Now’s The Time – Start Taxing Americans Abroad Like Other Countries Tax Their Citizens
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The United States taxes on the basis of citizenship. This means it taxes American citizens on their worldwide income regardless where they live. An American citizen living in London, or Toronto, or Tokyo, or Johannesburg, generally must file U.S. tax returns and pay U.S. tax, even if he or she does not live in or travel to the U.S. Taxation is not based on any physical presence test. The source of the income makes no difference either: income exclusively earned and additionally taxed abroad is also subject to U.S. reporting. Moreover, Americans abroad are commonly taxed twice, for example on some types of investment income and certain retirement-savings vehicles. In some cases, where an individual was born in the U.S. to foreign parents on a student or temporary work visa who then returned to their home country, those subject to the tax law and its penalties may not have not been aware of their status as an American birthright citizen.
This is not the worldwide norm. The United States and, arguably, the small African country of Eritrea are the outliers in taxation based on citizenship regardless of residency.
THE TIME HAS COME TO SWITCH FROM THE CURRENT CITIZENSHIP-BASED TAXATION (CBT) APPROACH TO RESIDENCY-BASED TAXATION (RBT).
Is this possible? Yes, if we immediately do several things. American citizens need to get behind a well-conceived proposal, which is revenue neutral – it doesn’t cost the Treasury anything in lost revenue – and addresses the potential for tax abuse and evasion. To do this, first we need to do our homework by preparing comprehensive revenue estimates for legislators and providing a clear data package to show that the change from CBT to RBT can be made revenue neutral. ACA is undertaking this important work now and needs everyone’s help!
Will Congress take this step? Yes, ACA believes that now is the opportunity. International tax rules for corporations are being revised currently, and enactment of some form of territorial taxation for corporations is almost a certainty. This means that companies’ foreign earnings will not be taxed or will be taxed at a reduced rate. Residency-based taxation (RBT) for U.S. citizens overseas follows the same principle that legislators are being asked to accept for America’s global businesses.
How will this happen, and how can you help? American Citizens Abroad Global Foundation (ACAGF) is raising funds to pay for high-quality revenue estimates on conversion from CBT to RBT using the ACA’s “Baseline” approach as a starting point for revenue estimating. This process—known as “scoring”—will allow the development of the best possible proposal and will help to ensure its enactment. Click here for details.
Have questions about ACA’s “Baseline” approach? See Frequently Asked Questions for answers.
Funds are being raised now to begin the “scoring” process with an established economic consulting firm, but we need your help to support this ongoing effort. Now is the moment for this reform. Your donation to the fundraising is tax deductible. For individuals with access to a corporate donation-matching program, please consider asking your employer to amplify your contribution. Donate today.