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Citizenship And Worldwide Taxation: Citizenship As An Administrable Proxy For Domicile (Part 1)



Edward Zelinsky ( Part I)

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.

  1. Introduction

Alone among the nations of the world, 1 the United States taxes its citizens’ incomes and assets on a worldwide basis. In contrast, other nations tax individuals on their global incomes and holdings only if such individuals reside in these nations. The scholarly consensus holds that U.S. citizenship-based taxation is an aberration and an error and that the United States should accordingly not tax U.S. citizens who live abroad. 2

I disagree with this consensus on both counts. 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.

Supporting my argument is an international analysis of cases in which other countries (Canada, Australia, and the United Kingdom) tax their residents’ worldwide incomes on the basis of domicile and reach results similar to the outcomes obtained by a citizenship-based tax system. However, the U.S. citizenship-based system obtains these results more efficiently by focusing on citizenship rather than making factually intensive inquiries about domicile.

I further dissent from the traditional justification of U.S. citizenship-based taxation, namely, the putative benefits of such citizenship. In this context, three models of U.S. citizenship are relevant, 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.

For the vast majority of U.S. citizens who reside within the country, there is no practical difference between citizenship-based and residence-based taxation. However, for U.S. citizens who live abroad, the difference [*1292] can often be significant. Focusing on these nonresident citizens illuminates the strengths and weaknesses of the case for citizenship-based taxation.

Parts II-IV of this Article provide the framework for assessing the United States’ citizenship-based taxation of individuals on their worldwide incomes and assets. Part II describes the two bases for the exercise of jurisdiction to tax, source and political allegiance, and then outlines the framework by which the United States implements taxation premised on political allegiance via citizenship-based taxation of individuals on their worldwide incomes and holdings. Central to this citizenship-based framework are provisions of the Internal Revenue Code – credits and exclusions – that abate citizenship-based taxation, as well as provisions that tax certain former citizens more heavily than other nonresident aliens.

Part III of this Article distinguishes between three different conceptions of U.S. citizenship: the minimalist model, the psychological model, and the Tiebout/purchase model. Although there are other ways to approach citizenship, these three conceptions of citizenship provide the most productive vantages for assessing the benefits of citizenship in the tax context. The minimalist conception of U.S. citizenship, most prominently propounded by Professor Bickel, emphasizes that relatively few legal rights flow from U.S. citizenship as such. The psychological model highlights the intangible emotional and symbolic value of a U.S. citizen’s membership in a proud and historic political community. The Tiebout/purchase model of U.S. citizenship conceives of citizenship as a public service that a citizen purchases through his tax payments.

Part IV of this Article discusses the practical effects on nonresident U.S. citizens of the Code’s current provisions. Through its system of credits, deductions, exclusions, and nondeductibility, the Code may tax otherwise similarly situated U.S. citizens in radically different fashions depending upon the amounts and kinds of taxes imposed by the nations in which such nonresident citizens live – even though these U.S. citizens all receive the same benefits of citizenship.

Against this background, Part V assesses citizenship-based taxation, in theory and as implemented, in terms of the public benefits received by citizens, the traditional defense of citizenship-based taxation. In this Part, I conclude that, as a theoretical matter, neither the minimalist theory of citizenship nor the psychological model of citizenship supports a benefits rationale for taxing U.S. citizens’ worldwide incomes and assets. Minimal benefits do not justify maximal taxation.

Although the Tiebout/purchase model provides more theoretical ballast for citizenship-based taxation, that model (like the other two) is undercut in practice by the method in which the United States implements citizenship-based taxation, in particular, taxing nonresident citizens differently for the same benefits of citizenship depending upon the kinds and amounts of taxes assessed by the nations in which such citizens live. It is [*1293] unpersuasive to justify worldwide taxation on the basis of the benefits of citizenship and then in practice tax in radically different fashion different citizens for the same benefits.

In Part VI, I turn to administrability as a criterion of tax policy. Under this heading, citizenship-based taxation proves to be an enforceable (if sometimes overbroad) proxy for the more difficult to administer standard of domiciliary residence. Thus, the compelling argument for citizenship-based taxation is not the traditional benefits rationale, but the attractiveness of citizenship as an administrable proxy for domicile under a residence-based system of taxation. Domicile and citizenship both focus upon permanent allegiance rather than immediate physical presence and thus resemble each other. Because other nations often define residence for tax purposes as domicile, i.e., the taxpayer’s permanent home, the United States’ policy of citizenship-based taxation is not the “outlier in the international community” 3 it is often thought to be, as citizenship is an administrable marker for such domicile. Indeed, when residence for tax purposes is defined as domicile, residence-based and citizenship-based taxation converge, with citizenship-based taxation reaching similar outcomes more efficiently than does residence-based taxation, which requires factually intensive inquiries into domicile. To demonstrate this point, I examine cases from Canada, Australia, and the United Kingdom.

In Part VII, I anticipate and respond to potential criticisms of my defense of citizenship-based taxation. In the final analysis, the United States’ system of citizenship-based taxation reaches results similar to those obtained under residence-based taxation, but reaches those results more efficiently by avoiding factually complex inquiries about taxpayers’ domiciles.

Written by Edward Zelinsky. View Part II

Footnotes will be provided at the end of this multipart series.

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Edward Zelinsky

Professor Zelinsky has authored two books “Taxing The Church: Religion, Exemptions, Entanglements And The Constitution” and “The Origins Of The Ownership Society” both available on Amazon. In addition, he has written extensively on the topic of Citizenship Taxation And Defining Residence For Income Tax Purposes.

3 thoughts on “Citizenship And Worldwide Taxation: Citizenship As An Administrable Proxy For Domicile (Part 1)

  1. Avatar Phyllis Weatherby says:

    The US uses birthplace as a proxy for citizenship and then uses citizenship as a proxy for domicile. And charges $2350 to let a US-born individual renounce the unwanted citizenship thus imposed.

    Dressing it up as “efficient” doesn’t help in the least.

  2. Avatar Karen says:

    How administrable is citizenship as a proxy for domicile in the case of dual citizens? Should both countries be able to tax worldwide income? Most dual citizens are not domiciled in both countries simultaneously.

  3. Avatar fn0 says:

    The claim that for US citizens abroad the United States’ system of citizenship-based taxation reaches results similar to those obtained under residence-based taxation is ludicrous and ignores the restriction and costs created by GILTI, treatment of superannuation, RDSPs, RESPs, capital gains on one’s primary residence, PFICs, 3520s, denial of partrnerships, senior management positions, bank accounts, etc, etc – the list goes on

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