Friday, 4 May 2012

American Citizens Abroad: Don't Tax Us as Residents

The US should tax on the basis of actual residence, and not citizenship, says Jack Bugnion of ACA.  This is a reprint of remarks he gave in a press release in February, covered here.  The major arguments are the standard three: efficiency, administrability, and fairness (discussed in that order).

The competitiveness argument is the standard "if you change the tax system companies will hire more people."  There is no empirical evidence in support; experience suggests this is unlikely.  I similarly have no way to judge whether FBAR really is FUBAR from an administrative point of view, but it's of course true that Congress perpetually underfunds IRS so we can expect uneven enforcement--that's as much a fairness argument as an administrative one, and probably could be made more compelling.

The fairness argument is that "Americans abroad would not only be freed from the unjust burden of double tax reporting and double taxation but would also enjoy expanded job opportunities overseas and the possibility to invest in local investment vehicles ... now out of reach due to the burdensome U.S. filing for PFICs (passive foreign investment corporations). They would also be relieved of foreign currency risks when purchasing a home."  I don't know that a double reporting burden is unjust.  It's certainly a pain and it's really unfortunate that it is also likely a jobs act for accountants.  But unjust seems like a strong word to use in the grand scheme of things.  Double taxation is relieved by credit and in some cases exemption on the US side though there are undoubtedly limitations and it's complex, no doubt about it, see previous point.  The PFIC and currency risks are more compelling, because now we are talking about investment traps for the uninformed.

The problem is that even if I agreed with every point, there is a fix, and it is revocation of U.S. citizenship or permanent residence.  The price of that citizenship and permanent residence status just went up, maybe remarkably so.  As a result it is hard to argue that the U.S. cannot do what it is doing from a normative perspective.

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