Can Extraterritorial Taxation Be Rationalized?

Abstract

There exist multiple rationales for the U.S. extraterritorial tax system. The rationales seek to explain why overseas Americans should be subject to worldwide taxation by the United States.

This paper challenges those rationales: The allegiance rationale is outmoded and rejected by the U.S. Supreme Court; the benefits rationale has been discredited; the membership in U.S. society rationale is belied by the exclusion of overseas Americans from critical beneficial aspects of the U.S. economy, the U.S. tax system, and federal assistance; the “worth the tax cost” rationale disregards human rights and the realities of renunciation of U.S. citizenship; and the administrability rationale ignores that the administration of an extraterritorial tax system requires resources beyond those required to determine domicile – resources the IRS does not have.

Ultimately, all the rationales are theoretical. They do not confront the reality of the actual extraterritorial tax system in place today. They do not contend with the full scope and complexity of the actual system, or the system’s multitude of intractable problems and injustices.

Note: “This is an article published by the American Bar Association Section of Taxation in The Tax Lawyer journal in the Spring 2023 issue.”

Keywords: Extraterritorial Taxation, Citizenship-Based Taxation, Residence-Based Taxation, Citizenship, Expatriation, Exit Tax, FATCA, IRS, Human Rights, Equal Protection

JEL Classification: D63, E62, F22, F54,G28, H24, H25, H26, H30, K34, N41, N42