Revising the Taxation of Americans Abroad
The following in-depth article by Bérengère Parmly (American University Washington College of Law) examines this question as it applies to US citizens living overseas. It explains the thinking in Congress which led to certain legislation and includes new research from Congressional hearings. The article covers all issues from Section 911 to the Foreign Tax Credit to the Exit Tax and helps to unerstand what has been the motivation in Congress behind the tax situation that Americans overseas face today. While it was written in 2008, and does not include the lastest developments, it includes a unique history of the development of citizenship-based taxation.
REVISING THE TAXATION OF AMERICANS ABROAD -
Improvements? Or illustrations of the impractical nature of such taxes?
It is estimated that between 4 and 7 million Americans live overseas. If “Abroad” were the 51st state of the Union, it would fall anywhere between the 13th and the 24th largest state in terms of population. To “live” overseas encompasses a diversity of situations: studying abroad from one semester to several years, accepting an extended professional mission overseas, representing the US government on military bases and in embassies, settling in a foreign spouse’s country, or simply following a desire for adventure and new surroundings, traveling and landing in a remote corner of the world. Traditionally portrayed as a country of immigrants, the United States is now also exporting its citizens in growing numbers, a trend fed both by individual enterprise and national policy.
Indeed, expatriation has been encouraged by the US government in a number of instances. The Peace Corps has sent out over 190,000 volunteers into the world since its creation in the early sixties. Fulbright scholarships have been given out to over 273,000 American students. There have been 32 Rhodes scholars every year since 1903, or over 3000 since the beginning of the prestigious program. Given the average age of the participants in these programs, long-lasting personal ties to the foreign countries visited are a foreseeable result, transforming what may have been initially conceived as temporary adventures into lifetime commitments. According to a survey of American overseas voters in 2006, over a third of the respondents lived abroad because of their marriage (they were married to a foreigner or had followed a spouse on overseas assignment), and another 20% were abroad because of their job. 83% of all respondents declared themselves to be living abroad “permanently or indefinitely”, and 58% had already lived abroad for over ten years.
Nowadays, though, most Americans no longer rely on the government to send them abroad. Because the Census Bureau does not count the number of Americans abroad, we must rely for figures of “private” expatriation on its statistical estimates published at the time of the last census, as well as private surveys and data from associations of Americans abroad. According to the heavily caveated estimates of the Census Bureau, an average of 48,000 native-born Americans emigrated each year between 1990 and 2000, nearly double the number for the previous decade and undoubtedly less than either the actual figure for the 90ies or the following decade. A prominent company specialized in employee relocation consulting has been monitoring trends of individual mobility for years; over the course of these surveys, on average a little under half of the clients surveyed (48%) report that their expatriate workforce has increased over the past year. Short of knowing exactly how many Americans abroad there are, the figures reported by the IRS sufficiently illustrate the growing trend of expatriation. Turning to revenue instead of census counts, the worldwide individual income reported by taxpayers subject to US taxation was multiplied by 43% between 1987 and 2001, while the subcategory of foreign-earned income quadrupled.
On occasion, expatriation is the result of a financial calculation and a for-profit enterprise for a wealthy few. Such considerations had already spurred legislative action in the 60ies. A handful of egregious examples of such enterprises rose to celebrity in the mid 90ies, having resulted in gains to the “entrepreneurs” in millions of dollars of tax savings. Such individuals’ abusive tax avoidance schemes have largely contributed to giving expatriation a bad name. Repeatedly, and particularly in the mid-90ies, they have spurred Congress to amend taxation laws to prevent repetitions of these practices. The dragnet that resulted from this handful of cases threatens to be tightened each time a new infamous case pops up, or simply every time tax revenues are considered insufficient, as in 2004 in the American Jobs Creation Act, in 2006 in the Tax Increase Prevention and Reconciliation Act, and for several years now, with the effort to implement an “exit tax” on US residents expatriating on a permanent basis.
The tightening screw builds on a tax policy regarding expatriates that is unique to the US, and makes the lives of law-abiding US citizens and green-card holders residing abroad inordinately complicated and costly. Yet it has little demonstrated effect on either of the intended goals: increased deterrence of tax avoidance and citizenship renunciation, and/or greater revenues. Indeed, quite the contrary: while no figures exist yet, many Americans living overseas signal that the latest legislative changes coupled with the dramatic fall of the dollar have tipped some expatriates’ decision to return to the US, leaving behind what were productive careers abroad.
Though the author strongly objects to the US policy of imposing what amounts to a tax on citizenship, particularly as it is unique among the world’s industrialized nations and disfavors American expatriates in a global jobs market, this paper is not to revolutionize the fundamental tenets of US tax policy concerning the taxation of Americans abroad. Rather the paper will seek to understand the rationale behind this exceptional policy. It will question whether its most recent developments, specifically the exit tax proposal, are effectively alleviating the problems they were purported to address, and doing so without aggravating existing externalities or creating new ones.
Therefore, we will begin by laying out the legal and policy reasons on the basis of which the United States government taxes its citizens and permanent legal residents when they reside abroad (I). We will review the three key features of the taxation of individual expatriates, the foreign-earned income exclusion, the foreign tax credit and the tax rules pertaining to Americans and green-card holders renouncing their citizenship or legal resident status (II). We will then analyze whether and to what degree, in light of the initial policies supporting the taxation of Americans abroad, the latest legislative changes in 2004, 2006 and likely in 2008 have improved the system or rather compounded some of its inherent flaws (III). Finally, we will conclude with several suggestions on how the system of taxation might better balance the government’s policy on the issue and the concerns of those Americans and permanent legal US residents directly affected by the policy (IV).
I. Why tax Americans who live abroad?
Much of the writing on US taxation involving international factors concentrates on the more common topics of international corporate transactions, and to a lesser extent, on the treatment of the foreign transactions of Americans residing in the US. The taxation of US citizens and legal residents residing abroad, the least frequent occurrence, naturally is the least commented of the three. In this paper, it will be the principal focus.
A. Jurisdiction to tax citizens and permanent legal residents residing abroad
No statute specifically targets US citizens and legal residents residing abroad for taxation by the US government. Rather, their US tax status results from the absence of restrictions on a very broadly defined overall jurisdiction to tax. The XVIth Amendment of the Constitution authorizes, and the Internal Revenue Code enforces, the taxation of income “from whatever source derived”. The first two sections of the tax code identify the subjects of such taxation by reference to their family status, not their citizenship or domicile. The second section, providing definitions, jettisons “non-resident aliens” (NRAs) into a separate set of tax rules, but does not purport to give an affirmative definition of the remaining set of potential taxpayers. Only a Treasury Regulation incorporates the definitions of the Immigration and Nationality Act by reference.. Thus, while the first federal tax laws explicitly subjected to US tax “every citizen of the United States, whether residing at home or abroad”, the taxation of American expatriates under modern tax law has become a default rule. Nevertheless, it is a core principle of our tax system.
B. Policy supporting the taxation of citizens and legal residents abroad
The Supreme Court went further than Congress both to spell out and to justify the federal government’s jurisdiction to tax American expatriates on their worldwide income. In 1924, a US citizen permanently residing in Mexico was made to pay an excise tax to the US on his Mexican property. The Court upheld the constitutionality of the payment in the case of Cook v. Tait. The decision referred to precedent purporting to find explicit legislative intent to tax Americans overseas. Furthermore, the Court based its ruling on the argument that a US citizens’ property located outside the United States “derive[s …] benefit from the United States”; furthermore, that “the government, by its very nature, benefits the citizen and his property wherever found and, therefore, has the power to make the benefit complete”. Without defining or giving examples of these benefits, the Court concluded that this “benefit of citizenship” argument justified taxing citizens and permanent legal residents living abroad as if they resided in the United States.
