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Monday, August 26, 2013

Citizenship-based Taxation: Repression, Resistance, and Democratization

“Hence, taxation appears to be one arena in which the stakes are tangible, salient, and large enough that individuals know what their self-interest is and often express attitudes consistent with these objective stakes.”

Andrea Louise Campbell
“What Americans Think of Taxes”
The New Fiscal Sociology

I just finished a fascinating book of essays on taxation called The New Fiscal Sociology:  Taxation in Comparative and Historical Perspective edited by Isaac Martin et al.  

Fiscal sociology is a cross-disciplinary approach to what makes taxation tick. Economics is important but interestingly enough so are psychology, sociology, and history.   Taxation, the book’s editors point out, “raise a number of fascinating questions about political processes.”  Some examples:

People may strongly disagree with how their taxes are used and yet most pay anyway.  Why is that?  Force may work for a time but it is costly and inefficient.  Sometimes it is the economy of a particular place that drives what options that state has in terms of taxation.  How do these systems come about and what happens when conditions change?  Are tax systems “path dependent”?  Why in a globalized era have tax systems not converged and become more uniform across the globe?  And finally, what is the relationship between taxation and democracy above and beyond the simple (but often unrealized) premise of  “no taxation without representation”?

It is the last question that I find the most interesting.  

The American system of taxation based on citizenship (and not residency) has its roots in the Civil War though it did not take its present form until the 1970’s.  It is nearly unique in the world and, up until very recently, was not enforced.  This changed at the end of the first decade of the 21st century with a number of measures designed to make Americans and Green Card holders abroad “legible” to the US government.  FATCA is the most recent (and most controversial) of these measures.

Reading Charles Tilly’s essay “Extraction and Democracy” gave me another way to look at tax systems in general and citizenship-based taxation in particular.  It raised many questions for me about what could happen if the United States government does succeed in making CBT “work”. What follows here is a modest attempt to apply Tilly’s argument to the citizenship-based taxation controversy.

Tilly begins his essay by pointing out the obvious:  all states need resources to survive.  What is less obvious is how taxable resources vary according to the local economy and the limited means by which states can extract that revenue.  They can:
  • produce them in their own enterprises;
  • seize them and exchange them for state-sustaining resources (e.g. oil for weapons);
  • extract them from subject population that already hold and/or produce such resources."
Tilly points out that the first two have nothing to do with “citizen consent”.  There is little or no bargaining by the state because the state usually does not need its citizen/subjects approval to do these things.

But extracting resources directly from its citizens or subjects must involve negotiation and this is just as true of autocracies as it is of democracies.  The ideal is to achieve a kind of “quasi-voluntary” compliance where most people pay up without hissing like Colbert’s goose (or getting out the guns).

Tilly then describes a cycle of “Intervention-resistance-repression-bargaining” that ensues when states look to their population for financing (option c).

In the case of citizenship-based taxation (an extra-territorial expansion of the tax base) the “intervention” was the decision to tax Americans abroad in the 1970’s.  What followed was not so much “resistance” as a kind of implicit contract between the U.S. government and its citizens abroad to ignore the whole business. Compliance was (and still is) nearly non-existent.  Clearly, the system was almost impossible to enforce on a world-wide scale and thanks to exclusions and tax credits, it was unlikely that the U.S. would have derived much revenue in any case.   

The “repression” started in the latter part of the first decade of the 21st century, most likely in response to growing budget deficits, a deadly recession, and a need to finance two on-going wars.  

This repression has led to resistance and today there is a growing movement to fight back (the American Diaspora Tax War.)  In this dialogue of the deaf are we finally coming to a tipping-point where something must change?  Maybe and that brings us to the end of Tilly’s  cycle where the the last stage is “bargaining.”  Resistance is noted, negotiations begin, and deals are made.  

The core of Tilly’s argument is that this bargaining process can lead to greater democratization in the long run.  Governments respond to strong push back from the people they are trying to extract resources from and, in the end, bargaining ensues since it is more cost-effective than the harsh (and very expensive) policy of “the floggings will continue until morale improves.”

