Tuesday, April 2, 2013

To understand why citizenship-based taxation is objectionable, consider the STEM Jobs Act of 2012

Victoria Ferauge explains in as clear a way as may be possible why it is important to understand what people mean when they talk about citizenship-based taxation, and why the US effort to impose it with the big stick of FATCA is so objectionable to Americans living in other countries (also known as "immigrants" in those countries). She makes a number of points but I wanted to highlight one here:
In the [dialectic on Americans living abroad, which equates expatriation with tax evasion] it seems not to have occurred to the American public or its lawmakers that the people they are trying to attract [through immigration policies aimed at high-skilled workers] are the product of other countries' investments in producing a well-educated populace
In light of that, consider what the Heritage Foundation says about the STEM Jobs Act of 2012:
American businesses are struggling to fill high-skilled employment opportunities. STEM jobs grew at over three times the pace of non-STEM jobs between 2000 and 2010 and are expected to grow almost twice as fast by 2018. Business groups have spent years urging Congress to reform the visa system in order to fill these empty positions.
Enhancing the ability of high-skilled workers to enter the U.S. would be an asset to the nation’s economy as well as its indebted government. 
In case the instrumentalist nature of our interest in immigrants is not clear, the point is we're going to make these foreign-born, foreign-raised, foreign-educated, now high-skilled, highly-paid workers a permanent part of the American taxpaying public, which can increasingly be defined as the American wage-earning public. One may be forgiven, perhaps, for juxtaposing this deep thirst for foreign talent against America's ongoing disinvestment in its own social infrastructure, including public education (also helped along by the Heritage Foundation).

Victoria's post thus seems to me to contain the contours for constructing the normative case for taxing humans. There is much to be done on this topic, but it seems clear that the practice of admitting immigrants at all, let alone actively seeking highly-skilled ones, demonstrates that inbound human mobility is a social good that states support; that inbound human mobility (perhaps especially of the high-skilled kind) may be the product of rather intense social investment by some other country; and that conversely taxing on the basis of citizenship regardless of residence is a means of preventing outbound human mobility and so runs strictly counter to the overall good of human mobility while also being hostile to the aims of other countries also seeking inbound labour.

The US has long objected to onerous fiscal controls on the capital it sends across borders, so it seems particularly difficult to understand the ongoing support for placing onerous fiscal controls on its outbound labour supply. Contextualize that observation within the story of the shift of taxation from capital to labour over the past 50 years, however, and a pragmatic explanation is easily ascertained. But pragmatism does not make the normative case. In fact, it violates the conventionally-understood major normative factors for assessing taxation--efficiency, administrability, and fairness--because it introduces an insurmountable amount of arbitrariness. This topic deserves much more thinking than has been allocated to it by tax policy observers, including myself.

There is much more at the link, please do go and read Victoria's whole post.


  1. One of the most bizarre things about US citizenship-based taxation is the fact US was built by immigrants.

    The homelands of those immigrants did not stalk them for life-long money and servitude. If they had, those immigrants and their American born children could not have survived in the US and could not have built it into the prosperous country it became.

    My Swedish grandparents and my German and Irish great-grandparents would be appalled to learn their adopted country was treating me this way just because I chose to follow a path similar to theirs--to live an honest, productive and contributing life in a country other than the one where I was born and raised.

  2. Thank you very much for your comments, Allison, on the post. Yes, my deepest fear is that citizenship-based taxation plus automatic information exchanges of personal financial information equal a mighty weapon in the hands of states wishing to prevent emigration. This has been a goal of states in the past - see Citizenship and Those Who Leave: The Politics of Emigration and Expatriation edited by Nancy Green and Francois Weil for an overview of past methods. Ruth Mason also has an interesting article about the mobile worker and tax benefits called Tax Expenditures and Global Labor Mobility http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1356331.
    Many of the articles I've managed to dig up on the topic of taxation of global labor mention an article by Richard A. Musgrave & Peggy B. Musgrave called Inter-nation Equity and a book called Tax Policy in the Global Economy, essay by Peggy Musgrave. Once my bank account is healthier I'd like to get copies (the latter is over 100 Euros). If you have any other titles or articles to recommend, Allison, I would be most grateful to have them.

  3. I am going to post the same comments here I just made on Victoria's blog:

    I was having dinner with several "homelander" Americans earlier this evening and this subject came up. I can't say it went very well. For one thing I am discovering there is actually quite a bit a prejudice among very "progressive" Americans both toward immigrants and expats. In fact a part of me believes we must to be even more militant and disobedient after this evening.

