Co-blogger Lynn Gazis-Sax points us to this Tim Worstall article, which contains the following statement:
[T]he US tax system is based upon citizenship while everyone else bases it upon residence. If you have a US passport then you are subject to US taxation (you might not have to pay any because of a low income, but you’re still subject to those tax laws). It doesn’t matter where you live in the world you still cough up to Uncle Sam. The only way out of this, the only way to “avoid” such US taxation is to give up your US citizenship.[1]
[Update 20121002: The clear implication of this passage is that citizenship is a prerequisite for subjection to U.S. taxation; and that consequently, aliens are not subject to those laws, because if they are, one could not “’avoid’ such US taxation” by “giv[ing] up your US citizenship.”] I’m no expert on U.S. tax law, but even I know that Worstall’s linkage of citizenship & taxation isn’t quite correct. It is true that U.S. income tax laws apply to American citizens abroad as well as at home; as IRS’s Tax Guide for U.S. Citizens and Resident Aliens Abroad explicitly states:
If you are a U.S. citizen or resident alien, your worldwide income generally is subject to U.S. income tax, regardless of where you are living. Also, you are subject to the same income tax filing requirements that apply to U.S. citizens or resident aliens living in the United States. Expatriation tax provisions apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their residency.[2]
However, this excerpt’s repeated references to “resident aliens” also belie Worstall’s citizenship-taxation linkage. The category of “resident aliens,” according to IRS Publication 519, includes aliens with green cards.[3] It also includes aliens who have a “substantial presence” in the United States[4] while lacking either “a tax home in a foreign country” or “a closer connection to that country than to the United States[.]”[5] Aliens outside this category are deemed “nonresident aliens” for tax purposes. Regarding the tax treatment of these two categories, Publication 519 further notes:
Resident and nonresident aliens are taxed in different ways. Resident aliens are generally taxed in the same way as U.S. citizens. Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U.S. trade or business.[6]
Hence, even nonresident alien status does not necessarily exempt a noncitizen from U.S. income taxation. Nor is an alien exempted from these rules even if he is unlawfully present in the United States:
The Internal Revenue Code does not have a special classification for individuals who are in the United States without authorization (commonly referred to as “illegal aliens”). Instead, the Code treats these individuals in the same manner as other foreign nationals — they are subject to federal taxes and classified for tax purposes as either resident or nonresident aliens. An unauthorized individual who has been in the United States long enough to qualify under the “substantial presence” test is classified as a resident alien; otherwise, the individual is classified as a nonresident alien.[7]
I don’t have much to say regarding Worstall’s views on French or American tax rates. It seems pretty clear, however, that his asserted linkage between American citizenship and subjection to federal income tax law is incorrect.
[1] Tim Worstall, Why France’s 75% Income Tax Rate Is Going To Be So Disastrous, Forbes, Sep. 28, 2012, http://www.forbes.com/sites/timworstall/2012/09/28/why-frances-75-income-tax-rate-is-going-to-be-so-disastrous/.
[2] Internal Revenue Serv., Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad 2 (2011), available at http://www.irs.gov/pub/irs-pdf/p54.pdf.
[3] Internal Revenue Serv., Publication 519, U.S. Tax Guide for Aliens 4 (2012), available at http://www.irs.gov/pub/irs-pdf/p519.pdf.
[4] Id.
[5] Id. at 5 fig. 1-A.
[6] Id. at 18.
[7] Erika Lunder, Cong. Research Serv., RS21732, Federal Taxation of Aliens Working in the United States and Selected Legislation 3 (2008), available at http://assets.opencrs.com/rpts/RS21732_20080214.pdf.
I remember a link to a Supreme Court decisions about a month ago regarding dual citizenship, and IIRC the gist of it was you can’t really renounce your citizenship and there is no Constitutional provision for it.
you can’t really renounce your citizenship
Actually, you can. See travel.state.gov/law/citizenship/citizenship_778.html
and there is no Constitutional provision for it.
That doesn’t mean expatriation is impossible; rather, it means the question is left up to the judiciary and Congress. Prior to the Civil War, the courts rendered mixed verdicts regarding expatriation; but in 1868, Congress settled the question with a statute affirming U.S. citizens’ right to expatriate. See generally I-Mien Tsiang, The Question of Expatriation in America Prior to 1907 (1942).
1) Thanks, MI, for the correction to Tim Worstall’s article. I suspect he was so preoccupied with the question of how easily citizens can or can’t get out of paying high tax rates that he didn’t think to consider the question of non-citizens paying taxes, but it does matter. I sure wouldn’t want to be paying taxes so that freeloading resident or non-resident aliens could use the same services without paying taxes.
2) I actually knew someone who renounced his US citizenship (via the route of “formally renouncing U.S. citizenship before a U.S. diplomatic or consular officer outside the United States” as detailed in MI’s link). His name is Garry Davis (see his Wikipedia entry here: , and I met him because he at that time was staying near my mother’s house in Maine. He renounced his citizenship, made himself a World Passport, and took to issuing such passports to others. Sometimes, they’re accepted, and he told me that sometimes he’d been able to get refugees out of tight situations by issuing such passports and then persuading a country to accept them.