Assuming that the U.S. government will eventually have to bargain with its diaspora, that the majority of Americans abroad will not renounce, and that efforts to change to a residence-based taxation system will fail, I thought about Tilly’s democratization argument in the context of citizenship-based taxation and came up with a few possibilities for what this might mean for both the American diaspora and the U.S. government.  Just a few ideas for discussion and I’d be very interested in your thoughts on this.  What might we see if the American government succeeds in imposing CBT?

Recognition:  In a sense citizenship-based taxation is a perverse sort of diaspora recognition on the part of the United States. It is very disheartening to be valued for the contents of one’s wallet and little else.   Still, if Americans abroad become “quasi-voluntary” compliant taxpayers it is much harder for homelanders to deny the legitimacy of their “domestic abroad.”  It is not the most positive form of recognition (and other nation-states do a much better job) but it could be construed as a starting point.

More Political Participation from Abroad:  The resistance to citizenship-based taxation takes many forms, one of which is increased political participation on the part of Americans abroad.  This might mean joining one of the organizations representing our interests like AARO, ACA or FAWCO.  It might also mean more active voters from abroad.  In some states with large numbers of overseas voters this could potentially have an impact on the result of local elections.  Efforts to raise our visibility as voters may also change the landscape in our favor. Visiting my Congressional reps in Seattle I introduced myself as “one of X’s constituents from France”.  Others are doing this as well.  

Might this recognition of our status as taxpayers give us more moral authority when it comes to intervening in US politics?  

I know that paying U.S. taxes in addition to the French ones has changed my behaviour.  
I no longer feel any unease about voting for (or against) school levies, local judges, state-level senators and representatives, and local funding requests for infrastructure in the home country.  I am not directly taxed at the state, country or city level for the last since I do not live in Seattle, King County or the State of Washington, but having sent a check to the U.S. Treasury, do I not fund these things?

Services and Benefits:  If we manage to get the U.S. government to the bargaining table, and they are not willing to mitigate the tax system, then we would be entirely within our rights to demand services commensurate with (but not identical to) what homeland Americans receive.    These services could be delivered through the local US Embassies and consulates and could include: Medicare for those Americans abroad in countries without a national health plan, free English and civics classes for our children; more U.S. government support of institutions serving Americans abroad like cultural and research centers, librairies, international schools, and  overseas veteran’s associations.  

A Greater Role for "Local Government" - U.S. Embassies and Consulates:  Clearly services cannot be delivered to Americans abroad by the United States government in the United States.  Some existing services already are delivered locally:  U.S. consulates offer help with Social Security and some - like Paris and London - have a small local branch of the IRS.  

An expansion of these services, the creation of new ones, and sufficient authority to adapt to local conditions would have several beneficial effects.  Americans abroad would have an incentive to go to the U.S. consulate for reasons other than the renewal of a passport every ten years - they might even find it worthwhile to register with the embassy;  tax compliance would probably increase if filing help was readily available in English and the local language; and finally a local service provider (be it the IRS or Social Security or another department) that is close to home (the host country) would probably find it easier to earn the trust of the American population in that country.

These things could be a sign of democratization favoring Americans abroad but is that necessarily good for American democracy in the U.S.?  If even a few of these things came to pass then homeland Americans would have to wrestle with the following:
  •  Recognizing that there are 6-7 million Americans citizens who have chosen NOT to live in the U.S. but who are nonetheless full status citizens;
  • Acknowledging that formal US citizenship does not necessarily correlate with a discrete territory and an American identity.  (There are Americans abroad who have never lived in the U.S., have no intention of living there, do not speak English and know next to nothing about United States other than what they have gleaned from local media).
  • Living with “foreign” intervention by these citizens in U.S. domestic politics at the city, county, state, and federal level. 
  • Accepting that Americans abroad will not necessarily be subject to the laws they help to create but their views will be included nonetheless.  This diverse population has been shaped and changed by the countries in which they live and their point of view may be very different from that of the average homeland American, Left or Right.
  • Meeting the demands for services and benefits from this population locally (i.e. in the countries where they live).  

