ACA/DEG Analysis of Revenue Effects of Residence-based Taxation
This is the second ACA/DEG analysis of a possible version – a so-called “Vanilla Approach” – to Residence-Based Taxation (RBT). The first study was released in November 2017, as the Tax Cuts and Jobs Act was being enacted.
This study analyzes economic issues relating to RBT. During 2017 and 2018, DEG, under contract with ACA, constructed a model of income tax returns associated with US citizens residing abroad and several sets of related public data. This model was employed to analyze policy proposals for RBT. It was used for presentations to Tax Committee Congressional staffs, the US Treasury, and the Joint Committee on Taxation to further their understanding of the baseline data and issues with respect to RBT.
This second study updates the 2017-2018 model, significantly expanding the number of countries in the individual-income-tax-return-to-United-Nations-immigration-statistics-cross-walk (a core feature of the DEG model) in order to refine estimates of US citizens residing overseas (both filers of tax returns and non-filers, and government employees using Departments of Defense, State, and Office of Management and Budget data). The second study is also based upon public data only. It updates the revenue estimating baseline to account for the impact of the Tax Cuts and Jobs Act and the COVID-19 pandemic. It also brings current the revenue estimating baseline for the Congressional Budget Office data for federal fiscal years 2022 through 2031. It analyzes parameters of one possible approach to RBT (“vanilla approach”). The goal was to develop an approach which is revenue neutral, tight against abuse and leaves no one worse off than under existing rules. Related to this is the key goal of making a “vanilla approach” “friendly”, i.e., easy to understand and apply, for existing long-term residents abroad.
The study in large measure is the gathering and organization of multiple publicly available data sets (baseline data). The next element is construction/refinement of a model for analyzing taxation of Americans abroad, based on the baseline data. This modeling approach mimics, to a great degree, an approach that would be used at the Joint Committee on Taxation, Congressional Budget Office, and Office of Tax Analysis.
|THE STUDY AND ITS PARAMETERS, BELOW, ARE IN NO WAY A LEGISLATIVE PROPOSAL. THE SHAPE OF RBT IS FOR CONGRESS TO DECIDE.
|THE DESCRIPTION OF REVENUE EFFECTS IS INTENDED TO BE HELPFUL, BUT IT SHOULD BE EMPHASIZED THAT THE ONLY ESTIMATES THAT ARE DEFINITIVE ARE THOSE PRODUCED BY THE JOINT COMMITTEE ON TAXATION.
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.
The most important parameters of the study are:
Under a residence-based taxation (RBT) system, U.S. citizens residing overseas, in general, would be taxed as non-resident aliens.
Long-term residents abroad would be “grandfathered”, meaning they would be automatically eligible for RBT. They would not be subject to any form of “transition tax” or “departure fee”. A “long-term resident abroad” is anyone who has resided abroad for at least 3 years prior to date of enactment of RBT.
Others – people who are not long-term foreign residents – to be eligible would have to have resided abroad for the most recent 5 taxable years. Relatively wealthy individuals in this category might be subject to a “transition tax”. A one-time user fee ($2,350) would be charged. See American Citizens Abroad Side-By-Side Analysis: Current Law; Residency-Based Taxation, 20 April 2022
The study finds that during the 2022 to 2031 10-year budget period reductions in individual income tax revenues would be offset by “transition tax” revenues and departure fees. This overall result does not rely upon revenues “picked up” from any form of increased compliance or enforcement.
“Hard bits” of the Study include estimating utilization of RBT and, therefore, potential tax “leakage” (revenue loss) to the U.S. tax base. Results are also sensitive to estimates of new RBT elections each year after enactment and new RBT elections with adjusted gross income in excess of $500,000.
The DEG model is built around public data from the IRS, the Federal Reserve Board, the Social Security Administration, the United Nations, and country tax guides to construct baseline data concerning the taxes of Americans abroad. The model’s outcomes are sufficiently “granular” to permit “what-iffing” on key elements. In particular, the model estimates domestic and foreign sources of income by type of income and tax treaty status for U.S. citizens residing overseas. The general work plan was to build a best possible analytical tool. It takes into account the provisions of current law that would need to be addressed in order to arrive at RBT. Work with the model shows that is possible to adjust a list of key provisions, modifying this provision and that provision, in-order-to arrive at zero or near-zero revenue loss (revenue neutrality).
- 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 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.
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%.
 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.
 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.
 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.