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UPDATE TO COMMENTS – Are the Psychological Benefits of U.S. Citizenship An Adequate Justification For The Worldwide Taxation of Nonresident U.S. Citizens?



This is in response to all the comments received on my post from last week entitled: Are the Psychological Benefits of U.S. Citizenship An Adequate Justification For The Worldwide Taxation of Nonresident U.S. Citizens?

Thank you everyone for the lively discourse. I have to admit that when I sought off writing this blog, I had no idea that it was going to generate as many comments as it did. I just recently learned that it made the WSJ Expat Facebook page (thanks for the “heads up” Walter).

While I recognize that this topic inspires deeply-held beliefs and passionate debate, I have to compliment everyone for keeping the level of discourse both courteous and professional.

I am very impressed (although not surprised) with the vast knowledge that so many of you possess on a topic as arcane as the justification for the U.S. system of worldwide taxation. Ask many people what gives the U.S. the right to tax its citizens and residents on their worldwide income, and the answer you usually get is, a “statute” or “the Internal Revenue Code.”

I can’t help but to respond to some of the comments made about the other justification for U.S. worldwide taxation, namely the perceived “benefits” of being a U.S. citizen. Many of you did a stellar job debunking this myth, backing it up with hard facts.

I recently wrote an article on the alleged “political, civil, and social rights” derived by U.S. persons who reside outside of the U.S.: Is the Justification For The United States’ System of Worldwide Taxation A Hoax? – Part I. You can find it on the TaxConnections blog here, http://www.taxconnections.com/taxblog/is-the-justification-for-the-united-states-system-of-worldwide-taxation-a-hoax-part-i/#.VL_3hItN38s

Against these rights, how did Mr. Cook fair? He fell woefully short of enjoying most, if any, of these rights. With respect to political rights, Mr. Cook lacked the most fundamental one: the right to vote. Why? Because back in 1924 when Cook was decided, a U.S. citizen living abroad did not have the right to vote.That’s because such a person “did not live in any state and thus had nowhere to cast a ballot.”

In terms of civil rights, Mr. Cook, not unlike any contemporary U.S. citizen living abroad, could “have called on the U.S. for formal diplomatic protection, including representation in international negotiations or arbitration.” Mr. Cook could have also requested “less formal assistance” from the American Consulate in Mexico or, at the extreme, “military protection, including evacuation” by the U.S. military.

The problem of course, is that there is no telling whether the U.S. would have granted these requests. In other words, Mr. Cook “merely had the right to ask.” Beyond that, because Mr. Cook was a Mexican resident, his civil rights were guaranteed not by U.S. law, but by Mexican law.

Searching long and hard, perhaps the only vestige of U.S. civil rights that Mr. Cook retained was the ability to return to the U.S. at anytime. In terms of this right, Mr. Cook had a “leg up” on a permanent resident. Very simply, permanent residents can be stripped of the right to permanent and continuous presence in the U.S. if they commit any one of a number of certain types of crimes, aptly referred to as “aggravated felonies.”

With respect to social rights, there are few U.S. social benefits that the “contemporary Mr. Cook” would be entitled to while living in Mexico. For starters, unemployment insurance and Medicaid are state-run programs to which Mr. Cook would not be entitled to today since he has no state of residence.

On the other hand, if the contemporary Mr. Cook was self-employed or worked for a U.S. employer, he would be eligible for U.S. social security benefits, since there is no totalization agreement between the U.S. and Mexico.

If, however, Mr. Cook had lived in one of the twenty-four nations with which the U.S. had a totalization agreement, then he would not be eligible for U.S. benefits.

In order to see how paltry a nonresident U.S. individual’s rights actually are, it is helpful to compare the U.S. legal rights of such an individual with the U.S. legal rights of a resident alien. It certainly reveals a lot.

Thank you everyone for weighing in.  Please join my new Community “FATCA Tracker” on TaxConnections where we cover recent developments in the area of FATCA.

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As a former public defender, Michael has defended the poor, the forgotten, and the damned against a gov. that has seemingly unlimited resources to investigate and prosecute crimes. He has spent the last six years cutting his teeth on some of the most serious felony cases, obtaining favorable results for his clients. He knows what it’s like to go toe to toe with the government. In an adversarial environment that is akin to trench warfare, Michael has developed a reputation as a fearless litigator.

Michael graduated from the Thomas M. Cooley Law School. He then earned his LLM in International Tax. Michael’s unique background in tax law puts him into an elite category of criminal defense attorneys who specialize in criminal tax defense. His extensive trial experience and solid grounding in all major areas of taxation make him uniquely qualified to handle any white-collar case.

   

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3 thoughts on “UPDATE TO COMMENTS – Are the Psychological Benefits of U.S. Citizenship An Adequate Justification For The Worldwide Taxation of Nonresident U.S. Citizens?

  1. calgary411 says:

    Thank you for your follow-up to all of the comments you got, Michael DeBlis and, especially in my view, your BRAVERY as a US tax lawyer with an open mind who has dug deeper into the inequity for US-defined US citizens abroad vis-a-vis a US resident alien.