To be very clear nothing I said above should be considered an endorsement of citizenship-based taxation which is gutting the American community abroad.  But in the resistance to it do we see the seeds of a politically active overseas American community?  Is there opportunity in adversity?  Will we be able to bargain for a better deal?  How far will the homeland government go to reach the exalted state of “quasi-voluntary compliance.”

Perhaps the most important question would be: Is the American Homeland ready to embrace its diaspora and accept all the repercussions of extending the nation to include its Domestic Abroad?


A broken man on a Halifax pier said...

The only real solution is getting rid of citizenship-based taxation. I can only see two arguments that would be taken seriously:

- CBT wastes resources at the IRS end, as they are forced to process hundreds of thousands of complex returns that show no taxes due.

- Getting rid of CBT would simplify implementing FATCA. To take Canada as an example, U.S. Persons could be a formidable lobby if they got organized, but US residents with Canadian accounts never will be.

Also, Cook v. Tait was tried in the era before dual citizenship was acknowledged - I'd be very interested to see the same issues tried again with a US/Country X national living in Country X.

Rosy the Riveter said...

A good question, Victoria. I already suggested in a different forum that if US citizens are taxed abroad, then they should be eligible for US benefits. I was roundly denounced for having mixed apples and automobiles, and comparing the uncomparable so forget any sympathy from homelanders. Or even some of the goody-two-shoes over here who think citizenship-based taxation is a wonderful idea because it somehow makes them more American.I still think the only valid approach is full opposition, period. NO reciprocity, NO declaring any foreign-source accounts or income, NO NOTHING.

A broken man on a Halifax pier said...

@Rosy -

The logic in Cook v. Tait was the opposite - since the citizen benefits from the protection of the state abroad, then they should be taxed abroad.

There are many problems with this (duals are explicitly not protected, but still have to file) but in principle that's the official logic.

bubblebustin said...

Great concept to ponder, but hasn't the US government already made attempts to add a little sugar to help the medicine go down in the form of FEIE's and tax credits, and still USP's abroad are choking? I predict that if USP's abroad begin to receive anything of financial benefit, there will be a desire to cut back whatever monetary concessions we have. Be careful of what you wish for.

Nina Olson's suggestions to Congress on how to make CBT work have long been ignored. Just what would be the incentive for them to start listening now?

My prediction is that unless lawmakers get wise real fast, they will just end up ignoring the situation until there are no US persons living abroad. Every day that we aren't given relief, the more our resentment becomes entrenched and our resolve to become non-Americans undeterred. As in a marriage when the bond of trust is replaced with anger or fear, no reconciliation is worth the effort.

Ellen Lebelle said...

Oh, how I wish there were some encouragement from the US to help American parents teach their children abroad. Free coursework online, subsidies for American libraries, reasonably priced consular service (getting a paper notarized costs $50 per signature per page) ... in exchange for our tax dollars.
A dream, so I'm more in Rosy's frame of mind.

Rosy the Riveter said...

To the Broken Man on the Halifax Pier: You're right about that. Except that the only instances I know of where US Persons get protection from the US Government is when they are stuck in hotspots in the world and need to be reptriated or housed (and that's not often), or else have lost passports (which they still have to pay for). The protection should also mean that their private foreign accounts are not plundered since that cash is not US source. But FATCA has put an end to even that. And the "Avoidance of double taxation" treaties signed with most nations are very poorly named. If you read the fine print down to the bottom, the US freely gives away hefty percentages of US citizens' inheritances and other US source benefits to foreign countries which have nothing to do with any of that.

bubblebustin said...

I've often used the Stages of Loss or Grief to express what US persons abroad are experiencing at the hands of our own government:
Denial and isolation, anger, bargaining, depression, and finally acceptance (if we're lucky).
Unfortunately for us the feeling of loss appears to be only one way, and if and until the US government views us as an asset, there's no hope in hell that they'll come to the table in an attempt to bargain. Our immediate task should be how to effectively illustrate to the USG how a thriving diaspora benefits the US, while accepting that as pioneers in this area, it won't be easy.

Anonymous said...

the trend is against unrestricted right to birth citizenship.

because of birth tourism on 30 now grant automatic citizenship at birth.

Anonymous said...


Interesting post. You raise interesting philosophical questions about taxation.

