Senator Charles Grassley of Iowa will serve as chairman of the Senate Finance Committee during the upcoming 115th Congress. Senator Grassley’s decision to lead the Finance Committee may have important consequences for the nation’s colleges and universities. Grassley, a Republican, has criticized increased tuition charges in the face of the pronounced, tax-free growth of many college endowments.
In light of his prior statements and the current political environment, a Grassley-led Finance Committee may scrutinize higher education endowments. On the committee’s agenda could be legislation aimed at the tax benefits such endowments enjoy and the benefits of tax-exempt entities more generally.
Does the new federal tax law, commonly known as the Tax Cut and Jobs Act (TCJA), tax churches as some have argued? If so, is this tax appropriate?
The answers are “yes” and “yes.” The TCJA provisions taxing qualified transportation fringes treat secular and religious employers alike, including houses of worship. In a world of imperfect choices, the TCJA reasonably treats all employers fairly without entangling church and state inordinately.
Churches (including all houses of worship such as synagogues, temples and mosques) pay more taxes than many people believe. Churches do not pay property taxes or basic income taxes. But churches do pay the employer portion of federal social security (FICA) taxes for their non-clergy employees. Churches also often pay or collect state sales taxes on the tangible personal property they sell or purchase. In most states, churches also pay real estate conveyance taxes like other real estate purchasers and sellers.
Gaudreau and Civil Engineer highlight the resemblance between citizenship-based and residence-based taxation when residence is implicitly (as in Gaudreau) or explicitly (as in Civil Engineer) defined as domicile, the taxpayer’s permanent home. Both domicile and citizenship are measures of long-term permanent allegiance rather than short-term physical presence. Consequently, the outcomes in tax cases will often be the same whether in personam jurisdiction to tax on a worldwide basis is asserted in terms of an individual’s citizenship or in terms of her domiciliary residence.
Determining domicile – the taxpayer’s permanent home – is often a factually daunting challenge, as is demonstrated by Gaines- Cooper. Consequently, in tax cases, citizenship is an administrable proxy for domicile. From this vantage, the U.S. system of citizenship-based taxation is closer than is generally recognized to other nations’ residence-based tax systems: When residence is defined for tax purposes as the taxpayer’s domicile, citizenship-based and residence-based taxation converge, but citizenship based taxation reaches these similar results more efficiently by eliminating the need for factually intensive inquiries about domicile.
Administrability, Residence, And Citizenship – Overview
As noted earlier, tax mavens often invoke ability-to-pay considerations to justify the worldwide taxation of an individual’s income and assets by the nation in which she resides. The country in which an individual lives exercises in personam jurisdiction over that individual. In addition to such personal jurisdiction, the nation of her residence is often the country in which an individual works (at least in significant part), earns some (often much) of her investment income, and maintains some (often much) of her assets. By virtue of her presence in the country of her residence, that country, the argument goes, is best positioned to measure and tax an individual’s overall capacity to pay by aggregating her worldwide income and assets and by enforcing against this resident the taxation of her aggregate income and assets. These ability-to-pay considerations, combined with the substantial public benefits the nation of residence provides to its residents, underpin the near universal practice of worldwide income taxation by the nation in which an individual lives.
At first blush, this argument for residence-based taxation leaves no room for a defense of citizenship-based taxation. If residence-based taxation of worldwide income and assets is the proper way to measure and tax an individual’s overall abilityto- pay and if such residence-based taxation correctly reflects the governmental benefits bestowed on individuals by virtue of their respective residences, it is the nation in which a U.S. citizen lives which should tax her worldwide income and holdings. If a U.S. citizen lives abroad, it follows from this argument, the nation of residence, rather than the United States, is best positioned to assess such citizen’s ability to pay by aggregating and taxing her worldwide income and assets. Moreover, the nation in which an individual lives is also properly compensated for the public benefits it provides to its residents by taxing globally such residents’ income and assets.
- Citizenship-Based Taxation and Benefits
Against the background established in the last three Parts, we can now assess the merits of the United States’ practice of taxing on the basis of citizenship, with a particular focus on the United States’ policy of taxing its nonresident citizens on their respective worldwide incomes and assets. In this Part, I evaluate citizenship-based taxation in terms of the benefits associated with U.S. citizenship. Governmentally furnished benefits are a traditional consideration for tax policy and, as we have seen, 130 is the rationale of Cook. However, upon examination, the benefits rationale for citizenship-based taxation proves unpersuasive, both in theory and in practice. The most significant civil and social benefits extended by the U.S. polity are tied to U.S. residence, not to U.S. citizenship.
The strongest benefits argument for citizenship-based taxation is one with which citizenship mavens are most uncomfortable, namely, the Tiebout/purchase characterization of citizenship as a public service purchased through tax payments. However, even that approach cannot be squared with the current system, which in practice charges different tax prices (often radically different tax prices) for the identical benefits of U.S. citizenship, depending upon the level and kinds of taxes assessed by the nation in which a U.S. citizen resides and earns his income.
