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Citizenship And Worldwide Taxation: Citizenship As An Administrable Proxy For Domicile (Part 5)



Edward Zelinsky ( Part 5)
  1. 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.

Quantifying government benefits is an inherently subjective process. Nevertheless, the minimalist model of U.S. citizenship undermines the benefits defense of citizenship-based taxation. If there is “minimal content [to] the concept of [U.S.] citizenship,” 131 the limited legal benefits stemming from U.S. citizenship cannot, as a theoretical matter, justify the [*1315] taxation of a citizen’s worldwide income. Minimal benefits do not justify maximal taxation.

It is instructive in this context to contrast the U.S. legal rights of a nonresident U.S. citizen with the U.S. legal rights of a resident alien. In only one area does a nonresident U.S. citizen currently possess significantly more rights than does a resident alien. In particular, a nonresident citizen today usually possesses the political right to vote in federal elections. However, in the context of social and civil rights, the resident alien, by virtue of his physical presence within the territorial jurisdiction of the United States, possesses substantially weightier U.S. legal rights than does the nonresident U.S. citizen. While there is no easy metric for balancing political rights against social and civil rights, the minimal legal rights accorded to a U.S. citizen as such undermine a benefits rationale for taxing that citizen on his worldwide income and assets.

Using Marshall’s framework, 132 in political terms, at the time of Cook, neither a nonresident citizen nor a legal alien had significant U.S. political rights since neither could vote in U.S. elections. A resident alien falls outside the protection of the Fifteenth Amendment and thus lacks any constitutional entitlement to vote. By the time of Cook, virtually all states which had earlier extended the franchise to aliens had withdrawn it. 133 That is where matters stand today: Resident aliens do not vote in U.S. elections.

When Cook was decided, a U.S. citizen living abroad, since he is typically not a citizen of any state, usually 134 had nowhere to vote in U.S. elections. However, since 1986, a nonresident citizen has had the right to cast an absentee ballot in federal elections “in the last place in which [he] was domiciled before leaving the United States.” 135 Thus, today a nonresident U.S. citizen has the right to vote in federal elections in the state in which he used to be domiciled.

On the other hand, in terms of civil rights, a resident alien receives significantly greater benefits from the U.S. polity than does a U.S. citizen living abroad. The nonresident citizen has the right to ask for assistance, [*1316] which the federal government may (or may not) furnish. In contrast, a resident alien receives a full panoply of civil rights, including the protection of his person and property by the U.S. legal system and the guarantees embodied in the Bill of Rights. The equivalent civil rights of a nonresident U.S. citizen stem from the nation in which he resides, not from the United States.

Similar observations apply in the context of social rights: The social rights of a resident alien derive from the United States while a nonresident citizen receives few, if any, social rights from the United States. If there is no totalization agreement between the United States and the foreign nation in which a nonresident U.S. citizen lives, such citizen will accrue U.S. social security benefits in consideration for his self-employment or FICA taxes, provided that he is self-employed or he works for a U.S. or other employer covered by the U.S. social security system. Otherwise, a nonresident citizen has no significant claims for social benefits from the United States. On the other hand, a resident alien is entitled to a full range of social services provided by the federal government and the states, including public education for his children and welfare benefits such as unemployment compensation and income assistance.

In sum, the extensive civil and social rights of U.S. residents (citizens and aliens alike) may justify taxing such residents’ worldwide incomes under a benefits theory. However, as the minimalist model of citizenship cautions, the benefits accruing to citizenship as such are limited and provide a weak theoretical basis for taxing the worldwide incomes of nonresident citizens. Minimal rights do not justify maximal taxation.

A benefits justification for citizenship-based taxation is equally problematic under the psychological model of citizenship that focuses upon the intangible symbolic value of U.S. citizenship. Most of us feel great pride in our U.S. citizenship. It is, however, hard to characterize that pride as a “benefit” justifying taxation. We also feel great pride from other associations in our lives, e.g., our connections with our religious and heritage communities and with our alma maters. No one suggests that these institutions can impose involuntary tax-type payments to compensate for these psychological benefits. Why should the federal government?

The obvious distinction between the federal government and these other pride-engendering institutions is that the government provides collective services that require taxes to prevent freeloading on those services. This distinction, however, merely restates the observation the government provides public services. And that observation, in turn, runs back into the reality that the public benefits received by nonresident U.S. citizens from the federal government are minimal. Nonresident citizens cannot freeload on most U.S. public services because they do not receive such services.

