September 23, 2024
As readers know SEAT’s mission is to “Stop Extraterritorial American Taxation”. This means that the goal is to end U.S. citizenship taxation. Notice I did NOT say the goal is “residence-based taxation”. By defining the goal as ending citizenship taxation, it is easy to see that the goal is accomplished by and ONLY by severing/separating U.S. citizenship from U.S. tax residency. In other words: U.S. citizens should NOT be “subject(s)” to U.S. income taxation because of U.S. citizenship. Residence-based taxation is the likely (and hopefully) inevitable consequence of separating citizenship from tax residency.
Dickens in “A Tale Of Two Cities” began with:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way–in short, the period was so far like the present period that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”
I end my analogy to “A Tale Of Two Cities” with the opening paragraph. That said, for those U.S. citizens struggling to end the U.S. “Extra-territorial Tax Regime”, it is indeed the “best of times” and the “worst of times”.
“The Best Of Times” – A consensus on separating citizenship from tax residency
A reminder of what citizenship taxation really is:
A supporter of @citizenshiptax is somebody with a vague awareness of it. An opponent of #CBT is somebody who understands what it really is. @Expatriationlaw explains what tax based on citizenship is and why citizenship and @taxresidency must be separate. https://t.co/fWVML997t7
— John Richardson – Counsellor for US persons abroad (@ExpatriationLaw) September 10, 2024
Amazingly for the first time, a consensus is emerging that U.S. citizenship must be separated from U.S. tax residency. SEAT has been defining tax reform in this way since at least as early as 2021. Republicans Overseas has adopted this objective for some time (having made separating citizenship from tax residency the cornerstone of its tax reform policy a long time ago). Last week the Democrats Abroad Taxation Tax Force articulated severing citizenship from tax residency as its goal in tax reform. Other individuals and groups appear to have agreed that ONLY severing citizenship from tax residency will provide a permanent solution to the problems of Americans abroad. Those wishing a better understanding of what separating citizenship from tax residency means are invited to go to Appendix A of this post.
Once citizenship is separated from tax residency, there are two questions that must be addressed:
Question 1: Assuming that “residency” replaces “citizenship” as the criterion for “U.S. tax residency”, how is “residency” to be defined?; and
Question 2: Assuming a change from citizenship to residency, how are U.S. citizens abroad (who were nonresidents prior to any new legislation) to be treated?
The identification of these two questions, brings us to “The Worst Of Times”.
“The Worst Of Times” – Achieving the goal of separating citizenship from tax residency
A consensus that the goal should be separating citizenship from tax residency is a huge achievement. For many, the idea that U.S. citizens should not be tethered to the U.S. tax code, leashed to the U.S. dollar, required to report on almost all of their non-U.S. activities and constantly subject to the “Sword Of Penalties”, has required a major shift in their psyche. It’s a psychological evolution in how Americans abroad imagine themselves. It’s almost a “second American revolution”.
Q. Why then “The Worst Of Times”?
A. Because U.S. citizens abroad are not the same. They have been impacted by U.S. citizenship taxation and FATCA in different ways. Most care only about solving their own problem. Few care about solving the problem for future generations.
As Republicans Overseas and SEAT have said time and time again:
Only severing citizenship from tax residency will solve the problems of all people, all the time and under all circumstances.
Taxation and the rise and fall of civilizations
All you need to understand the values of a country is to understand its tax system.
Tax residency (who is subject to the full force of a country’s tax laws”) is the cornerstone of a country’s tax system. Therefore, one can understand a great deal about a country’s values by understanding how it defines “tax residency”. The United States continues to define tax residency primarily in terms of citizenship (who you are) and not by your economic and physical relationship to the country (where you live and earn income). Therefore the practical meaning of U.S. citizenship taxation is that:
1. The United States imposes taxes, forms and penalties on people who do NOT live in the United States; and
2. In relation to income and assets that are outside the United States.
Ending U.S. citizenship taxation will end this injustice.
The injustice of the U.S. tax system is a particularly egregious and visible example of why tax residency is a moral issue.
I suggest that achieving the goal of separating citizenship from tax residency, means two things:
First, the evolution of what “citizenshipless” tax residency becomes should be guided by the common good. It cannot and should not be guided by what benefits any particular group. Generally, all Americans should be able to move from the United States without being encumbered by taxation. More on this in future posts.
Second, that pressure must be brought on all players in the U.S. Government NOW.
I completely agree with Laura Snyder’s recent post: “What a Visit to Kate Sheppard’s House Taught Me About Congressional “Readiness” for Changing U.S. Tax Residency.”
She makes (I think) two points.
First, that the right time to seek change is when change is needed. There is no point in delay; and
Second, that the road ahead is difficult. There will be good times. There will be bad times. There will be temporary setbacks. But, that temporary “failure” is the price of and often the necessary condition for success.
My father once told me a story about his father who was a traveling salesman. My grandfather once brought my father on a trip with him. They stopped at a the business of a potential customer. My father waited in the car and watched his father being almost physically thrown out of the building.
When he arrived back at the car, my grandfather said to my father:
Well, we are one step closer to our next sale!
What is needed is a full court press to end citizenship taxation NOW!
John Richardson – Follow me X.com @ExpatriationLaw
Appendix – Understanding what separating citizenship from tax residency means
Ending U.S. citizenship taxation is an increasingly popular topic. Here is a presentation that I organized in July or 2024 attempting to answer the questions of:
1. What does it mean to end citizenship taxation; and
2. What would a system of residence taxation really look like?
A podcast with IRS Medic on July 10, 2024
A link to the presentation slides
