On 17 March 2023 the New York Times ran an article titled Americans Head to Europe for the Good Life on the Cheap. This article does not reflect the reality that faces most of the estimated 9 million Americans living abroad. First off, most Americans living in Europe (or anywhere outside the US) are working for local businesses and have normal local salaries. They face the same cost of living challenges as anyone in the country where they live. Unlike the myth perpetuated by the article, they are not high net worth “fat cats” living a life of luxury. Surveys collected by organisations such as Democrats Abroad and SEAT bear testament to the fact that the incomes of Americans living outside the US are distributed similarly to the incomes of US residents. Contrary to the picture painted by this article, those Americans living in Europe (and elsewhere) who truly try to fit in and integrate their lives into their new homes find that Uncle Sam has followed them and will require them to file US tax returns reporting their non-US income, even though they maintain few, if any, economic connections to the US. They find that their US citizenship works to apply tax and disclosure rules that discriminate against them because they are not living in the US. They will find that their local bank account balances are being reported to the IRS annually (even though the US public roundly rejected the suggestion that domestic banks should make similar reports on accounts maintained inside the US). They will find that they are unable to invest in mutual funds that are sold in the currency they use for everyday transactions – Uncle Sam insists that they invest their savings in the US or face the punitive tax rules applied to Passive Foreign Investment Companies (PFICs). This, of course, makes it very difficult to save for retirement, and doubly so when the IRS does not recognise the local equivalent of a 401(k) as allowing for tax deferred savings. The two surveys cited above, as well as one conducted by the Association of Americans Resident Overseas (AARO) bear testament to these realities.
The article quotes residents of Portugal and Spain who object to the low taxes paid locally by the American families profiled amid a serious local housing crisis. Their anger should be aimed at the governments that allowed these special visas with tax breaks. In most countries tax is paid by those who reside in the country (and therefore use the services provided by that country’s government). The Golden Visa arrangements highlighted in the article (and recently cancelled) allow people to shirk the obligation to contribute to the society in which one lives. In the opposite direction, the US practice of taxing nonresident citizens also violates the principle that taxes should pay for services used. Every other developed country determines who is subject to the full force of their tax law by looking at where an individual’s centre of economic interests lies. That is, they look to residence or domicile rather than mere citizenship. In a globally mobile world where many have multiple citizenships, it’s time for the US to enter the 21st century and stop using citizenship as a criterion for determining who to tax.