There is, in short, a disconnect between the premise that U.S. citizenship engenders intangible psychological and symbolic benefits and [*1317] the assertion by the federal government of tax jurisdiction over nonresident citizens’ worldwide incomes and assets. Why should pride in U.S. citizenship lead to worldwide taxation? There is no persuasive answer to this question. In syllogistic terms, the major premise – the emotional value of identification as a U.S. citizen – requires a minor premise connecting it to the asserted conclusion – worldwide taxation of U.S. citizens’ incomes and assets. The absence of a compelling minor premise leaves the syllogism incomplete.

Under a benefits theory of taxation, the most compelling argument for citizenship-based taxation derives from the Tiebout/purchase model of citizenship as a government service purchased by tax payments. Unlike the minimalist and psychological models of citizenship, the Tiebout model does not require a decision about the nature of public benefits, i.e., whether the benefits of citizenship are minimal or are essentially psychological in nature. Rather, under the Tiebout/purchase approach, the federal government states the price of citizenship – worldwide taxation of the citizen’s income and estate – and each individual assesses for himself whether the tangible and intangible benefits of U.S. citizenship are worth the price. If not, a current citizen will expatriate while a prospective citizen will elect against naturalization. Each will decide for herself. Neither can object to the worldwide taxation of her income or assets if she voluntarily makes the choice that U.S. citizenship is worth the stated price.

At its core, the Tiebout theory of citizenship is love-it-or-leave-it, a theory that eschews overarching assessments of the benefits of U.S. citizenship. Rather, a Tieboutian approach simply requires each citizen to assess for herself the subjective, personal value of her citizenship relative to its tax cost.

As we have seen, 136 citizenship mavens generally disfavor a conception of citizenship as a public service that can be freely bought and sold. However, as we have also seen, the Tiebout/purchase concept of citizenship is today reflected in Code § 877A, which allows certain U.S. citizens who have resided in the United States for ten or fewer years to elect against U.S. citizenship without thereby becoming “covered expatriates” for U.S. tax purposes. 137 This election furnishes these citizens a Tiebout-type choice to pay the tax price of continuing U.S. citizenship or to forfeit that citizenship as not worth the tax cost to them.

Although in theory the Tiebout model of citizenship provides the strongest benefits rationale for citizenship-based taxation of an individual’s global income and assets, for two reasons, that model does not in practice justify citizenship-based taxation in its present incarnation. First, the Code currently implements the Tiebout model poorly. Depending upon the [*1318] nature and amount of the taxes assessed by the nations in which they respectively live and derive their incomes, two nonresident citizens may pay radically different U.S. taxes for the same citizenship benefits. Second, U.S. citizens typically lack the mobility between jurisdictions, i.e., between different countries, which underpins the Tiebout model.

As we have seen, a U.S. citizen, A, who resides in a foreign country that relies on an income tax will typically pay little or no U.S. income tax because the foreign tax A pays on foreign-source income is credited against A’s U.S. income tax liability on a dollar-for-dollar basis. In contrast, a U.S. citizen, B, who resides in a nation that finances public activity through a general sales tax (or other similarly nondeductible levy) will pay U.S. income taxes at the full rate, since B’s foreign sales tax payments are neither deductible nor creditable for U.S. income tax purposes. The benefits of U.S. citizenship are the same for these two individuals despite the radically different tax prices assessed for those benefits by the federal Treasury. In Tiebout terms, there is no rationale for this discrepant pricing of the benefits of U.S. citizenship since the benefits are the same for both citizens, and thus both should confront the same price.

In some contexts, it may be appropriate for governments to charge different prices to persons receiving different kinds and different quantities of public services. For example, public finance economists often recommend user fees when feasible, such as public water system charges based upon the amount of water each consumer uses. 138 Another classic case is a special assessment levied against homeowners when public sidewalks are installed in front of their respective houses. 139 In these cases, it may be appropriate to charge some persons more and some persons less (or not at all) for a particular public function since some persons receive more benefits from the service and should accordingly defray more or all of the cost. 140

In some contexts, it may be appropriate for governments to charge different prices to persons receiving different kinds and different quantities of public services. For example, public finance economists often recommend user fees when feasible, such as public water system charges based upon the amount of water each consumer uses. 138 Another classic case is a special assessment levied against homeowners when public sidewalks are installed in front of their respective houses. 139 In these cases, it may be appropriate to charge some persons more and some persons less (or not at all) for a particular public function since some persons receive more benefits from the service and should accordingly defray more or all of the cost. 140