The argument that a government extends tangible services and on occasion some form of protection to its overseas citizens certainly bears some validity for any functioning country. However, no other member of the Organization for Economic Cooperation and Development, and few countries in the world, have made such a loose relationship between country and individual a basis for income taxation. Instead, the architecture of international taxation rests on two core factors: the source of the income and the residence of the taxpayer, two factors which guide every other developed country’s jurisdiction to tax. The writings on the issue of the taxation of citizens who both reside abroad and have wholly foreign-sourced income are a drop in the ocean of literature on cross-border taxation, a telling illustration of the anomaly of this typically American policy.
Academic authors and government bodies such as the Joint Committee on Taxation have further expounded the short Supreme Court jurisprudence on the taxation of Americans overseas. In doing so, they point to the following purposes.
One of these purposes is the “benefits of citizenship” justification of Cook v. Tait. Another is “equity”, as defined with emphasis on horizontal equity in a national context. This posits two core principles: 1/ “all taxpayers earning similar levels of income should be subject to tax at similar overall effective rates”, and 2/ the tax taken into account to measure equity is the taxpayer’s country’s tax system, in this case US tax law. Either this presumes the legal fiction that US citizens are subject solely to US tax law, or it determines that foreign taxation is not a burden to be taken into account when creating national tax law. No American legislator today would support either statement, and over the years, exclusions covering foreign income and credits covering foreign taxes have been necessary attempts to patch the obvious potential for double taxation on US citizens and residents abroad.
Domestic exemptions and credits have served as one instrument to coordinate overlapping tax systems, international tax treaties have been the other. Yet even in its tax treaties (which do not cover all countries in the world), the United States has not relinquished its right to tax its citizens abroad notwithstanding local taxation. The US Model Tax Treaty contains a “savings clause”, applicable “notwithstanding any provision of the Convention”, allowing it to tax its residents and “by reason of citizenship […] its citizens, as if the Convention had not come into effect”. This provision also extends to former citizens or legal residents for ten years after the loss of such status, if the law of the country losing a citizen deemed the loss of status to result from tax avoidance purposes. In short, the treaties are meant to address US individuals in their dealings with foreign tax law, and foreigners dealing with US tax law, not Americans abroad dealing with US tax law. The OECD Model Tax Treaty, by contrast, carries no such “savings” clause.
The third argument brought forth by supporters of a tax system based on citizenship is economic efficiency, defined as a tax policy that creates no incentive to invest in, or move to, any particular country, or a.k.a. “capital export neutrality”. Closely tied to this last goal is the preservation of the US tax base and the prevention of tax havens. This last but certainly not least justification rises to the forefront in a period of crack-down on tax havens, targeting of the tax gap and need for increased revenues. In a period of slow to no economic growth, coupled with an executive branch determined to seek at least the appearance of overall tax reductions regardless of the macro-economic situation of the country, the only outlet for raising revenue is indeed to attack the “tax gap”, and this has been the go-to solution particularly under Republican administrations since the Reagan era at least.
The expatriate community is a prime target for the politically correct revenue raisers and tax-gap fighters for several reasons. First, from a political standpoint, the taxation of US citizens and residents abroad frequently results in revenue raising that does not affect a strong national constituency. Its representation in Congress is spread over the 50 states, diluting their impact on any legislation. Second, enforcement of taxation laws on Americans who may have few administrative ties to their home country has proven notoriously dicey. And third, the bad-faith behavior of a handful of wealthy expatriates has guaranteed that taxation on anyone associated with them would be politically well received. Indeed, a push to tighten the rules on the taxation of expatriates in 1995 was provoked by a series of articles in the American press documenting the actions of several high-profile tax evaders. One such individual had “expatriated” to Belize, only to get himself “appointed” back as a Belizean consular officer in Florida… hundreds of miles away from any Belizean consulate, or indeed, any significant pool of Belizean expatriates!
The revenues derived from the taxation of American expatriates are measured every five years, and the results from the latest “test” year, 2006, have not yet been released. The latest available official figures (2001) do not allow for a definitive study of the financial impact of the latest measures concerning the taxation of expatriates, contained in the 2004 American Jobs Creation Act and the 2006 Tax Increase Prevention and Reconciliation Act. However, using the 2001 figures to provide an order of magnitude, the gross foreign-source income for 2001 was $56.5 billion, spread out over nearly 300,000 returns. Americans abroad reported $27.4 billion of foreign-earned income to the US Treasury that year. The 2006 figures are sure to represent still higher amounts. The reported income resulted in the collection of slightly less than $3.5 billion that year, from nearly 300,000 tax returns. The $3.5 billion, while still a difficult sum for Congress to part with in times of pay-go rules on federal expenditures, gaping deficit and looming recession, represents a mere sliver of the overall federal revenue. It is no sliver for the individuals concerned however: $3.5 billion collected from 300,000 household represents a cost of over $10,000 per household!
II. How does it work?
A. General vs. US principles of international taxation of individuals
a. The basics of international taxation of individuals
For over 80 years, the determination of which government gets to tax what income has been rooted in a two-prong test. First, what is the nature of the income: is it active (wages or business income) or passive (dividends, rents, royalties); second, if active, where was it produced, or if passive, where was it received and where was it consumed or saved. There are exceptions and the application of these theoretical rules raises numerous practical difficulties. Nevertheless, this basic breakdown remains the skeleton of the international taxation system, and the principal guideline for coping with the problem of double taxation. Active income is to be taxed by the source country, and passive income is taxed by the country of residence of the recipient. The focus of this universally accepted tax analysis is the income, not the taxpayer.
Where the taxpayer is the object of scrutiny, it is to determine his or her state of domicile or residence, not his or her nationality. All other OECD countries tax their citizens on their income only if it is derived from the country or if the citizen is residing in the country at the time the income is earned. It is telling that much of the literature on international taxation studies the hypothetical wherein Taxpayer X resides in one country and derives income from another. It almost never mentions, and certainly never extensively covers, the case of an X living in and deriving income from one country, but being a citizen or having the legal right to reside in another. Nowhere – except in the US taxation system - is the citizenship of the income recipient considered a relevant criteria.
b. US international taxation of individuals
In the US international tax system, the analysis must begin not with the nature of the income or place of residency of the taxpayer, but rather with the status of the taxpayer. There are three categories of individuals in the American world of international tax: US citizens, US permanent legal residents, and non-resident aliens. For international tax purposes, “US residents” are green card holders, or persons who meet the substantial presence test. For tax purposes, they are treated as US citizens.
The US taxes non-resident aliens pursuant to the internationally accepted model laid out above: according to the nature of their income. Wages and business income derived from the US are taxed at the rates applicable to US citizens. Passive income derived from the US is taxed at a flat rate of 30%. All other income, not sourced in the US, is not taxed by the US. Finally, if a non-resident is married to a US citizen, he or she may elect to abandon his/her non-resident status for tax purposes, and be treated as a US citizen him/herself instead.
US citizens and residents, on the other hand, have the duty to pay tax to the US government on their income “from whatever source derived”, including whatever geographic source that might be. Therefore, if they receive wages or business income for work conducted abroad, that income will be taxed by the source country per the internationally accepted rules, but also by the US, to whom fiscal fealty is owed by its citizens even when they work (and therefore almost always also live) abroad. Similarly, if they live outside of the US and receive passive income, it will be taxed by their country of residence, per the internationally accepted rules, and again, also by the US government, by virtue of the taxpayer’s citizenship or legal right to return to the US. It is obvious from this summary that the American model inevitably invites double taxation on its expatriates. Our tax system has therefore developed three key features to minimize such an occurrence without conceding the core principle that it has jurisdiction over citizens’ and permanent legal residents’ income even while they reside out of the country.