It is an important discussion to have.

The problem is that what the US calls "citizenship-based taxation" (for the most part) is NOT and has little to do with taxation. It is about life control. The fact that they call it taxation does NOT make it taxation.

Most of the issues relate to:

1. fines (FBAR,PFIC, FATCA) penalties; and

2. Outright life control (can't do retirement planning, have business partnerships, discrimination against non-American spouse, etc.)

3. What can only be described as "terrorism" - threats of fines,penalties, confiscation, with NO assistance compliance assistance provided.

Frankly, I believe that the very description of this as "citizenship-based taxation" mischaracterizes and perpetuates this problem.

For those who those who question whether Cook v. Tait would be decided the same way today:

This is an interesting question. What is very clear is that Cook v. Tait at least addressed the issue of "taxation". At the time Cook v. Tait was decided the USG was not trying to define "residence based life control" as legitimate taxation.

There is another issue here that the time has come to address. The more I think about and experience this, I have come to see this as a clear "extra-territorial application" of U.S. law.

This particular issue has NOT been adequately considered. The U.S. can think what it wants. It can make what laws it wants. But, it has no jurisdiction over residents of other countries for things they do in their countries. Time and time again, I see lawyers, simply assuming that the U.S. has the jurisdiction to make extra-terroritorial laws rather then question their validity. My point is that the U.S. courts are NOT the arbiters of whether the U.S. can make laws governing conduct in other countries. The international community is. Now I agree that the U.S. could and may try to sanction somebody who returns to the U.S. But, it has no right to enter other sovereign countries and try to enforce its laws. The international community can and should:

1. Take a firm position on their affirmation of their own sovereignty;

2. Take the lead in discussing the ethics and morality (and rather immorality) of things like CBT and FATCA.

The irony of FATCA is that, it is the countries who co-operate with the U.S. on FATCA that have the most to lose. This "coalition of the willing" (because they misunderstand CBT) don't realize that with an IGA they are agreeing to, absorb the costs of actually turning a significant part of their GNP over to the U.S. - a kind of "forced tribute".

It's not about taxation. It's about life control and confiscation.

Tim said...

One issue to consider is not all parts of the US have the same form of local government. Rhode Island, Connecticut, Massachusetts(most), Alaska, and Hawaii don' t have county government for example. Massachusetts in many communities has a unique form a local government called "Open Town Meeting." Participation in Open Town Meeting is very much predicated on actual attendence at the Town Meeting(MA and to a lesser extent the rest of New England are unique in the governance structure in the developed world outside of Switzerland).

Victoria FERAUGE said...

@Broken Man: I agree that CBT is THE central issue. But we may have to do this in steps....

@Rosy: Interesting that the homelanders reacted the way they did? What was their justification for denying us services?

@bubblebustin: Indeed they have thrown us a few bones. Just enough so they can cover themselves and argue that there is no double-taxation. Of course, we know this is false....

@Ellen: I would have killed for the same thing. A civics class so that my kids could have the French perspective on how the US political system worked and the American perspective too.

@anonymous: In AA we learn that we have no power over people, places or things. More and more I suspect that FATCA will prove this adage correct. Post coming on this at some point....

Unknown said...

Sorry I am getting to this only now, but it is a fascinating post, Victoria!!

So refreshing, no matter what the issue, to have it turned inside out and see it from an entirely different perspective!

One of your caveats concerns what might be feared as "intervention by US citizens abroad in US domestic politics at city, county, state and federal level". That might easily be solved in the same way that taxes and voting are dealt with now - the voting law that covers overseas citizens covers federal elections only; and unless you own property in the US, it would be logical that you be taxed only at the federal level (which is certainly the case for me, as a CT "resident", for voting purposes, but with no CT property).

Fascinating, in any event, to ponder your possible positive effects of CBT "if it worked"...

Victoria FERAUGE said...

@Lucy, So good to see you here! I hope you had a magnificent summer.

I think your solution for voting sounds very reasonable indeed. Though I would argue that as logn as we have family in a particular area, we still have interests. I've been voting in Seattle for various public transportation schemes because I wanted my 60 year old mother to have a much nicer ride to work in downtown.