3) I have some degree of entitlement to dual citizenship through my father having been born in Greece. I’m not sure whether Greece automatically considers me a dual citizen (I know that, from their point of view, Dad didn’t cease to be a Greek citizen when he became a naturalized US citizen), or whether I just have a streamlined path to Greek citizenship if I go live there. I do know that the Greek government speaks of people like me as “Diaspora Greeks,” and I’ve taken part in one online chat that a government official had to communicate with Diaspora Greeks.
There was one time when I considered using that potential dual citizenship. In 1992, during the war in former Yugoslavia, when I was with my husband in Serbia to talk with peace activists there, my contingency plan, should US/Serbia relations suddenly deteriorate while I was there, was to head for the nearest Greek embassy or consulate with my husband, tell them, in Greek, that I was a Greek and my husband the spouse of a Greek, give them phone numbers of addresses both of my father in the US and of my aunts and uncles in Greece, and ask them to get us safely out of Serbia. I figured the US government would have no problem with my declaring myself the citizen of an ally in order to get safely back to the US, and that Greece was the US ally least likely to see its relations with Serbia sharply deteriorate at the same time the US’s did.
1. You’re welcome.
2. I don’t personally know anyone who’s renounced their U.S. citizenship. Back in college, I did know a guy who claimed that he wanted to be excommunicated by the Catholic Church so that he could have an excommunication certificate for framing. I don’t know if such a certificate actually exists.
3. Don’t know much about Greek nationality laws, or those of any other countries. One of these days, I might research the nationality laws of China and Britain to see if I qualify (via my parents) for citizenship in either jurisdiction. Apparently, I’m still a dual citizen of the United States and Canada. I did draft & sign a letter renouncing my Canadian nationality when I applied for a U.S. security clearance; and that letter was deemed acceptable by whoever granted my clearance. However, because I didn’t follow Canada’s own citizenship-renunciation process (*) – of which I was then unaware – it appears I’m actually still a citizen under Canadian law.
(*) See cic.gc.ca/english/citizenship/renounce-eligibility.asp
Dunno if the Catholic Church issues excommunication certificates, but the Wisconsin Synod Lutheran Church does, and a friend of mine has one on her office wall.
“It seems pretty clear, however, that his asserted linkage between American citizenship and subjection to federal income tax law is incorrect.”
Oh come on. You know very well what I mean.
If you’re not a US citizen then you get taxed on where you are resident. And if that residency is in the US then you get taxed in the US.
If you are a US citizen then you always are subject to US taxation laws.
And this is what makes the difference: A Frenchman can avoid French taxes just by leaving France. An American cannot avoid US taxes just by leaving America.
Oh come on. You know very well what I mean.
Here’s what you wrote:
the US tax system is based upon citizenship while everyone else bases it upon residence. If you have a US passport then you are subject to US taxation . . . . It doesn’t matter where you live in the world you still cough up to Uncle Sam. The only way out of this, the only way to “avoid” such US taxation is to give up your US citizenship.
The clear implication of this passage is that citizenship is a prerequisite for subjection to U.S. taxation; and that consequently, aliens are not subject to those laws, because if they are, one could not “’avoid’ such US taxation” by “giv[ing] up your US citizenship.” Maybe that’s not what you meant to say, but that is how the above passage comes across.
If you are a US citizen then you always are subject to US taxation laws.
This is indeed true of citizens, but can also be true of aliens with green cards. Unless covered by a tax treaty (*), such aliens are also subject to U.S. tax laws regardless of whether they reside in the United States or abroad.
If you’re not a US citizen then you get taxed on where you are resident. And if that residency is in the US then you get taxed in the US.
Maybe that’s what you meant to say, but what your article states is that
the US tax system is based upon citizenship while everyone else bases it upon residence.
In this statement, there’s no indication that the United States taxes anyone based on residence; rather, residence-based taxation is something other countries do, while the “US case is unique . . . . For the US tax system is based upon citizenship . . . .”
In fact, as I note my post, the U.S. tax system is a hybrid. For U.S. citizens, subjection to U.S. taxation is based on personal status (i.e., as a citizen) and is residence-independent. The same is true of green-card holders not covered by a tax treaty. For any other alien, taxation depends not only upon the alien’s residence (as determined by the “substantial presence” test and whether or not the alien has a “tax home” in his country of origin), but also upon 1) tax-treaty provisions (if applicable), 2) whether or not the alien has “a closer connection” to his home country than to the United States, 3) source of income (**), and 4) “whether or not [the alien’s] income is effectively connected with a U.S. trade or business” (***). Being a nonresident alien doesn’t necessarily exempt a noncitizen from U.S. tax laws; it simply renders the noncitizen subject to a different part of those laws. For instance, if a nonresident alien has “U.S. source income,” then that income is subject to U.S. taxation (****).
If it is indeed true that France and other EU countries base taxation upon residence (I have no idea), then the applicability of U.S. tax laws to green-card holders and to nonresident aliens (in some circumstances) would seem to reinforce your point that avoidance is more difficult in the U.S. tax system than in its EU counterparts.
(*) See IRS Publication 519, p. 54.
(**) Id. at 11.
(***) Id. at 18.
(****) Id. at 11.