B. Three key aspects of US expatriate taxation
a. The Foreign Earned Income Exclusion
Encouragingly, the Internal Revenue Code rules regarding the taxation of US citizens or US residents living abroad do begin by stating the classic residence principle: “there shall be excluded from the gross income of [qualified individuals…] the foreign earned income of such individuals”. This is the Foreign-Earned Income Exclusion (FEIE), which allows a certain portion of the income earned abroad to be “excluded” from consideration for US tax purposes. It is computed on Form 2555, and reported as “other income” on line 21 of the 1040 tax return form, later to be removed from the total amount of taxable income earned that year. Indeed, while this exclusion provision is an acknowledgement of the excessive reach of worldwide taxation, it does not alone reverse the basic principle of US taxation: that foreign-earned income of US citizens and legal residents is taxed by the US regardless of the taxpayer’s residence. In a compromise between this basic philosophy and the pressure of American business and expatriates in need of new opportunities in the gloomy economic environment of the late 70ies, the exclusion was reinstituted, but was capped. At $75,000 in 1982, it stands at $85,700 for the 2007 tax year. In addition, the exclusion only covers “earned income”: a US citizen or legal resident loses its protection entirely when he or she retires, as pensions and annuities are not eligible for the FEIE. Indeed, the purpose of the credit as viewed by the legislature is to encourage and support of “productive” expatriates, not to “subsidize” retirement in Europe.
b. The Foreign Tax Credit
What of the income earned abroad that exceeds the $87,500 cap? The second option available then is the Foreign Tax Credit. It is computed on Form 1116, and reported on the Form 1040 on line 51. This will only offset foreign “income” tax, as defined in the foreign jurisdiction. As a mere credit for an actual amount paid, rather than a recognition that tax in general has been paid on the foreign-earned income already, it does not preclude the US from collecting any additional tax at the level at which it would have been paid if the income had derived from the US. Furthermore, it is not a refundable credit: the US taxpayer residing abroad will in no circumstance be able to collect from the US government any foreign tax paid in excess of the amount that would have been paid at home.
c. The Permanent Expatriation Rules
As US tax duties are governed by the citizenship and immigration status of the taxpayer, it should follow logically that they would change along with this status. They do, but rather than switch directly to the tax rules applicable to non-resident aliens, those individuals who cut their US ties fall into a ten-year period of tax purgatory to which a unique set of rules applies in addition to those applicable to regular NRAs. For virtually all US citizens, and green-card holders whose residence in the US was longer than eight of the last 15 years, income derived from the US within ten years of renunciation is taxed at the rate applicable to US citizens or that applicable to NRAs, whichever is higher. The rules under which the source of income is generally determined are amended so that “income derived from the US” encompasses items generally not included, such as gains on the sale of personal property located in the US and stock or securities issued by a US entity. Other modifications to general tax rules apply to ensure the full effect of the ten-year window: for example, non-recognition exchanges conducted during the period are either taxed immediately on any gain realized or conditioned on the taxpayer agreeing to consider the gain to be US-sourced on the date that it would normally be recognized. Finally, there is a “recapture” rule: if the taxpayer were to be present in the US for more than 30 days during any one year within the 10-year period, he or she would be taxed by the US as if they were a US citizen or legal resident again for that particular year, i.e. on his or her worldwide income.
The rules of §877 of the Revenue Code apply on one key condition: the individual renouncing US citizenship or legal resident status must “have for one of its principal purposes the avoidance of taxes”. The examination of this key factor seems a legitimate analysis under the circumstances. However, it is not a totality of the circumstances analysis, as the study of an individual’s “purposes” would lead one to believe. The “purpose” of renunciation is determined by two numbers: a) the amount of income tax paid to the US over the previous five years and b) the individual’s net worth on the date of renunciation, and since 2004, by furnishing proof of tax compliance over the previous five years. An individual who paid on average over $125,000 of income tax, or whose net worth was $2 million or more, is automatically deemed to be expatriating in order to avoid tax. Though the caps are set generously high, they reduce the analysis of an individual’s purpose to a presumption, one that now offers no recourse for contest.
The presumption of tax avoidance at a certain level of income was made irrefutable in 2004, as the option to apply for a Private Letter Ruling was dropped. Prior to that amendment, a taxpayer pinned with a tax avoidance purpose had one year to apply for a PLR which would take into consideration additional circumstances pointing to a legitimate non-tax purpose for expatriation. Inserted in the revenue provisions of the American Jobs Creation Act (a location and purpose common to all reforms to expat tax rules, as we will see below), the amendment was intended to ease the IRS’ administrative burden of enforcement by making qualification a purely mathematical test. Indeed, between 1997 and 2002, 270 such PLRs were rendered, including nearly half giving “no opinion” as to the principal purpose of avoiding tax. While this step may therefore have been considered administratively too burdensome, it cannot be said that it was unnecessary: 132 of the PLRs concluded that the taxpayer did NOT have tax avoidance as a principal purpose, and therefore was released from the alternative tax regime. Only 11 PLRs confirmed a tax avoidance purpose. By eliminating this recourse, the 2004 reform sacrificed the opportunity to make what were found to be legitimate arguments in the vast majority of cases. If a little over 400 persons/year were documented as having renounced US citizenship or legal residency during that period, these PLRs constituted a significant proportion of these cases.
III. (How) Does it work?
These three features of the US taxation system have all been amended within the last decade, both to tailor them more efficiently to their intended purpose, and to marshal them along with a panoply of tools to pursue broader tax policy goals, such as revenue raising and the prevention of tax evasion and citizenship relinquishment. The problems with the administration of these laws have been highlighted in a number of thorough and candid studies and reports from the Joint Committee on Taxation, the Department of the Treasury and the General Accounting Office, and the laws were changed or are being changed in partial response to their findings. However, these reports also warned that such amendments would only superficially address the core enforcement problem inherent to the nature of such laws. Not only are they seeming to prove correct in their pessimistic predictions, these reports do not address the extent to which these amendments have suddenly transformed the tax burden of American citizens and permanent legal residents currently abroad, in ways that are no less severe for being largely unintended.
A. The trouble with the FEIE in practice.
The policy behind the FEIE as it applies today demonstrated an intent to cover all but the few very wealthy overseas residents. At a level of $75,000 in 1982, it indeed covered the vast majority of employees sent abroad on a company salary and more than largely provided for the travel-writers, English teachers and other self-employed wanderers who formed the characteristic profile of the expatriate of the 70ies and early 80ies. But only since 2005 has the FEIE been indexed for inflation, to reach $85,700 in 2007. If it had been tacked to inflation from its inception, it would cover nearly $166,000 in 2008, or twice the current amount. At that rate, it would continue to cover the same population it did at its inception and likely cover a significant percentage of Americans residing abroad. As the figure stands today however, the FEIE mirrors the flaw as the Alternative Minimum Tax: designed to protect all but the very wealthiest tier of expatriates, it now fails to protect the middle class taxpayers and lets them fend with the tax system as if they were all one of those wealthiest few.
Compounding the conceptual flaw of the FEIE were the two negative consequences of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), and the fall of the dollar.
Before the 2005 bill was enacted, income not covered by the FEIE was taxed as if the excluded income did not exist: the first dollar of income to fall outside of the exclusion was taxed at the lowest marginal rate, or under current rates, 10%. Under TIPRA, the non-excluded income is now taxed at the marginal rate, which for $85,701 means at 25%. Thus not only is the proportion of income unprotected from double taxation by the FEIE much lower today than when the exclusion was implemented, the tax rate on this unprotected income is now also significantly higher.