The Code’s discrepant tax treatment of different nonresident citizens is equally troubling from the perspective of those who think of the tangible and intangible benefits of U.S. citizenship as objectively ascertainable and as weighty. Consider that discrepant treatment from the vantage of one who rejects Professor Bickel’s argument that the benefits of U.S. citizenship are minimal and instead characterizes those benefits of citizenship as substantial. If the tangible or intangible benefits of U.S. citizenship (or both) are weightier than the Bickel argument indicates, it is anomalous that one nonresident citizen receives these hefty benefits while making no contribution to the federal treasury (since his U.S. income taxes are totally offset by the credit for foreign income taxes) while another nonresident citizen receives these benefits of citizenship at the cost of full U.S. taxation (since the foreign taxes he pays are neither deductible nor creditable).

There may be persuasive reasons for the Code’s current treatment of different foreign taxes, i.e., the crediting against U.S. income tax liability of foreign income taxes paid on foreign-source income, the income tax deductibility of foreign property taxes and foreign taxes associated with income producing activities, and no federal income tax deduction or credit for other foreign taxes such as general sales taxes. The foreign tax credit, for example, is usually defended as facilitating international trade and capital flows by eliminating double income taxation. 141 Foreign tax mavens often talk about the need for tax rules that encourage “capital import neutrality” 142 or “capital export neutrality.” 143 The § 911 exclusion of foreign earned income is often justified as “intended to promote economic growth.” 144

[*1320] However meritorious these arguments for the Code’s current rules may (or may not) be, the net result of those rules is a pattern of differential taxation of nonresident citizens, which in practice undermines the argument for worldwide taxation of U.S. citizens on the basis of the putative benefits of citizenship. Identical benefits should mean identical taxation, or at least reasonably identical taxation. However, under the Code, U.S. nonresident citizens pay radically different taxes for the same benefits of citizenship. It is accordingly unpersuasive to view the Code in its current form as creating a Tiebout market for citizenship when no consistent or coherent tax price is charged in that market.

The second practical problem with a Tiebout justification of the United States’ worldwide taxation of its nonresident citizens is the lack of mobility between nations; most U.S. citizens cannot make the locational choices among nations required under the Tiebout model. A critical assumption of the Tiebout model is that a taxpayer can, with relative ease, move between different jurisdictions in search of a congenial package of taxes and services. The classic case satisfying this assumption is the affluent suburbanite who, with relatively small transaction costs, can choose from among different communities in the metropolitan area to find the most appealing tax and service package.

This, however, is not a realistic view of citizenship in the modern world. 145 Whatever the future may hold, at present, it is unconvincing to analogize individuals’ mobility among municipalities (the prototypical Tiebout setting) to the limited ability of individuals in practice to change their respective nationalities. Without mobility among nations similar to mobility among cities, the Tiebout model of citizenship fails, as that model justifies the stated tax price of U.S. citizenship – worldwide taxation – only if U.S. citizens voluntarily choose their respective citizenships.

In the final analysis, the benefits rationale for citizenship-based taxation is unpersuasive. That rationale has been part of our constitutional tradition since Cook. However, it does not survive scrutiny in light of the minimal legal benefits associated with U.S. citizenship; the absence of a convincing link between the psychological utility of citizenship and worldwide taxation; the lack of mobility among nations, which precludes active shopping among alternative citizenships; and the divergent tax prices the Code currently assesses different citizens for the same benefits of citizenship.

In a recent defense of citizenship-based taxation, 146 Professor Kirsch offers a different perspective: “Citizens abroad receive significant benefits from holding citizenship.” 147 In assessing the propriety of the United States’ [*1321] worldwide taxation of nonresident citizens, Professor Kirsch contends, “the fact that other citizens might receive greater benefits is not directly relevant.” 148 Moreover, “a benefits analysis generally does not dictate the proper level of income-based taxation. Rather, it merely determines whether sufficient grounds exist for exercising some kind of tax jurisdiction.” 149

In addition, Professor Kirsch argues, “it is reasonable to conclude that the retention of U.S. citizenship reflects a selfidentification with the population of the United States (or the belief that the benefits of citizenship are worth the tax cost).” 150 Thus, in terms of the three models of citizenship, Professor Kirsch concludes that the U.S. practice of global citizenship-based taxation is warranted, as the benefits of citizenship are not minimal but “significant”; nonresident citizens identify psychologically and symbolically with the United States by retaining their respective citizenships; and, in Tiebout terms, U.S. citizens can expatriate if they decide for themselves that U.S. citizenship is not worth the cost of worldwide taxation.

