Resolving the Conflicts of Citizenship Taxation Two Proposals

Abstract

The United States is the only country in the world to exercise taxing jurisdiction over the income of its citizens and long-term permanent residents, even when they reside abroad. This citizenship-based taxation (CBT) is controversial, especially among tax scholars, though there appears to be only limited political appetite for realigning U.S. tax jurisdiction to reach only domestic-source and domestic-resident income, as peer countries do. After reviewing the normative value of CBT and the existing multiple taxation mitigation measures, this Article presents two alternatives to the current U.S. regime. First, I propose the U.S. tax only the incomes of current-year residents and recent expatriates but exempt the foreign-source income of nonresident citizens after a five-year extended residency period in order to more closely correlate tax jurisdiction and nonresidents’ meaningful connections to the American taxing community. Recognizing that this may be politically infeasible, however, I propose that Congress uncap the existing foreign earned income exclusion in IRC § 911 for American expatriates living in high-tax countries, reducing their substantial compliance burdens without sacrificing revenue that would effectively be eliminated by the foreign tax credit or creating new opportunities for tax-motivated expatriations.