Aside from the legislative flaws of the FEIE, its value is now sharply eroded by the fall of the dollar relative to other major world currencies. The FEIE is and always was expressed in US dollars. Thus the amount of coverage provided by the exemption was always subject to an exchange rate risk. A US citizen or legal resident earning a salary in euros, British pounds, Swiss francs, Japanese yen and other currencies has seen the level of his or her USD-denominated income shoot up over the last two years without having received the benefit of a raise in real economic terms. In every aspect of their tax payments to the US, American expatriates have reported taxable income commensurate with anywhere from a 15% to a 33% raise, artificially soaring even further above the ceiling of the FEIE as it had been set at its inception.
B. The trouble with the FTC in practice.
The foreign tax credit, despite its generic name, does not cover all foreign taxes, and of the qualified foreign taxes, does not credit the full amount paid.
First, it is not a refundable credit. If the amount of income tax paid to the foreign jurisdiction were to be lower than what the American expatriate would have paid on a similar level of income earned at home, the difference is owed to the US. The reverse is not true however, as the credit is limited, in short, to the hypothetical US tax on the taxpayer’s level of income. Far from placing the expatriated taxpayer in the position he would have been in had he remained in the US, the credit ensures that he is subject to the same tax duties as if he were home, but ignores the additional tax burdens that may remain on his shoulders if his foreign tax liability were to be higher than the American one. It is the global US tax revenue that is preserved by the foreign tax credit, rather than the individual taxpayer’s comparative tax burden.
Because the FTC covers foreign income taxes, according to what would be “an income tax in the US sense”, regardless of the local denomination of the tax, the residual tax burden shouldered solely by the taxpayer may be considerable. The FTC’s coverage of income taxes provides only narrow protection in countries where income tax is not as prominent a means of national revenue collection as they are in the US. For example, European countries impose notably high consumption taxes, to which all American expatriates, as local consumers, must submit to to the tune of up to 25% depending on states and types of products. These have no way of being accounted for to demonstrate that the overall tax burden of a particular individual expatriate already meets the US level. (One must be a foreign citizen permanently taking the item out of the country, therefore residing abroad, to have a value-added tax deducted on foreign purchases at the airport… naturally an option available only to the Americans whose purchases abroad are vacation luxuries rather than daily expenses.) A number of countries also have a wealth tax, akin to a US estate tax that would be paid annually. Such taxes are not related solely to income and are thus not creditable for US tax purposes.
If the foreign income tax liability is higher than the American one would be, the taxpayer has the option to report the foreign tax as an itemized deduction, but this is rarely advantageous and never amounts to a full “equalization” of tax burdens between Americans in the US and abroad. The itemization of value-added taxes is not even a practical option. Therefore the result is not a system that makes expatriation “tax neutral” for the individual, but rather only for the US government. If this were the only consideration in deciding whether or not to go abroad, such an insufficient system of credits would actively discourage any American from taking the step. Discouraging expatriation is not the purpose of the tax laws on expatriation. Deterrence is the core purpose of the tax laws on permanent relinquishment of citizenship or legal residency however.
C. The trouble with §877: a solution with the exit tax alternative?
In a 2003 report commissioned as a review of the reforms to §877 enacted in the 1996 HIPA bill, the Joint Committee on Taxation candidly highlighted the inefficient enforcement of §877. Different definitions of what constituted citizenship or legal resident status relinquishment, coupled with the absence of any systematic collaboration between the tax, immigration and foreign policy agencies resulted in “little or no enforcement” of the special tax rules under §877. The Committee acknowledged numerous times the “inherent” difficulty of administering a law that can be easily circumvented by simply leaving the country and never returning. It observed that the IRS has “generally ceased compliance efforts directed at former citizens and former long-term residents”, an admission that such compliance requires a degree of resources the agency would find inefficient to allocate to the task. When asked by the JCT to quantify how much revenue had been collected before and after the 1996 changes to the §877 tax regime, the IRS answered that it “had not tracked that information”; when asked how many people IRS were monitoring under §877, the answer was “None”. Though the Committee’s report does not cover it, the administration of expatriation taxes requires not only close coordination with several other US government agencies, but also significant input from the IRS’ foreign counterparts. This is unlikely to occur if the US authorities themselves have abandoned the topic and the foreign agencies have no reciprocal need to track their own former nationals.
Rather than have to pursue the enforcement of laws on out-of-reach taxpayers, the Clinton administration between 1995 and 2001 and Congress up to now have worked on a series of proposals to condense the “trial period” of ten-years into a single event, an “exit tax”, effective the year that the citizen or permanent legal resident renounces such status, and conditioning such relinquishment. The citizen/green-card holder would present the sum of his or her worldwide assets for evaluation, and a tax would be levied in the year of expatriation as if he or she has sold all these assets at fair market value that year. This mark-to-market tax, like the current alternative tax regime under §877, would not apply to all persons renouncing their US tax status. Two categories would continue to be statutorily exempt: a) those who acquired dual citizens without ever retaining significant contact with the US, and b) with a much narrower window, those who acquired US citizenship at birth and renounce it before they reach 18 ½ years old. For all others, the type of test currently anchoring the §877 rules would remain: a combination of income tax payments and net worth, and a proof of full compliance with the US tax authorities. The first $600,000 of net gain on the deemed “sale” would be exempt from this “exit tax”. The applicable tax rate changes with the various proposals, as does the manner in which such an exit tax is to be phased in. Some items would be subject to special treatments: deferred compensation for example would not count as a present asset and therefore not be taxed at the time of “exit”, but would continue to be subject to the 30% withholding tax applicable to non-resident aliens; real property situated in the US would continue to be taxed in the US even to NRAs, and would also receive separate treatment. Finally, individual intent and circumstances would not be taken into consideration: all taxpayers would be subject to the same tax regime.
The idea of forcing a “clean break” at the time of citizenship renunciation would certainly appear to simplify an individual’s tax situation, and facilitate the enforcement of the tax at a time when it is more convenient to do so, i.e. while the taxpayer is in the country. However the number of exceptions and special regimes included in the text of the law itself already demonstrate the difficulty of realizing such a clean break. Further dismissing the likelihood of a clean break, few taxpayers are likely to be able to pay the exit tax in a lump sum. Acknowledging this problem, the law would allow the exit tax to be paid over a period of time, provided that sufficient security is left in the US to cover the sum owed. While this addresses the taxpayer’s probable lack of liquidity at the time of expatriation, it creates a new entanglement with the US tax authorities which further defeats the purpose of the “clean break” upon expatriation. The law does not describe in much detail the nature of the “security” that would be taken by the US government, but for enforcement purposes, a form of lien attached to title would be the safest way to ensure payment. This would considerably diminish the value of the underlying asset in the hands of the taxpayer during the period necessary to finish paying the exit tax. Either this creates another dissuasive burden on expatriation, or it increases the incentive to “cheat” by not declaring a formal renunciation and simply moving abroad and informally severing ties to the country.
Indeed, the exit tax does not create any new obstacles to the right to physically leave the country. It relies on the taxpayer’s willingness to come forward and follow the formal renunciation process spelled out in the law before the taxpayer has moved out of the country, rather than simply move abroad and remain outside the country thereafter. Such reliance is precisely what results in the poor enforcement of the expatriate taxation laws today: there is no incentive to follow this process, and the tax authorities do not have the means to enforce it. Closing the tax gap on the persons subject to either the current alternative tax regime or the future exit tax procedure will not be accomplished by a change of the tax laws themselves, but would require US immigration, State Department and foreign authorities to draw a tighter net.
