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Taxing Americans Overseas - think about it this way...

Earlier this year (2012) Governor Brown forecast that California was facing a $16 billion budget shortfall for 2012.

Perhaps Governor Brown should follow the lead of the Federal Government and enact legislation that subjects all persons born in California, as well as persons born in other states who have, (during their lifetime lived in California for 5 years or more), to California income taxes no matter where they live today; be it California or elsewhere. They would be taxed on wages, pensions, 401(k) withdrawals and Social Security benefits received in their new state of residence and on capital gains from the sale of real estate, stocks, bonds and everything else. He might even still be able to close the budget gap by allowing such persons to claim a tax credit for income taxes paid to another state where they live and work today, which might be applied to partially offset their California tax.
California’s top state income tax rate is 10.3%. In this example, ex-Californians now living in New York, where the top state tax rate is 8.82% would owe little additional tax to California, but if they can afford to live in New York they might not object to paying a little more to their old home state where they were born or went to school, or where they worked for a while.

It would be a lot tougher for ex-Californians who now live in Texas, Florida and other states which raise their tax revenues, not through an income tax, but through other kinds of taxes.  They would just have to settle for a lower standard of living than their neighbors and co-workers who had not come from California and therefore had no double tax obligation to two state governments.

Of course the Federal Government would never allow California or any other state to levy and collect income taxes from ex-Californians who today live in a different state. Yet this is exactly what the Federal Government does to US citizens and long-lime foreign citizen residents of the US, who for whatever reason, have relocated to live, work or retire in a foreign country.  They are subject to the tax system of that country and then are taxed again on that same income by the IRS as if they never left home.  Not only that, the US Federal income tax applies to persons born outside of the United States even if only one parent is a US citizen, even though that person born abroad is a citizen by birth of the foreign country within which he/she resides, does not have a US Social Security number, has never had a US passport, nor even visited the US even once in their entire lifetime and does not speak even one word of English.

An important difference between the California example and the Federal example is that Federal tax rates are much higher.  If the foreign country has a tax system that mirrors the US tax system and its tax rates are as high or higher than those in the US, then the US citizen living abroad may possibly end up with a zero tax obligation to the IRS, but in order to take advantage of these foreign tax credits he must still file a US tax return each year, plus several other forms such as FBAR and FATCA, which provide the IRS/Treasury with full details on their local bank accounts, where they live, as well as brokerage accounts, foreign social security taxes paid to their account by a foreign employer, as well as, foreign retirement accounts which are immediately taxable by the IRS even though under foreign tax laws they are not taxed by those countries until, like similar US retirement accounts, the funds are actually withdrawn after retirement.

The United States is the only industrialized country in the world that subjects its citizens, who live abroad to double taxation. This double taxation clearly makes US citizens and former foreign residents non-competitive for jobs abroad since American companies with operations abroad who require expertise not available within that country, as a general policy, exclude US citizens from these positions in favor of qualified nationals of other countries because Americans, under this citizenship-based taxation policy, have to be compensated more in order to have the same take-home pay as non-US citizens. Extra compensation for this additional tax cost is considered as taxable income and subject to tax by both countries, which further increases the non-competitiveness of US citizens for these positions.  In those countries similar to the US, who forbid compensation discrimination based on national origin, it is illegal for employers to provide additional compensation to offset this unique US double tax obligation.

There is only one other country that taxes based on citizenship, a very small underdeveloped country in Africa by the name of Eritrea. Eritrea subjects its citizens living abroad to a 3% tax on their foreign income when they live abroad. Interestingly, this tax was condemned by a UN resolution at the Security Council in 2011 for violating the human rights of its expatriate citizens. The US voted in favor of this resolution, which was passed by a majority of the member nations on the Security Council.