    First on immigration to the US. My sense is immigration is viewed very much through a political lens. Basically more immigrants are good because they will vote Democrat and the Democrats will be able enact social programs and policies that these people support. There was not in my mind a lot of interest in the issues or problems immigrants to the US face. At one point I brought up how many countries such as lets say Iran(and many other countries) refuse to allow people to renounce their Iranian citizenship and when Iranian immigrants to US obtain US citizenship and travel back to Iran they must enter still on Iranian passport and Iran refuses to give the US any consular access/assistance to these individuals. They didn't this was "good" but really did not think much could or should be done about it. It is someone "elses" problem basically.

    After this one person argued perhaps the US should do what Iran does and simply prohibit the "rich" from renouncing their citizenship. However, the also thought that any US citizen living outside the US for more than ten years should be forced to give their US citizenship even if it makes them stateless unless of course they are "rich" in which case it should be made impossible for them to renounce or give up their citizenship. Several others seemed to be in agreement with this idea.

    The dinner was at a fairly liberal and chic restuarant in Boston on Newbury Street. I mentioned that the local member of Congress Mike Capuano was a co-sponsor of HR 597. Everyone liked Capuano but several thought it was a waste of time for him to be focusing on legislation like HR 597 instead of more "important" issues closer to home.

  4. The policy debate of proper international taxation between residence and source aside, my main worry is that more liberal policies among all countries regarding the decision of whether to tax citizens will create two kinds of citizens. It is the implications of that potential split that concern me the most. My thought goes something like this, but it is admittedly not fully developed.

    Countries have an interest in taxing their citizens, where ever they may reside. Otherwise, countries may miss out on revenue. Sure, it's a money grab, but without revenue, there is no government. We all know this. Ok, so now say we cease taxing based on citizenship altogether. What may result are two general kinds of people in the world. Those who are globally mobile and those that are not.

    At that point, any investment that governments make in attracting human capital will be toward those who are globally mobile. And these are already privileged people with more resources available to them than almost anyone else in the world, not to mention those in their citizenship country. Governments may no longer have incentives to structure their social policies for the benefit of their non-mobile citizens. Instead, these folks may become captive taxpayers for life. Whatever social policies available to these non-mobile classes may end up being dictated by the globally mobile that are paying taxes in their countries of residence. There may be a strange distortion that results, when it comes to a people having the right to participate meaningfully in the governance of their country.

    In theory, of course, there may be good reason for doing away with citizenship-based taxation. The theoretical justification may follow some of what Rawls spells out in Law of Peoples. But part of the problem with Rawls in Theory of Justice, is that he does not account for immigration and emigration. Martha Nussbaum, for example (but she is not alone, of course), shows why this is problematic as Rawls attempts to transition his theory onto a global stage—at that point, Rawls's just society must allow for immigration and emigration, but then this seems to rupture his otherwise tight domestic theory of political justice. So, too, in this case where we might say that citizenship-based taxation doesn't make sense from a social policy point of view, or when viewed from tax policy alone, but then how will that break-down our other notions of what democracy or an otherwise just society might require?

  5. Thanks Jason,

    Some of this already happens between US states even though in theory most of income tax base/points are uniform throughout the US. People benefit from the better education and public services in states like MA, CT, and NY then get super rich and move to Florida. This is in turn diminishes their tax base to pay for services of poorer MA residents. Then on other hand poorer residents of FL are stuck in FL unable to move to MA or NY even if they want to due to the imbalance in cost of living. Increasingly in states like Massachusetts(which long ago shed its Taxachusetts label) tax policy even to the extent on the surface is being set completely by the Democratic Party with an eye towards "competitiveness" not "equality."


    Then of course of their is the issue of Democracy. In a direct or proportional voting system it would be easier to just give ALL citizens the equal right to vote wherever they reside and justify a right to tax wherever they live. However in much of the world especially the anglo saxon world we have representative democracy. In the US non resident citizen absentee voting is essentially grafted on top of the state and local election machinery. It works ok because absentee votes really don't matter in the end. Canada doesn't on the other hand allow absentee voting for long term non resident citizens because in some ridings/districts such as those around Vancouver over half the eligible voters live outside of Canada.