Simplification and enhanced enforcement are two of the three goals of the exit tax. In every bill containing an exit tax amendment, it was positioned in the Revenue provisions. Clearly, the assumption is that the new process will bring in new sources of revenue; since the levels of income subject to the exit tax are not meaningfully different from those currently subject to the expatriate alternative tax regime, the assumption must be that it will help close the tax gap on the expatriation population. Again, in a laudable effort at limiting the cost for such a measure for the middle-class would-be legal expatriate, the ceilings are set high enough that most middle-class taxpayers may not be affected. But again, this is a self-defeating measure if it results in relatively low actual collections, not only in absolute terms but in relation to the extraordinary effort to collect them: estimates range around $250 million in the first four or five years it is implemented. Between 1995 and 1999, only 182 persons reported themselves to be above the double monetary threshold test that would trigger the alternative tax regime, only 76 more reported in 2000 and 2001. With an income tax threshold that may be lifted to $136,000 under some exit tax proposals, and with the new $600,000 blanket exemption, fewer people still are likely to qualify. And none of the ones who reported in the past and would under the exit tax regime are likely to be on the black list of a dozen multimillionaires that started all the legislative action to begin with.
For what little income might be raised, for what few improvements in the administrative burden of enforcement might be obtained, the exit tax proposal is a more questionable exercise of the federal authority to tax by its interplay with the freedom to circulate. Admittedly, the exit tax only targets citizenship relinquishment, not geographic relocation, and does not categorically prevent it. Thus any foreign precedents to date would be distinguishable. Contrary to the Soviet laws taxing Jews who sought to leave the country, the US exit tax targets those who renounce their citizenship, not those who merely seek to leave the country, and it applies to any American seeking relinquishment, not a particular class of citizens. Closer to us, the European Court of Justice ruled in March 2004 that a French law imposing the acceleration of recognition on appreciated assets to any person who elects to settle outside of the country was a violation of the freedom of establishment and individual circulation, forcing France and several European countries with similar laws to modify them. The principle was confirmed two years later in another case involving a similar Dutch law. Again, the case is distinguishable because the trigger of the French law was not renunciation of French citizenship but simply the election of a foreign domicile for tax purposes, and freedom of circulation abroad is a pillar of European treaty law which is arguably given more weight than in US law. Still, even if US courts were to find the exit tax as it is proposed unobjectionable, the systematic condemnation of such types of taxes by some of the US’ closest economic partners compounds the doubts already raised regarding the likelihood of obtaining the necessary cooperation from foreign states that would be required to enforce the new law.
D. Structural troubles: the cost to US competitiveness.
The degree to which the tax dimension of expatriation is a problem for the American citizens or green-card holder depends on the conditions of his or her expatriation. For those Americans who are self-employed or those who were hired on a local contract, the burden of compliance with both local and American tax systems rests solely on them. If, on the other hand, they are employed by an American company, sent abroad on a fixed term assignment, the company usually bears the burden of the tax differential though a tax equalization package prepared in consultation with accounting firms. The expatriate assignee continues to pay US taxes through withholdings on his salary, and the company bears the burden of paying the appropriate combination of US and foreign taxes both as the employer and on behalf of the employee to the respective governments.
This is what makes the taxation of Americans abroad an issue of national competitiveness: it creates a unique administrative and cost burden on American companies, or companies conducting business in connection with the US, or simply hiring American citizens. American companies have a disincentive to send their national employees to their foreign branches, creating an adverse effect on the cohesion of the company. Conversely, Americans working for foreign companies in the US will be less likely to be selected for an overseas assignment than their foreign colleagues, impeding their growth in the company and the possibility of Americans making a significant impact in multinational enterprises. Indeed, the impact of the taxation of American employees abroad on US businesses and the US’ overall capacity to export goods and services was identified as far back as 1979 by the President’s Export Council, who argued, evidently without success, against the narrowing of the §911 exclusion rules.
This angle bears a more direct impact on legislators’ immediate concerns and is beginning to be addressed in both Houses of Congress. Indeed, the only bills that have been introduced to address the flaws in the taxation of Americans abroad are both presented under the title “Working American Competitiveness Act”. They both call for the removal of the cap on the Foreign Earned Income Exclusion, which would effectively bring the US back to a territorial income tax system, mirroring every one of its major trading partners.
IV. Can it be improved?
If the US holds fast to its principle of taxing Americans who reside overseas and whose income is therefore principally, if not exclusively, foreign-sourced active income, a few incremental changes could be implemented that would improve the system without causing any change in policy. Most reforms however, rather highlight the inherent flaws of the system.
A. Increasing the cap on the FEIE.
Following the three characteristics we have tracked throughout this study, the first and easiest amendment would be to increase the cap on the Foreign Earned Income Credit to bring it up to the level it would have been at today, had it been pegged to the cost of living all along. This would bring it up from $87,500 now to nearly $190,000. This would considerably simplify the tax reporting of the majority of Americans abroad today whose income would no longer exceed the cap. It would not cause any revision to US tax policy, because the exclusion was never intended to sunset, as it effectively has by covering a proportionately smaller and smaller amount of income over the last twenty-five years. It would also not violate the central tenet of tax neutrality: as Americans abroad already pay taxes, and often higher ones, on the income they would be allowed to exempt for US tax purposes, the exclusion would not be creating any tax incentive to expatriate. Rather it would limit a cost of expatriation that itself violates the neutrality principle today.
Lifting the cap altogether, as several legislators of the House and Senate have proposed, would be more of a departure from orthodox US tax policy. It would indeed amount to a full tax exclusion of all foreign-earned income to Americans abroad, in line with the laws of virtually every other country in the world. However, again, this would therefore not be a special favor to Americans abroad as compared to the rest of the world’s expatriates, but rather would end the special burden Americans now bear. Though it would signify an immediate loss of revenue to the country, it is a revenue that only the US had allowed itself to collect so far, and therefore would only bring the US back in line with the rest of the world, not be a loss that would unfairly disadvantage the US treasury.
B. Broadening the scope of the FTC.
Reforms to the Foreign Tax Credit will necessarily be imperfect, insofar as it relies for efficiency on the premise that all taxes are collected in the same fashion and are easily transposable from one tax system to the other. Paying taxes in one’s country of residence is an inescapable necessity. Taxation is mostly the government’s means of collecting the cost of providing services to the population, and the most government services received by any individual are those derived from the local and national government of the place he or she resides in. Each country’s diverse means of collecting revenue and dispensing services cannot be easily summarized in a way that each taxpayer can account for in order for it to be credited in another country. Nor indeed should every foreign tax be allowed to be credited. Why should the American taxpayer community as a whole carry a burden imposed by a foreign tax policy, the benefits of which it will never enjoy? (The various wealth taxes, often used to offset particular social policies, are a prime example.)
If an American student takes a job in the US, for example, he or she will be allowed to deduct student loan repayments from his or her taxable income, a public acknowledgement of the moral and economic value of obtaining a higher education. If this student instead finds employment in a foreign country, loan reimbursements will be paid no less, but will no longer be deductible from taxable income in that country. Most foreign governments either do not have the interest or the means of supporting college education, or have different ways of acknowledging its value, namely by funding universities directly through national tax revenues, and making the cost of attendance small to none. This type of tax “loss” to the individual is assumed as a cost of going abroad, which no expatriate has ever thought to claim back. Compensating for such loss might be the right to attend one of the free public universities in the new country of residence. This is only one of numerous examples of the national idiosyncrasies each country reflects in its tax policy, which make it impossible for any American expatriate to engage in meaningful tax planning. To truly be “neutral” on the subject of expatriation, US tax laws would need to take into account the total tax burden borne by an expatriate and an American residing in his home country. It is impossible to parse through all the types of taxation in two different countries to tailor a foreign tax credit to each situation. But nor is it fair to leave expatriates in a “heads, I win, tails, you lose” situation: carrying all the extra tax burdens of the local country, but also having to remit additional tax payments to the US simply because the form their tax payments take abroad do not reflect the US definition of “income tax”. Indeed, they are often deemed to fall short when their total tax burden is significantly higher than it would have been in the US. Without rejecting the Supreme Court’s argument that “benefits” arise from the passport one may carry, and for which the US government may impose a tax, they might more simply be acknowledged in the form of fees, already paid when applying for a passport, which could be extended to consular registrations as a periodical bill.
