The Myths and Truths of Extraterritorial Taxation

Abstract

The 1924 U.S. Supreme Court decision Cook v. Tait is considered to underpin the U.S. extraterritorial tax system. It is cited with statements such as “it is settled law” that the U.S. Constitution permits the federal government to tax the worldwide income of nonresident U.S. citizens. But in the century since Cook was decided, both U.S. citizenship and the U.S. tax system have developed and expanded, as have our understandings of equal protection and human rights.

As compared to 1924, today many more overseas Americans are subjected to a nationality-based extraterritorial system that severely penalizes activities required to sustain modern life. The activities include owning a home, holding a bank account, investing and planning for retirement, operating a business, holding certain jobs, and pursuing community service opportunities. Neither U.S. residents (regardless of nationality) nor non-U.S. nationals residing overseas are subjected to such a penalizing system.

While Cook may hold that the federal government has the power to tax overseas Americans based upon their worldwide income, it is a myth that Cook allows the government to tax overseas Americans under any conditions, without any regard for the effects the policies have and in manners that violate their Constitutional and human rights.

Cook is ripe for revisiting. The U.S. extraterritorial tax system is unique in the world. Other countries offer examples of alternative systems that protect against tax abuse while also respecting fundamental rights.

Keywords: Citizenship-Based Taxation, Fourteenth Amendment, Equal Protection, Discrimination, Second-Class Citizenship, Human Rights, FATCA, FBAR, IRS, Exit Tax, Self-Determination, Departure Tax, Renunciation

JEL Classification: F54, F68, H20, H24, H25, H26, H30, H31, H87, J47, J61, J68, J71, J78, K30, K33, K34, K39