- Implementing Citizenship-Based Taxation
As a final preliminary to evaluating the United States’ citizenship-based taxation of individuals, we must explore the Code’s implementation of such taxation. Recall, in this context, that the Code currently prescribes three different income tax treatments for the foreign taxes paid by U.S. citizens and residents. Foreign income taxes levied against foreign-source income are fully creditable against U.S. income taxes to the extent such foreign taxes are equal to or less than the U.S. taxes assessed against such foreign-source income. 124 All foreign taxes paid in connection with trade, business, and investment activity are deductible for U.S. income tax purposes, as are foreign real property taxes. 125 Other foreign taxes, such as general sales taxes levied by foreign nations, are neither creditable nor deductible. 126 As a result of this disparate treatment of different foreign taxes, otherwise similarly situated U.S. citizens who reside abroad pay different U.S. taxes depending upon the types and amounts of the taxes levied by the countries in which they live and earn their incomes.
- Three Theories of Citizenship
In this Part, I identify three conceptions of U.S. citizenship that help to evaluate the propriety of citizenship-based taxation. Some commentators describe citizenship in terms different from those identified in these three models. 65 Whatever the value of these alternative conceptions of citizenship in other contexts, for the issue explored in this Article – the propriety of taxing on the basis of citizenship – these three models are the useful approaches to citizenship and the benefits defense of citizenship based taxation.
- The Minimalist Model
For Professor Bickel, a minimalist conception of U.S. citizenship both describes the reality of U.S. law and embodies a normatively desirable state of affairs: “Happily,” Professor Bickel wrote, “the concept of citizenship [*1304] plays only the most minimal role in the American constitutional scheme.” 66 Prior to the adoption of the post-Civil War Amendments, the U.S. Constitution “contained no definition of citizenship and precious few references to the concept altogether.” 67 Citing the First and Second Amendments, Professor Bickel noted that “the Bill of Rights throughout defines rights of people, not of citizens.” 68 Thus, “the original Constitution presented the edifying picture of a government that bestowed rights on people and persons, and held itself out as bound by certain standards of conduct in its relations with people and persons, not with some legal construct called citizen.” 69
1. An Overview of U.S. Citizenship-Based Taxation of Individuals
There are two bases on which nations may exercise the jurisdiction to tax: source and political allegiance. 4 Under the heading of source, a nation taxes in rem income or assets located (“sourced”) within its borders regardless of where the owner of such income or assets lives. On a theoretical level, source-based taxation reflects the claim of the nation in which income arises or assets are held that such nation provides the benefits [*1294] within its territory that protect such income or assets. 5 On a pragmatic level, source-based taxation reflects the practical ability of the nation in which income or an asset is located to impose tax before such income or asset is remitted to the owner abroad.
ABSTRACT: The United States’ worldwide taxation of its citizens is less different from international, residence-based norms than is widely believed and is sensible as a matter of tax policy. An individual’s citizenship is an administrable, if sometimes overly broad, proxy for his domicile, his permanent home. Both citizenship and domicile measure an individual’s permanent allegiance rather than his immediate physical presence. Because citizenship and domicile resemble each other, and because other nations often define residence for tax purposes as domicile, the U.S. system of citizenship-based taxation typically reaches the same results as the residence-based systems of these other nations, but reaches these results more efficiently by avoiding factually complex inquiries about domicile.
In contrast, the traditional justification of U.S. citizenship-based taxation, the putative benefits of such citizenship, is not persuasive. In this context, three models of U.S. citizenship are relevant, namely, the minimalist model, the psychological model, and the Tiebout/purchase model. None of these models justifies the worldwide taxation of U.S. citizens on a benefits basis. Rather, such taxation is persuasive because of administrative considerations, i.e., the close resemblance of domicile and citizenship that makes the latter an administrable proxy for the former.
In this paper, I place the United States’ adherence to citizenship-based taxation in the context of the states’ tax systems. Fortyone states impose general income taxes on the worldwide incomes of their respective residents. 1 These state tax systems are important repositories of experience that confirm the administrative benefits of citizenship-based taxation. Domicile today plays an important role in state tax systems as a gap-filler when more objective statutory residence laws fail to assign any state of residence to the taxpayer. Citizenship is an administrable proxy for domicile and serves a similar gap-filling role in the taxation of individuals whose income and activities straddle national boundaries.
For income tax purposes, most states today define residence as either domicile (the traditional definition) or as statutory residence, typically formulated as an individual’s satisfaction of an objective test such as 183 days spent in the state. 2 In contrast to the relatively objective nature of statutory [*272] residence laws, the fact-intensive domicile inquiry focuses upon the taxpayer’s intent to return to the taxing state and his permanent allegiance to that state, rather than his immediate physical presence in the state. 3 As the domicile inquiry is factually complex, it is both manipulable by the taxpayer and difficult for the tax collector to enforce. The contemporary domicile standard is best understood as a gap-filler invoked by the states when the more objective test of statutory residence fails to assign the taxpayer to any state of residence.
The states’ difficulties enforcing domicile-based taxation highlight the administrative benefits of citizenship-based taxation. As long as residence is understood for tax purposes in terms of domicile, citizenship is an efficient proxy for such domicile. The states’ experience defining residence supports the United States’ citizenship-based approach to federal income taxation. Under the Internal Revenue Code, citizenship serves as an administrable proxy for domicile and fulfills the same gap-filling function played by domicile under the states’ income taxes.