C. Changing the premise of the exit tax / Enlisting the help of foreign agencies.
The premise, now irrefutable, of the taxation of persons renouncing their US citizenship or legal residence is that their actions are tax motivated. Given the figures cited at the beginning of this study, tax is almost never the purpose of expatriation. The example of the American millionaire electing to become a citizen of Belize is a rare extreme. Equally rare is the opposite extreme of a man who was born to Chinese parents in the British Indies, became Pakistani after that country’s independence and the Chinese Revolution, then British when his banking career sent him to Hong Kong, then the US, and who finally renounced his US green card to retire where the core of his family had settled, in Canada. Most individuals fall somewhere in the middle, and expatriate as a result of a single event: marriage to a foreign spouse, or a study abroad program or foreign posting that leads of other career opportunities locally.
The presumption that an American expatriates for tax reasons should be tested, for circumstances such as the nature and depth of the ties the would-be expatriate has to the proposed country of adoption. If hard numbers are to be used, the comparative tax burdens an individual can anticipate on his income in the new country and in the US should be the relevant figures to measure. It is highly unlikely, and absurd to presume, that an American moving to Scandinavia does so in order to pay less tax!
In addition to changing the nature of the test under which we propose to decide whether an individual should be taxed on expatriation, the accent should be placed in priority on the means of enforcement if expatriation laws are to become more than a theory. This is no longer a matter of tax enforcement assigned solely to the IRS, but one that puts the onus on those agencies that control the movements of persons in and out of the country, and those that cater to Americans abroad in other circumstances. Consular registrations would have to be matched and reported to IRS databases for easier tracking.
Most efficient however, since not all Americans abroad are registered in the consular lists, would be to impose a systematic reporting to the IRS by the foreign tax collection agencies of all foreign tax returns filed by Americans. They are the only agencies guaranteed to have the means to collect the information needed by the IRS to enforce the expatriate taxes both to US citizens and legal residents and to former US tax persons. This would impose a significant burden on foreign tax authorities, and as we have said earlier, one they are unlikely to undertake lightly as they have nothing to gain directly from it. Indeed, they would likely raise direct objections to the reporting of their own citizens who would be affected: their citizens who hold US green cards, or former US citizens who had adopted the foreign nationality. This likely would entail amending the tax treaties to include a new reporting duty, which the tax partners would have no apparent reason to agree to, except to decide to impose such a tax as well.
As for that, the trend in the rest of the world is rather to end expatriate taxation or to renounce ideas similar to the exit tax. One of the few other countries to tax its residents on income earned abroad while residing abroad, the Philippines gave up in 1997, in despair at ever being able to enforce it’s taxation on its large diaspora. In France during the 2007 presidential campaign, current IMF Director Dominique Strauss-Kahn, himself a candidate for the nomination of the Socialist party, put forward a proposal to tax the income of French expatriates residing abroad. The measure was spurred by the same impulse that started the expatriate tax reforms in the US: a mega rock star’s avowed tax-avoidance expatriation to Switzerland. Yet it was met with a very different response: the report was tabled by the Socialist party after a short fortnight of controversy, and the party currently in power roundly criticized it as a fundamental misunderstanding of the causes of expatriation. The prospects for convincing treaty partners to help the US implement a tax they do not have, much less those that actively fought its implementation at home, are slim.
D. Changing perceptions.
The definition of law and policy concerning the taxation of Americans abroad would benefit from one last, but not legislative, change. This would begin with a simple care in the use of terminology: prominent authors in the fields seem to use the words “residence” and “nationality” interchangeably. In this field specifically, and in a globalizing world, one can no longer make the mistake of equating the two. More broadly, it would behoove the American legislator to consider the full scope of the American overseas community, rather than focus on a black list of obnoxious multimillionaires when drafting the tax laws that in the end apply to all. Those who are reluctant to amend the taxation of expatriates for fear of creating tax “benefits” to them cannot have looked at the total tax burden applicable to an American abroad in most countries in the world. As for the “exit tax”, what may be seen as a “loophole” when viewed through the narrow lens of a handful of escaped fortunes is a path most Americans would prefer to avoid, and hope never to have to consider.
The inherent difficulties of implementing the taxation of Americans abroad are only frustrating if one believes such expatriates to be benefiting from a windfall by having moved abroad. If on the other hand, one agreed to consider “horizontal equity” among taxpayers not by citizenship, but by geographic location, one might recognize that letting Americans be taxed at the often considerably higher overall levels imposed by many of our trade partners, rather than the rates they would have paid at home and now bear no relationship to their lives, would not be such a scandal!
The recent changes to the taxation of overseas Americans partly stem from a laudable effort to improve the enforcement of the laws as they stand, and from the need to raise additional federal tax revenue. But in light of the issues highlighted here, we should be questioning whether enforcement of such laws can be meaningfully improved at all, by the tax community or by any other entity. Given the nature of the activity being taxed, the most effective enforcement does not require a change of the tax laws themselves. Rather, it requires one of two things. Either a degree of control on the movements of Americans in and out of the country that would make our economy suffer and our elected officials, let alone the electorate, cringe. Or a degree of cooperation with foreign tax authorities that those authorities are unlikely fund, given the total lack of reciprocity they can expect in the absence of any desire on their part to tax their own expatriates in the manner in which we tax ours, and occasionally interests contrary to ours in this respect. As they stand today, the changes in the tax laws have not demonstrably captured any significant number of formerly tax avoiding American expatriates: their only proven effect is on those expatriates who were already complying with the laws, and who are rewarded for their diligence with rapidly soaring tax bills. We can therefore question both whether the intended levels of revenue are really forthcoming, and whether such an unabashed intent to collect income tax revenue from American expatriates is a legitimate endeavor to begin with.
The proposal to institute an “exit tax”, as it may appear in our tax law by the end of the year, may not necessarily cause significant financial harm to either expatriates or the majority of would-be expatriates, should they ever choose to renounce their citizenship or green-card altogether. The amounts of exempt assets, coupled with the double tax test, are all high enough not to affect the middle-class family, if they are allowed to increase along with the cost of living. Also, the idea of taxing citizenship renunciation on the date of renunciation, rather than over a subsequent ten-year period, appears neater and easier to implement in theory.
Yet until an individual can be prevented from purchasing a plane ticket without a thorough background check into his immigration status, tax records, bank records, and overall financial and family situations, those who dispense with following the tax laws applicable to expatriates will continue to do so, simply by not going through the formal renunciation steps that are the key to the whole process in the first place. Again, only those who have been complying with the laws all along will bear an unjustifiably heavier administrative burden. And one that is unlikely to be paid for by the revenues collected from the rare birds who will be both rich enough and diligent enough to put themselves through the process and pay the tax they will be found to owe.
When there is enough data to analyze the phenomenon, studies are likely to show that the changes to the tax laws on American abroad in 2004, 2006 and perhaps 2008 will have provided additional revenues for the US government in the short term. But the analysis will not stop there: it will have to be balanced with the cost in the medium to long term of having turned the screw so hard on this particular class of taxpayers. On balance, these changes are already visibly impeding the activity being taxed, that of living and working overseas. More importantly, they seriously undermine the premise of the entire policy behind the taxation of expatriates. While the stated policy is to make expatriation “tax neutral”, i.e. not to encourage expatriation through the tax laws, it was never intended to discourage an activity otherwise associated with education, discovery, enterprise and growth of national prestige and revenue. The effects of the tax laws today do, regrettably, precisely that.
 There is no census of Americans abroad, see Note 8. The State Department’s figures are not regularly updated and remain conservative given their reliance on consular registration: the Bureau of Consular Affairs counted some 3.8 million private Americans residing overseas as of 1999. The Assn. of Americans Resident Overseas uses the figure of 6.6 million; www.aaro.org. See also, e.g., AP, “Americans Heading to the Polls”, Feb. 5, 2008 (using the figure of 6 million Americans abroad), “Census Bureau finds it can’t count Americans abroad”, THE HILL, Mar. 30, 2006 (using the figure of 4 million).