Although an important contribution to the debate, this analysis ultimately proves unpersuasive. In terms of the minimalist model of U.S. citizenship, a nonresident U.S. citizen receives the bulk of her social and civil rights from the nation in which she resides, not from the United States. When assessing these rights, the instructive comparison is between the nonresident U.S. citizen who receives her social and civil rights largely from the nation in which she lives and the resident alien who, by virtue of her presence within the boundaries of the United States, receives ample social and civil rights from the United States. This comparison bolsters the characterization advanced by Professor Bickel, and those who preceded and followed him, that the benefits associated with U.S. citizenship are minimal. Under the U.S. legal system, most rights flow to “persons” resident within the territorial jurisdiction of the United States, not to citizens as such.

It is, moreover, revealing that Professor Kirsch, while extolling the “significant” benefits of U.S. citizenship, himself ultimately concludes that those benefits do not justify the worldwide taxation of U.S. citizens. Rather, he argues that the benefits accruing to nonresident U.S. citizens establish the minimal jurisdictional contacts necessary for the United States to tax such nonresident citizens. However, no one suggests otherwise. The controversial issue is the level of taxation, i.e., whether the United States should, as a matter of policy, tax nonresident citizens’ worldwide incomes and assets. As to that question, Professor Kirsch agrees that the benefits of U.S. citizenship cannot provide an answer but “merely determine [] whether [*1322] sufficient grounds exist for exercising some kind of tax jurisdiction” 151 over nonresident citizens.

To justify the worldwide taxation of U.S. citizens, Professor Kirsch invokes the psychological benefits of U.S. citizenship and the Tiebout-type ability of U.S. citizens to expatriate if they view as inordinate the tax cost of U.S. citizenship. 152 The symbolic and emotional benefits of U.S. citizenship, which Professor Kirsch quite aptly labels as self-identification, are quite real. However, the question remains: Do the intangible, psychological benefits derived by a nonresident citizen from his identification with the United States justify global taxation of that nonresident citizen? As a logical matter, the answer is “No.” There is a missing link between the major premise – the psychological benefits of U.S. citizenship – and the asserted conclusion – worldwide taxation of U.S. citizens. Why does the latter stem from the former? I respectfully suggest that Professor Kirsch (or anyone else) cannot supply the missing minor premise in this syllogistic chain.

Professor Kirsch also invokes the Tiebout line of argument: Given the option of expatriation, the nonresident’s retention of his U.S. citizenship reflects his subjective “belief that the benefits of [such] citizenship are worth the tax cost.” 153 Of the potential benefits rationales for citizenship-based taxation, this is the most plausible, since it eschews any effort to assess objectively the value of U.S. citizenship. Rather, if a citizen retains his U.S. citizenship while abroad, he thereby signals his subjective assessment that the advantages to him of that citizenship outweigh its tax cost in the form of worldwide taxation of his income and assets.

Despite its theoretical appeal, for the two reasons discussed above, this rationale in practice proves unpersuasive. First, expatriation isn’t that easy. Second, the tax cost currently assessed by the United States for U.S. citizenship may be radically different for two nonresident U.S. citizens even though they receive the same benefits of citizenship.

Although Professor Kirsch’s argument helps to clarify the terms of debate, it does not deter from my conclusion: For a persuasive defense of citizenship-based taxation, we must look elsewhere than the traditional benefits rationale; although that rationale is the received wisdom, it does not withstand scrutiny. In the next Part, I advance a defense of citizenship-based taxation by focusing upon the way in which other nations often define residence for tax purposes as domicile, an individual’s permanent home. Domicile resembles citizenship, as both involve permanent allegiance even in the face of long-term absence. Citizenship thus proves to be an administrable proxy for domiciliary residence, a proxy that reaches tax [*1323] results similar to the outcomes of residence-based taxation when residence is defined as domicile. However, citizenship-based taxation reaches those results more efficiently, without the fact-intensive inquiries often necessary to determine an individual’s domicile. Moreover, given the resemblance of citizenship and domicile, the U.S. practice of citizenship-based worldwide taxation is not quite the international outlier it first seems.

(All footnotes will be provided at the end of this multipart series by Edward Zelinsky)

View Part 1, View Part 2

View Part 3, View Part 4

View Part 6

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.

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