Flophouse Series: Taxing the Diaspora

Within the debate over the U.S. practice of citizenship-based taxation, reporting of foreign (local to most of us) bank accounts and the proposal for new exit taxes lies some very fundamental questions:  Should states control emigration through tax policy?  Should brain drain (the flight of human capital) be treated the same way as capital flight (the movement of money and assets away from the country)?  Do diasporas owe something to their home countries and are their assets earned abroad legitimate targets for taxation?  And do the host countries have something to say about home countries trying to divert resources to fill their coffers and deal with their debt to the detriment of the host country tax base?  

In almost every debate on this subject on the Internet and elsewhere, the word "fair" is used by all parties.  "Homelanders" (citizens of the home country) suspect the emigrants of taking their capital (human or financial) earned in the home country and using it to live it up on Riviera or in Buenos Aires or Singapore.  Emigrants are equally suspicious of home country attempts to milk them of money and other assets earned abroad.  They see themselves as easy targets - low-hanging fruit for home country tax authorities - since diaspora representation is usually pretty poor in the home country political arena and efforts to "make them pay their fair share" are pretty popular domestically. In the case of the U.S. American emigrants might conclude that the nation is trying to escape its own obligations (and poor past decision-making) by trying to make the diaspora responsible for paying off a large portion of the national debt (a great deal of which was put on a Chinese credit card). In which case, perhaps Americans abroad ought to cut out the middle-man and send their tax money directly to Beijing.

With all this suspicion it is hard to have a measured, rational discussion about diaspora taxation.  This is a serious problem today between the American Diaspora and the United States.  The "debate" which is being conducted via letter writing, Internet forums and the like is feisty and often quite bitter.  If we start from the premise that the Other has nefarious motives, then we are in for a long and bitter fight that has the potential to harm everyone.  Yes, the U.S. government can make life very difficult for its emigrants with onerous reporting requirements, double-taxation and in various ways make it much harder for Americans abroad to do some very simple things like open local bank accounts.  On the other hand, there are 6-7 million U.S. citizens out there who might be in a position to do some real damage to U.S. interests.  It is not the sheer size of a diaspora that matters so much as its willingness to fight home country attempts to exert sovereignty over it in both the home and host countries using tools like public renunciation of citizenship, rallying public opinion, using the local and international legal systems, working through the political arena and the like.

But resolution (something that all parties can live with) is not going to be easy.  The first step really has to be establishing some kind of platform where a real debate is possible.  Some countries like France have given their diaspora direct political representation in the national parliament but the U.S. does not seem prepared to offer something similar.  There is however a very interesting initiative being proposed by Representatives Carolyn Mulroney and Michael Honda to create a Presidential Commission on U.S. Expatriates.  This is a modest but welcome proposal that could be the start of a real dialogue between the homeland and the American diaspora.  There is some risk here, however.  If the U.S. Congress simply decides to dismiss it as being unnecessary or a frivolous use of taxpayer dollars, some Americans abroad might interpret this as a sign that dialogue (which would be a kind of tacit recognition of the existence of an American diaspora) is not welcome and that any further efforts on their part to engage the U.S. government and the American people are simply a waste of time.

Over the next couple of days I'd like to use the Flophouse to look at the various merits and demerits of the diaspora tax systems that exist (like U.S. citizenship-based taxation which is nearly unique in the world) and others that have been or are being proposed  (Sarkozy had one and Patrick Weil had another).  I'd also like to look at some of the underlying and seldom discussed issues behind these measures which are about:  controlling emigration; preventing "brain drain" and capital flight; establishing or limiting sovereignty over international migrants, and how all the parties involved (home and host countries, emigrants/immigrants) perceive the obligations and duties of human beings to the original countries of citizenship and what each one thinks is owed to the country of residence or other country of citizenship.

To be very clear the following posts will not be an attempt to offer solutions nor will they be a complete overview of all the issues around this subject (just not possible on a blog).  Rather what I hope to do is to demonstrate just how complex the question of whether or not to "Tax the Diaspora" really is.