Considering 'Citizenship Taxation': In Defense of FATCA

Abstract

Inspired by Ruth Mason’s recent article, Citizenship Taxation, which reaches a general conclusion against citizenship taxation, this Article also questions citizen taxation under the same normative framework, but with a particular focus on efficiency and administrability, and takes a much less critical stance towards the merits of citizenship taxation. First, neither citizenship taxation nor residence-based taxation can completely account for the differences between residents’ and nonresidents’ ability to pay taxes under the fairness argument. Second, the efficiency argument, that citizenship taxation may distort both Americans’ and non-Americans’ citizenship decisions, is not convincing. The American citizenship renunciation rate is not particularly serious compared to other countries, and it is U.S. immigration law, not U.S. tax law, that should be blamed for obstructing highly skilled and educated immigrants. Third, despite enforcement difficulties abroad under the administrative argument, determining residence by considering all facts and circumstances in residence-based taxation would be worse than the bright-line citizenship criterion in citizenship taxation.

After discussing the competing normative arguments on citizenship taxation, this Article aims to defend the administrability of citizenship taxation in conjunction with new reporting obligations. Individual taxpayers’ obligations to file Foreign Bank Account Reports (FBAR) or report under the Foreign Account Tax Compliance Act (FATCA) are not seriously onerous. The fact that citizenship taxation along with FBAR and FATCA enhances global transparency further supports the case for citizenship taxation.

Keywords: Citizenship Taxation, Residence-based Taxation, Renunciation, FATCA, FBAR

JEL Classification: H24, K34