Citizenship-Based Tax Systems

The United States of America has a citizenship-based tax system.  Almost all other countries in the world (the only exception is Eritrea) have territorial-based tax systems.  These are facts.  To understand why this is so, have a look at this brief from American Citizens Abroad which I think does a splendid job of explaining the history of American tax policy and how it impacts all American citizens and Green Card holders in a globalized world.

Facts are good but for most people the consequences of citizenship-based taxation seem distant and complex.  Others seem to be of the opinion that anything that will catch "tax evaders" must be a good thing in principle even if it inconveniences a "few" people (like 6 million Americans and tens of millions of immigrants and Green Card holders).  I think something was lost in translation here and what we really need is a good interpreter.

A few days ago in response to an Washington Times article about FATCA and off-shore bank accounts someone took on that job and he/she did it so well that I'm going to post his analogy here.

"What if you were born in California but moved to New York early in life. You live and work and pay taxes in New York for 30 years and one day you find out you were supposed to ALSO file and pay taxes to California, because you were born there and never formally renounced your residency! You are a California Tax Evader! Since you didn’t report your New York bank account to California authorities, they are going to confiscate your assets! You have been paying full taxes and complying with New York law, but sorry buddy, you were born in California and therefore must report and pay taxes to your birth state until you renounce California residency. Oh and renouncing will cost you tons of money and California will threaten to never let you set foot across state lines if you do it. Oh, and your adult children are also facing personal bankruptcy; since you were “Californian” your children are also officially “Californian” until they renounce. Your entire family is destroyed and your New York born wife wants a divorce.
Finally, New York banks decide they will no longer let Californians have a bank accounts with them because the reporting requirements for you people are just too expensive. And California banks won’t let you have an account with them either (although they still consider you a resident), because you no longer have an address there. You may therefore have no bank account, no retirement plan, no investments, no credit card, no life.
This grotesque illustration is not at all far fetched. It is EXACTLY what US citizens are facing, if they have for any reason decided live outside of the US. US citizens who have lived outside of the states for decades, who are citizens of another country, who have paid taxes and abided by all laws, are now being pursued and persecuted in a breath-taking witch hunt.
Let me put it another way.
Mitt Romney’s parents were Italian immigrants. After they started living, working, and paying taxes in the USA should they have to keep on paying Italian taxes too? Should Italy have the power to confiscate their house because they didn’t send a report of their US banking activity to Italy? Should Mitt be considered an Italian citizen, be subject to Italian reporting and taxes, just because his parents were born there? Should he face total confiscation of his life assets because he misunderstood or didn’t even know about a reporting requirement? Should he have to hire an expensive Italian tax lawyer fill in annual reports to another country or face prison threats? That is exactly what US law does to its citizens abroad, it is absolutely outrageous and unacceptable."

That, my friends, is what citizenship-based taxation is all about.  Remember, all states have the right to decide whether or not someone is a citizen of their country.  Any one of you reading this who has the most tenuous connection to another state could wake up one day and find out that not only are you a dual citizen, but that you have duties and responsibilities to another state that you may have not lived in for years (or in some cases never ever lived in).  The U.S. has chosen to impose this on its citizens wherever they live and work and there is really nothing to stop other states from doing the same thing to Americans, many of whom have immigrant parents or grand-parents.

The U.S. has every right to decide who its citizens are and so does every other state on the planet. However, just because a state is acting within its rights, doesn't make the outcome right.  Citizenship in a democratic nation-state is based on consent, the right to effective representation and equal treatment under the law.  The U.S. implementation of citizenship-based taxation violates each and every one of these principles.