 In another growing category, several thousand Americans overseas are children born to expatriate Americans who have never yet had the opportunity to live in the United States.
 Peace Corps, Media Factsheet 2008, http://www.peacecorps.gov/multimedia/pdf/about/pc_facts.pdf.
 Fulbright Program Fact Sheet, http://www.fulbright.org/ifad/manual/Fulbright_Fact_Sheet.pdf.
 OVF 2006 Post Election Voter Survey Results, Feb. 2007, p.5; http://www.overseasvotefoundation.org
 The GAO conducted an experimental study of expatriate population in three randomly selected countries in 2004 in an attempt to start counting expatriates in the 2010 Census, and concluded that it “would not be cost effective” to do so; it refers to the Census Bureau’s acknowledgment that currently “no accurate estimate exists” on the number of Americans abroad. The several reports to Congress by the Census Bureau and the GAO on this issue do not even attempt to give a range or an estimate of the number of Americans overseas. See U.S. Gen. Accounting Office, Report to the Subcomm. on Technology, Information Policy, Intergovernmental Relations and the Census, Comm. on Gov. Reform, House of Representatives, “2010 Census - Counting Americans Overseas as Part of the Decennial Census Would Not Be Cost-Effective”, GAO-04-898 (August 2004).
 Gibbs, James, et al., “Evaluating Components of International Migration: Native-Born Emigrants”, Working Paper No. 63, Jan. 2003, http://www.census.gov/population/www/documentation/twps0063.html (As the study readily admits, the method actually covered little more than a dozen of the principal countries with large American expatriate populations, relied on emigration trends that are unlikely to be up to date, and resulted from a cobbling of several data sources that do not purport to be comprehensive, such as consular registrations and foreign census data.)
 GMAC, Global Relocation Trends – 2006 Survey Report, April 2007, p.6. http://www.gmacglobalrelocation.com/insight_support/grts/2006_GRTS.pdf
 Redmiles, Lissa, “Statistics of Income Studies of International Income and Taxes”, SOI Bulletin, p. 146, 153-54.
 A handful of examples were cited by name by Congressmen supporting the tightening of §877 rules on expatriation. See “Panel Clears Bill Taxing Wealthy Expatriates”, WASHINGTON POST, June 14, 1995, at F02. Figures quoted during the debates preceding the 1996 changes to §877 also honed in on a specific number of “billionaires” accused of having expatriated and renounced US citizenship for tax purposes: from 4 to 24, according to Republican lawmakers and the US Treasury, respectively. See also Jackie Calmes, “Archer Seeks Quick Action for his Tax Bill – Ways and Means Chief Sets Panel Vote on Proposal Targeted at Expatriates”, WALL STREET JOURNAL, June 13, 1995, at A4 (further illustrating the debate between Congressional Republicans led by Rep. Bill Archer and the Treasury, advocated more radical changes still).
 See note 12; see also Joint Comm. on Taxation, “Review of the Present-law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-Term Residency”, JCS-2-03, p.79 (Feb. 2003) (making the clear link between “press reports and hearings” about “a small number of very wealthy individuals”, and the Congressional response that resulted in the changes to the IRC§877’s alternative tax regime for former Americans and green card holders enacted in the 1996 Health Insurance Privacy and Accountability Act of 1996); Jerry Gray, “Senate Extends Deduction for Self-Employed”, NEW YORK TIMES, Apr. 4, 1995, at D-23, Jerry Gray, “Wrangling in Senate Again Bars Vote on Midyear Budget Cuts”, NEW YORK TIMES, April 1, 1995, at A26 (pointing out Sen. Kennedy’s threat to filibuster an income tax bill until revisions to §877 were considered).
 Conversations with members of the American Citizens Abroad and Federation of American Women’s Clubs Overseas – Washington, April 2008.
 See Joint Comm. on Taxation, “Review of the Present-law Tax and Immigration Treatment of Relinquishment of Citizenship and Termination of Long-Term Residency”, JCS-2-03, p.140 (Feb. 2003).
 U.S. CONST. Amend. XVI; I.R.C. §61(a).
 I.R.C. §1.
 I.R.C. §2(d), referring to §§871 and 877..
 Treas. Reg. §1.1-1(c).
 Isenbergh, Joseph, International Taxation, 8 (Foundation Press, 2005) (2000) (quoting Income Tax Law of 1894); Tariff Act of 1913, Section II(A)(1).
 Cook v. Tait, 265 U.S. 46, 44 S.Ct. 444 (1924).
 Cook at 55, 445 (citing US v. Goelet, 232 U.S. 293, 296, 34 S.Ct. 431, 433 (1914), interpreting a section of a five year old tariff act to apply “wholly irrespective of the fact that he was permanently domiciled in a foreign country”).
 Cook at 56, 445.
 See 2003 JCT Report at 140; Graetz, Michael J., Foundations of International Income Taxation, 15 (Foundation Press, 2003) (quoting Staff of the Joint Comm. on Taxation, Background Materials on Business Tax Issues, 53-56 (2002)).
 See paper’s section II, “How does it work?”
 JCT in Graetz, p. 15.
 JCT in Graetz, p.14.
 Musgrave, Richard A., Musgrave, Peggy B., “Inter-Nation Equity”, in Tax Policy in the Global Economy, Edward Elgar Publishing Ltd. May 2002, p. 165.
 US Model Tax Treaty, Art.1 §4, 1996.
 See also Isenbergh at 238.
 See generally OECD Model Tax Convention on Income and on Capital, 2005.
 JCT in Graetz, p. 14.
 JCT in Graetz, p. 15.
 See generally Steurle, Eugene, Contemporary US Tax Policy (Urban Institute Press, 2004).
 US citizens abroad vote at their last US address prior to expatriation, rather than in one block represented by one or more representative of the US community abroad (as is the case for example in France and Italy, and perhaps soon Ireland, who have Senators representing the expatriate voters; other countries with large diasporas go so far as to handle them through a special cabinet or sub-cabinet level office – Israel and Lebanon, for example). As for green-card holders, naturally, they have no say as they do not have the right to vote…
 In a letter dated May 2000 to the Joint Committee on Taxation, in response to a request to follow-up on the 1996 changes to §877, the IRS reported that only .1% of overseas US taxpayers had been audited in 1999, a decline by half from 4 years before, and a figure more than ten times lower than the audits of US-residing individual taxpayers. Letter from Commissioner Charles Rosotti, to Lindy Paull, Chief of Staff, Joint Committee on Taxation (May 5, 2000).
 See Nick Cohen, “Without Prejudice: Billionaire’s Sting on the Mosquito Coast”, THE OBSERVER, Aug.1, 1999, at 29.
 Curry, Jeff, Keenan Kahr, Maureen, “Individual Foreign-Earned Income and Foreign Tax Credit 2001”, SOI Bulletin, p. 98.
 American Citizens Abroad, ed., “A Portrait of Overseas American Taxpayers in 2001 – From Information Provided by the Statistics of Income Division, Internal Revenue Service, U.S. Dept. of Treasury”, Feb. 2004.
 See Avi Yonah, Reuvi, “The Structure for International Taxation: A Proposal for Simplification”, 74 TEX. L. REV. 1301, (1996); Musgrave, Richard & Musgrave, Peggy, “Inter-nation Equity”, in Tax Policy in the Global Economy, (Edward Elgar ed., Cheltenham, UK/Northampton, MA, 2002), pp. 159, 161: reference to a seminal study on international taxation by a group of economists commissioned by the League of Nations conducted in 1920.
