again. Something changed in the 1996-2008 time frame. There were a couple of high-profile expatriations and Schumer et al fashioned a dozen laws to “punish” them. A quote on one of the links in this thread above (about Cook v Tait) is from Schumer saying that “10,000 people have emigrated from the United States in the last decade and not been punished. That is about to change” (paraphrased). Of course Schumer has his facts way, way wrong. Canada alone receives about 10,000 US-sourced immigrants every two years or so. His poor accounting skills aside, I find it quite interesting that Schumer feels quite comfortable in plainly expressing the view that emigrants from the US are deserving of PUNISHMENT by reason of that fact alone. Remember, the US self-image is as a land of immigrants and every immigrant to the US is an emigrant from somewhere else and if the rest of world took it upon themselves to punish their expatriates as systematically as the US attempts to do, the last 200 years of US history would have been quite a bit rockier. How much longer would the US have taken to “fill up” if its immigration agents in the 19th Century had been banned, arrested or required to front exit taxes for the huddled masses they packed on to ships bound for the Golden Mountain? The US has had an expatriation act on its books for more than a hundred years enshrining the right of expatriation as a fundamental human right. How, with that “official” background lionizing the virtues of emigration/immigration the collective consciousness of the US could have shifted to the point that a pandering politician like Schumer feels that he can score points by turning his country’s founding myths on their ear is surely a matter worthy of some analysis! I might suggest that the US collective consciousness is infected with a pervasive sense of decay, decline and denial that is at odds with the brazen, “can-do” positive self-image of the “Greatest Country on Earth” (trademark registered!). Somewhere in that complex national psychology lies the root of the evil that 8 million US expats are being impaled upon.
2. The reticence of the entire world to pursue its own self-interest vis a vis this “peculiar institution” of CBT is something I find quite hard to explain. This is a topic that I should think Alison may have some interesting views to express. Yes, the US is a bully. Yes – one can go on with negative descriptions till the cows come home. Yet, FATCA was not laughed into irrelevance by the court of world opinion. It’s not as if the US threatened to invade countries if they didn’t adopt it. Their proposed economic sanctions were certainly eye-popping, but any sophisticated analysis would have shown them to be self-destructive threats that would very likely harm the US at least as much as their intended targets. Any semblance of global condemnation and solidarity would have crushed FATCA in its infancy and most should have had ample reason to do so based ENTIRELY upon the externalization of compliance costs to foreign financial institutions (whose increased US compliance expenses result in tax deductions in their home country, I might add). The prospect of facilitating ANY transfer of domestic revenues to the US Treasury should have turned any self-respecting Finance Minister or Chancellor of the Exchequer running for the barricades as few issues should be more central to the self-interest of a modern nation state than protecting its tax base. The entire web of international tax treaties is premised on exactly that and is entirely premised on intricate rules for allocating fiscal rights based on source of income and residency. The US arriving on the scene demanding ANY assistance for CBT makes each and every “US Person” in the rest of the world a fiscal trojan horse, leaking tax revenues on a non-reciprocal basis. The international tax system would break down if all adopted it. FBAR alone would virtually empty the bank accounts of all historically “non-compliant” US Persons overnight if the world gave the tiniest assistance to the US in imposing it with no reciprocal benefits whatsoever. I am mystified as to the willingness of the globe’s financial powers to simply be cowed by this without calling an obvious bluff. The US is still an important economic power, but by no means as dominant as it was 60 or even 10 years ago.
While I said two points caught my interest, setting them forth has raised a third: the capacity of the US to adopt one principle for itself and demand the rest of the world adopt another all the while imagining there are principles being consistently applied is indeed fascinating. There is a fancy word for that – syncretism (believing in two contradictory things at the same time). I have often mentioned the expulsion by Canada of the Eritrean diplomat caught trying to enforce that country’s CBT system (at the princely rate, I believe of 2%) inside Canada. My research into that shows that the ORIGIN of the action was a United Nations resolution condemning Eritrea in which the US ambassador to the UN appears to have played a leading role, apparently without cracking one of those patented, Putinesque smiles when he says one thing and does another. The scene from Casablanca comes to mind (“I’m shocked, shocked to find that gambling is going on in here”). In a prior generation, the entire Western world united in thwarting the Soviet bloc’s attempt to enforce its CBT system on refugees, calling it a human rights abuse and contrary to public policy, etc. The US was at the forefront of that fight while having laws that purported to do precisely the same thing to its own diaspora. None of our countries assisted the Soviets in that game yet all of those same countries are passively acquiescing in this one?
I do hope Joe Arvay gets a feisty judge willing to roll up his or her sleeves on this one when it gets to court!