    (The green card holder in the US, not having had clear full disclosure of the ongoing US tax and reporting obligations for accounts held in the old country, though, is in a precarious position now, living within the borders of the US. Word is getting out to proceed with caution before taking steps to become that US green card holder.)

    I also appreciate your article that backs much of what Nina Olson, National Taxpayer Advocate, has to say about the *international taxpayer* injustice in her Report to Congress.

    Thanks for opening this dialogue — wish more of your fellow lawyers would join the discussion.

  2. JC Double Taxed says:

    “Are the Psychological Benefits of U.S. Citizenship An Adequate Justification For The Worldwide Taxation of Nonresident U.S.”

    The question does not highlight the negatives of US citizenship for nonresident US citizens – but assumes benefit and minimal negatives.

    As a part of your series you may have one installment focusing on the negatives of US citizenship when you live abroad, and this should provide more balance to the series.

    DOUBLE TAXATION

    WITHOUT REPRESENTATION, as in representatives only focusing on issues of the 7 million US persons living overseas – like France has. If I were representative of US persons living overseas considering this equation of tax + excessive compliance and penalties without benefits, I would likely vote against all US spending bills and actually be quite Libertarian advocating minimal government, unless I could succeed in a switch to residence based taxation and much less complexity and suspicion for overseas accounts of US persons living overseas. We may see with FATCA and penalties that there are only more compliance and penalites being placed on US persons living overseas.

    WITH EXCESSIVE COMPLIANCE

    WITH EXCESSIVE COMPLIANCE PENALTIES, that could be bankrupting

    WITHOUT BENEFITS as US persons get living in the US such as you point out food stamps education etc.

    IS TYRANNY!

    ok, you might now go back and read all the uppercase. This should sound very familiar to you – as in justification for the American Revolution. While I get the idea that you are out for understanding of the situation, I don’t get a sense of outrage that America is violating key principles here upon which America was formed. It is more like the British attitude to the American Colonists. To that I say that when you celebrate the 4th of July, freedom, liberty, etc. there is a view that this is a hollow celebration of ideals America no longer stands for.

    Another angle to the question is comparing the situation of living overseas to that of living in the US. For instance if Tricia Moon (story told in The Wall Street Journal) lived in the US and paid all her taxes owed in the country of residence, made no more than $11,000 in any of the past five years and with joint accounts of no more than $102,000, then what would she then owe to the US in compliance and tax? Answer $0.

    But then the true story of Tricia Moon is that she lived in Canada for decades, paid all her Canadian tax, got $0 in benefits from the US, did not owe any US tax, BUT she figured she could be up for $455,000 in compliance and tax penalties for not reporting her joint accounts with her Canadian only husband to the Financial Crimes Enforcement Unit.

    LIVES in US: no requirement of reporting accounts, $0 liability.
    LIVES in Canada: up for potentially bankrupting $455,000 in penalties, suspicion of tax evasion on the basis guilty until proven innocent, substantial compliance cost even if no US tax is owed, and is subject to US financial terrorisim.

    I don’t think that your social security information is correct. If you live in certain countries then you get your social security reduced (if you contributed for at least 10 years in the US – to qualify for getting social security), and your social security gets reduced even if as you say you are self employed and pay social security all your life (even if you lived your entire life overseas).

    Living in Australia my Australian government mandated retirement account – superannuation – is considered by the US as a “nonqualified pension fund.” The way I am taxed on this is on the account annual gain at the US marginal rate. This sails right through the tax treaty. Also, the US does not recognise the 15% Australian contribution tax or 15% earning tax along the way or 10% tax for lump sum payout at 60 to try and get out of the US rules – no credit against US tax for this. Nor does Australia recognize the US tax in the way of tax credit nor do they allow withdrawals from superannuation to pay the US tax liability.

    So we see based on the retirement example that the US is a blocker and denier of tax deferred retirement savings while providing no substitute recognized by the Australian government (also providing no services). So if you LIVE in the US you may take advantage of 401K, IRA etc. yet if you live in Australia you are denied any similar tax advantaged account to save for your retirement.

    So another part of the analysis could be what is denied by the US government tax and compliance policies to those living abroad. Denied, living a normal life like the nonUS person in the next household who may be from another country. Denied, normal financial planning, and estate planning especially when a nonUS spouse is involved. Denied normal partnership and business executive opportunities as all accounts must be reported to the US else penalties – this may also include being treasurer of the local girl scouts – denied. Denied normal financial accounts in certain countries as the US has heaped too much compliance burden and penalties on banks of the world. Denied accounts in the US because of regulations not favourable if you are a US citizen but have a nonUS address (Fidelity Investments – Guilty).

    Liberty as experienced by a US person living in the US – denied.

  3. Lynne says:

    Two sentences from National Taxpayer Advocate says it all: “Why are we doing this to folks? Why are we tormenting them in this way?”

    I hope you will take another poster up on her suggestion to challenge CBT in the courts. Help stop the torment of millions of honest people around the world,

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