Analysis of Revenue Effects of Residents-Based Taxation

The Importance of accurate numbers.

The U.S. government does not have an accurate count of how many U.S. citizens live and work overseas, making it difficult to design effective policy or accurately assess the financial impact of proposed tax changes. In 2019, the State Department estimated 9 million Americans abroad, but in 2023 it stopped
issuing estimates due to data limitations. U.S. citizens are not required to report when they move overseas, so no central dataset exists. The Federal Voting Assistance Program (FVAP) estimated in 2018 that there were 4.8 million U.S. citizens overseas, including both military and civilian populations.
Without reliable data, legislation affecting Americans abroad can be misjudged - particularly when Congress evaluates the revenue impact (“scoring”) of policy proposals. ACA’s research into residence-based taxation (RBT) addresses this gap by building a more accurate baseline of the population and its economic activity.

Background to the ACA/ACAGF DEG analysis

This is the second ACA/DEG analysis of a possible version to Residence-Based Taxation (RBT). Side-By-Side Analysis: Current Law; Residency-Based Taxation, 20 April 2022 The first study was released in November 2017, as the Tax Cuts and Jobs Act was being enacted.[1]

ACA/ACAGF Study

This study[2] analyzes economic issues relating to RBT using a model developed by our contractor District Economics Group (DEG), based on publicly available data. The updated model expands country coverage and refines estimates of Americans abroad, including both filers and non- filers, as well as government employees. It incorporates the effects of the Tax Cuts and Jobs Act, COVID-19, and Congressional Budget Office projections for 2022–2031.

The study evaluates ACA's modeling for RBT designed to be:

● revenue neutral
● resistant to abuse
● no worse for taxpayers than current law

It is also designed to be practical for long-term residents abroad. This modeling approach aligns with those used by the Joint Committee on Taxation, the Congressional Budget Office, and the Office of Tax Analysis.

 Parameters

To evaluate potential revenue effects, the study applies a set of assumptions for an RBT system. These are for modeling purposes only.

Key parameters include:

● U.S. citizens abroad would generally be taxed as nonresident aliens
● Long-term residents (3+ years abroad) would be automatically eligible and exempt from
transition taxes and fees
● Others must demonstrate 5 years of foreign residence to qualify
● Certain higher-income individuals may face a transition tax
● A one-time user fee of $2,350 would apply

 Side-By-Side Analysis: Current Law; Residency-Based Taxation, 20 April 2022

Revenue losses from income tax would be offset by transition taxes and fees over the 2022–2031 period, without relying on increased compliance. To be as useful as possible, it’s helpful to posit some parameters of RBT. Then unofficial revenue projections can be run. These “parameters” should not be read as indicative of any proposal.

“Hard Bits”

Key uncertainties include how many individuals would elect RBT and the resulting impact on revenue, particularly among higher-income taxpayers.

The DEG model uses public data from the IRS, Federal Reserve, Social Security Administration, United Nations, and country tax guides to build a detailed baseline. It enables analysis of income sources and tax treatment across countries and allows testing of adjustments needed to achieve revenue neutrality.

Headline Results

• RBT can be made revenue neutral. Arriving at this result does not depend upon revenue from new compliance measures.

• Long-term foreign residents, those resident in a foreign country for at least 3 years prior to date of enactment (“Long-Termers”), can be made exempt immediately from any transition tax or one-time user fee, without creating a large overall revenue loss over the 10-year budget period.

• RBT can be elective, that is, individuals wishing to avail themselves of RBT benefits would make an election to do so. It would not be mandatory.

• The existing foreign earned income exclusion need not be repealed. Individuals preferring this approach can simply not make the RBT election. (It follows that with preservation of the foreign earned income exclusion and electability of RBT no one need be worse off if RBT is enacted.)

• Individuals who are not “Long-Termers” or who move abroad after date of enactment (“Newbies”) can qualify for RBT by showing that they have been a bona fide resident of a foreign country for the most recent 5 taxable years. Years abroad prior to enactment be counted.

• Individuals who are resident in a tax haven are not eligible for RBT. They can continue to use the foreign earned income exclusion under current law.

• Individuals electing RBT are not subject to US income tax on foreign income. They continue to be taxed on US-source income. (In other words, they are taxed like nonresident alien individuals. This follows the residency approach of almost all other countries.)

• Individuals electing RBT need no longer be subject to the FATCA reporting regime for the country in which they are resident.

• FBAR reporting is not changed.

• Individuals electing RBT are required to make an annual election confirming that they remain eligible, i.e., they have not moved back to the States.

• The plain vanilla RBT revenue effects, total for the 10-year budget period, approximately +$0.67 billion, after taking into account one-time user fee and transition tax revenues. (One-time user fee and transition tax are not applicable to Long-Termers.)

• The small revenue increase result does not depend upon additional federal income taxes that might be paid by individuals who are resident overseas but who currently do not file income tax returns. Under RBT, some of these individuals might decide to comply, file, and pay U.S. income taxes for prior years, and establish the 5-year overseas residence requirement so that they would be eligible for RBT. This would generate additional tax revenue, but these effects are not included in this estimate.

• Based on this analysis, ACA believes that if RBT is enacted, in excess of 2 million Americans abroad could, over the 10-year budget period go from being taxed on worldwide income to being taxed the same as nonresident alien individuals, that is, taxed only on US source income.

Nuts and Bolts

These are a few of the interesting estimates from the ACA Study.

• Number of non-military US citizens abroad in 2022 – 3,921,240.
• US citizens resident overseas as filers in 2022 – 2,292,000.
• US citizens resident overseas as non-filers in 2022 – 1,629,000.[3]
• Income and asset makeup of the community of US citizens overseas consistent with US domestic statics. US citizens overseas are not significantly more wealthy than domestic filers.
• The breakdown of Adjusted Gross Income of Americans abroad appears to be approximately 26% domestic and 74% foreign. For individuals with AGA in excess of $500,000, the breakdown appears to be 25% domestic and 75% foreign.
• It is possible to identify the income and returns in foreign countries by category – zero tax, low and moderate tax, greater than US rate. For example, the share of earned income after section 911 exclusion, in zero tax countries, is 12%. 

Footnotes

[1] The first study and this second study were financed in separate crowdfundings by American Citizens Abroad Global Foundation, a tax-exempt charitable organization, which is the sister organization of American Citizens Abroad, an exempt non-profit membership organization. ACAGF, intends to license the underlying data for use by interested parties. They will also periodically update this data.

[2] The Study is referred to as the "ACA Study". "ACA" commonly refers to American Citizens Abroad, Inc. and its sister organization, American Citizens Abroad Global Foundation. The sponsor of this study is American Citizens Abroad Global Foundation. Economic analysis was performed by District Economic Group, a non-partisan economic consulting firm which provides specialized economic analysis and insights into federal and state budget, legislative and regulatory policymaking processes.

[3] This figure does not equate to the number of “tax cheats”. Individuals may not have a sufficient level of income to need to file. They may genuinely not understand the rules.