 See e.g. Avi Yonah, supra, at 1311-1317 (highlighting the centrality of the factor of the individual’s residence, and acknowledging that the US system “does, however, include nonresident US citizens in this category”); Graetz, supra, at 5 (“Nations universally recognize that both the country of residence and the country of source have a valid claim to tax income”).
 See generally 2003 JCT Report at 140 (rapidly surveying the taxation on expatriation by a sample of other countries, and by extension the taxation on residence principle common to them); see e.g. Joint Comm. On Taxation, Explanation of Proposed Protocol to the Income Tax treaty between the United States and France, JCX-2-06, p.9 (Jan. 2006) (summarizing the international aspects of French taxation of individuals).
 See e.g. Steurle XXX, Musgrave, supra, at 164, 167. Some authors dismiss the issues raised in connection to citizenship and taxation as “not particularly common” and “typically at the fringes”: Isenbergh, supra, at 17.
 I.R.C. §7701(b)(1)(A)
 I.R.C. §911(a)(1)
 The FEIE first appeared in the tax code in 1962, when it was originally set at $35,000.
 Statement by an unnamed Congressional tax specialist, April 2008.
 I.R.C. §901(b)(1)
 §901(b)(1) also offsets two taxes that are more esoteric nowadays: those on any war profits or excess profits.
 See Andrew Walker, “The Tax Regime for Individual Expatriates: Whom to Impress?”, 58 TAX LAW. 555, 560 (Winter 2005).
 I.R.C. §904(a)
 I.R.C. §877
 Are excluded from these rules: 1/ those who are dual citizens from birth and had “no substantial contact with the US” (never held a US passport, never resided in the US, never spent more than 30 days/year in the last 10 years in the US) and 2/ those who renounce their citizenship within six months of their legal majority, or the age of 18.5.
 I.R.C. §877(a)(1); see 2003 JCT Report at 31; see also Walker at 565 (describing the §877 rules as “a form of alternative minimum tax for expatriates on U.S.-sourced income and effectively connected income”).
 I.R.C. §877(d)(1)(A-B).
 I.R.C. §877(d)(2)(A).
 I.R.C. §877(g)(1)
 I.R.C. §877(a)(1)
 I.R.C. §877(a)(2)(C)
 I.R.C. §877(a)(2)
 The provision of former §877 that allowed the taxpayer to submit a ruling request to the IRS to obtain a determination based on his or her individual situation was eliminated in the changes to §877 in the 1996 Health Insurance Portability and Accountability Act.
 American Jobs Creation Act of 2004, §804, Pub.L. 108-357, 118 Stat. 1418 (2004).
 See Summaries of IRS Private Letter Rulings Issued to Former Citizens and Former Long-Term Residents during the Period from Jan. 1, 1997 to July 1, 2002, included as Appendix 8, A-218, 255 to 2003 JCT Report.
 See U.S. Gen. Accounting Office, Tax Motivated Expatriation: Enforcement of IRS and Immigration Act Provisions, GAO/GGD-00-110R, 2000, included as Appendix 9, A-256,72 to the 2003 JCT Report.
 Economic Recovery Tax Act of 1981, §111, Pub.L. 97-34, 95 Stat.172 (1981). The first income exclusion provision applied only to Americans living in “hardship” areas, as defined by the State Department, and/or conducted certain types of humanitarian work: it covered only $20,000/year. It’s expansion to cover a broader definition of qualifying income and a much higher ceiling was enacted “in response to the exigencies of the business community”. See Nicholas Freud, Taxation of U.S. Citizens Abroad, TAX PLANNING INTERNATIONAL REVIEW, March 1982.
 Bureau of Labor Statistics’ Inflation calculator at http://data.bls.gov/cgi-bin/cpicalc.pl
 Tax Increase Prevention and Reconciliation Act of 2005, Pub.L. 109-222, 120 Stat. 345.
 IRS Publication 514, Foreign Tax Credit, p.11 (2007). The precise limit is the US tax liability, multiplied by the percentage of the taxpayer’s income that is foreign-sourced, which for most expatriates is the total income.
 Id. at p.7.
 In Switzerland, 1% of total taxable net wealth is paid annually by anyone owning over 732,000 CHF in assets; in France, the “Solidarity Tax on Wealth” is paid at variable rates on taxable net worth above $760,000 €. Conversations with members of the American Citizens Abroad and Federation of American Women’s Clubs Overseas – Washington, April 2008
 2003 JCT Report at 76 (explaining that the first alternative tax regime for individuals relinquishing their citizenship, passed in 1966, was intended to close an incentive to move abroad at a time when relative taxation systems made it particularly advantageous).
 Id. at 5-6.
 U.S. Gen. Accounting Office, Tax Motivated Expatriation – Enforcement, supra, at 5 (Appendix A-260).
 The exit tax has been introduced in virtually identical form at an increasingly rapid pace since 1995: see e.g., the Heroes Earnings Assistance and Relief Tax Act of 2007, H.R. 3997; the Tax Collection Responsibility Act of 2007, H.R. 3056; The Tax Relief Act of 2005, H.R. 4297; the President’s Fiscal Year 1996 and 2001 Budget Proposals.
 The Congressional Budget Office has estimated that the 2007 HEART bill, containing the most recent introduction of the exit tax proposal as a revenue raiser, would raise $278 million over the first four years of enactment; Letter from Peter Orszag, Director, Congressional Budget Office, to Hon. Charles Rangel, Chairman, House Ways & Means Comm, Nov. 5, 2007. See also Charles Bruce, The Exit Tax – A Perfectly Bad Idea, TAX NOTES INTL, No. 2006-3913 (March 2006) (citing an estimate of $251 million additional revenue raised by the exit tax alone in the first five years of its implementation).
 2003 JCT Report at 6.
 Walker, supra, at 580.
 See Communication de la Commission au Conseil, au Parlement Europeen et au Conseil Economique et Social Europeen, « Imposition a la sortie et necessite de coordoner les politiques des Etats Membres », 12 Dec. 2006. http://ec.europa.eu/taxation_customs/resources/documents/taxation/COM(2006)825_fr.pdf
 See KPMG Euro Tax Flash, “ECJ Decision in N. Case (C-470/04)on Dutch Exit Tax”, Sept. 12, 2006.
 See generally the writings of Daniel J. Mitchell at the Heritage Foundation; see e.g. Mitchell, Daniel J, “Tax Me Once, Shame on You, Tax Me Twice and the System Needs Fixing”, WASHINGTON POST, 06/29/2006. This is an argument that has much more traction than the unequal tax burden of the average American expatriate with legislators considering a change in the taxation of expatriates.
 President’s Export Council – Subcommittee on Export Expansion, “Tax Force to Study the Tax Treatment of Americans Working Overseas”, December 1979.
 Working American Competitiveness Act, H.R. 4752, 110th Cong. §1 (2007), Working American Competitiveness Act, S.1140, 110th Cong. §1 (2007) (identical bills proposing to eliminate the cap on the Foreign Earned Income Exclusion, essentially bringing a territorial rule of taxation into effect for all earned income).
 Neither of the Working American Competitiveness Acts have been scored as of April 2008.
 Barry Newman, “Taxing Issues: How Do You Quit Being an American? […]”, WALL STREET JOURNAL, Dec. 28, 1998, A1.
 See Graetz at 15 (using a title including the expression “citizenship/residence”), Hale E. Sheppard, Perpetuation of the Foreign Earned Income Exclusion: U.S. International Tax Policy, Political Reality and the Necessity of Understanding How the Two Intertwine, 37 VAND. J. TRANSNATL. L. 727, 730 (May 2004) (using residence and nationality within two sentences of each other, the one used to explain the other).
 See Alice Abreu, Taxing Exits, 10 U.C. DAVIS L. REV. 1087, 1158 (1996).