  6. Jason. Thank you for a very thoughtful comment. Yes, I understand your concerns. I'm not amused when I hear that people move out of France to escape taxes because that's what's paying for my cancer treatment here in the Hexagon. And I'm not even a citizen of France. :-) That said here are a few thoughts of my own:

    What is interesting is how this debate is so often framed as the "rich" or "desirable" human capital (and those are relative terms) fleeing their responsibilities to the detriment of their home country tax bases. I've been around three countries thus far in my life and I've met a fair number of immigrants and everywhere regular folks far outnumber the super-rich. And I'm not just talking about the folks from the south moving to the north but people like a U.S. laborer who works in Paris from time to time (don't ask me how he managed that) or the American stay-at-home mom who lives in Munich or the guy in one of Kaplan's books who is ex-military and runs a small business in Thailand or the African-American musicians I encountered one day in a small bar in the 10th district or the Portuguese tech I met in Shanghai.

    For the US system of citizenship-based taxation to work for these working people then what is needed is a complete redesign of the entire system which today applies rules meant for the rich to the clearly not-rich. Not only do all these people I mentioned in the last paragraph have to file and may be liable for taxes, they are currently getting few or no benefits from the US. If they going to be taxed then isn't it logical that the US confer on them at the very minimum the same benefits enjoyed by those US citizens living in the US. This would mean that would qualify for all the tax benefits like the mortgage interest deduction or tax breaks for the equivalent of IRA's in their host countries or contributions to their local churches and non-profit organizations. They should also be entitled to things like medicare even if they receive care outside the U.S. None of that exists under the current US system which is something of a "grab" since these taxpayers abroad have very poor political representation and they are not using services in the US. It's basically free money.

    I don't have a definitive answer for how to manage migration and local investment in human capital but I don't think the answer is to restrict everyone's mobility by taxing them wherever they go regardless of their income or what human capital they happen to possess. That doesn't strike me as an appropriate tool (and no other country bedsides the US uses it) especially since the burden will most fall heaviest on those the least able to pay to be mobile. A better answer might be encouraging more circulation and making it feasible for as many people as possible to live and work where they wish. Citizenship-based taxation puts a ball and chain on US citizens and as you put it turns them into "captives" by making it much harder for them to be mobile.

    In my post I said there were 100,000 Americans in France and 120,000 registered French in the US. What each country lost, it got something in exchange. And both countries hope (one would think) that someday some of those citizens will return home bringing back new ideas and new skill to the benefit of the home country. I realize that this sort of thing is hard to measure (not nearly as straightforward as dollars and cents) but there is value there.

    Thank you for the introduction to Rawls which I will be looking into. Something I've found on this topic that I'm very curious about is something called Tiebout Migration or the Tiebout Model. http://en.wikipedia.org/wiki/Tiebout_model. The model is about local government but some have theorized about what it would mean on an international level. It would be interesting to start a discussion about it.

  7. I'll make a few more comments here.

    I am not sure there is actually that much evidence that in terms of residency based countries there are actually that many people that change their residency solely for tax reasons. For example there are about 300,000 Canadian citizens give or take living in Hong Kong. I doubt very few of them live their solely to avoid tax.


    3 Million Canadian citizens live in the United States. I doubt many moved there for tax purposes. To make a comparison to Hong Kong I suspect there are a lot of Canadian citizens who live in New York City(21,000 instead of 300,000) there reasons for moving to NYC are probably very similar to those who moved to Hong Kong


  8. One more thing I'll add and its something I don't think many US citizens are aware of is that no OTHER country in the entire world gives US citizens the right of abode. What does that mean. Well any citizen of the 27 EU Member states by right can live and work in another EU member states. These arrangement also extends to the EFTA(Iceland, Norway, and Liechtenstein) and bilaterally to Switzerland. Similar arrangements exist in the Carribean Community and are being proposed/developed in the ASEAN(Southeast Asia), Mercosur(South America), and Eurasia(Russia + former soviet republics). Australia and New Zealand also have a bilateral immigration agreement along these lines. Canadians used to have the right of abode in the UK too.

    Now of course there are many other nationalities in the same boat as the US but for much of the world and really almost all of developed world most citizens have the "right" to live in some other country free of most restriction. I don't think sometimes we understand how this plays out into citizenship based taxation vis a vis other countries. People don't like their "rights" being taken away but Americans have never had the "right" to live in another country in the way other nationalities have had.