American Citizens Abroad has been doing some excellent work to try and get the U.S. system of citizenship-based taxation changed to residence-based taxation.
What's it all about and why would this be good for Americans abroad and Americans at home? Let's begin with a quick and dirty explanation of the difference between CBT and RBT.
Citizenship-based taxation (CBT): The U.S. is the only country in the world other than Eritrea that taxes based on citizenship and not on residency. This means that wherever in the world that an American citizen (or Green Card holder) is living and working, he must report his "foreign" (local to him) bank accounts, file tax returns and pay U.S. taxes in addition to the taxes he pays locally in the countries he resides in. An example:
An English teacher in France: Makes a modest salary, has French checking and savings accounts, and a small studio apartment. Because she lives in France she files French tax returns and pays national and local taxes to the French government and to the city she lives in. But because she is a U.S. citizen she must then turn around and report her French accounts to the US Treasury, file tax returns to the U.S. IRS and, depending on the circumstances, pay taxes to the U.S. government even though not one dime of her money came from the U.S. - it was ALL earned in France and deposited into local French bank accounts.
Residence-based taxation (RBT): Under this system a resident of a country may still be required to report on his worldwide income (depends on the country), but a non-resident only pays taxes on local income. An example:
Take the same English teacher in France and imagine she has a few investments in the U.S. that she left behind her when she moved Because she is a tax resident of France she would pays French taxes on what she earns and saves in France but she would only file tax returns and pay taxes to the U.S. on the income that is actually earned in the United States. Her French income would not be taxed by the U.S. because she is a resident of France and not of the U.S.
Sounds pretty straightforward (and sane) to me. To make it even easier to understand ACA has produced this excellent short video about their proposal which explains all the advantages the U.S. would have if it changed systems.
And for a bonus, here is an interview with Jackie Bugnion of ACA that provides more details:
My take on the CBT vs. RBT debate can be found in my 2012 post:
Diaspora Taxes: Citizenship-based Taxation.