Annual double-taxation-without-representation time rolls around for US citizens abroad

by Rhodri C. Williams

Spare a thought this week for US citizens abroad, who will be scrambling to comply with one of those nightmarish bureaucratic systems that no rational person would ever propose if they were working from a clean slate today.

As one of those affected, what to say? Many of us will have stayed up far too late during recent nights, working out whether we are likely to fall victim to an arbitrary snap-enforcement program that has imposed massive fines on people out of compliance with a previously dormant filing requirement we had precious little reason to be aware of. Still more of us face the prospect of spending entire days working through a battery of incomprehensible forms in order to prove what should be a self-evident point – we owe nothing to the US Government because our residence is registered in foreign jurisdictions with a legal right (and often a great enthusiasm) for culling our incomes in exchange for the services they offer. Those with higher incomes will simply be taxed on them twice over, and this by the ostensibly most tax-averse country in the developed world.

As an American on the ‘liberal’ side of the political spectrum, I have never had much time for black helicopter conspiracy theories about an oppressive ‘big government’. On the other hand, my experience with the US tax authorities has sharpened my classically American concerns about unrestrained government. While I have little doubt that the US Internal Revenue Service behaves responsibly and responsively (e.g. as a ‘service’) when it comes to ‘internal revenue’, it has taken the form of an unaccountable, repressive juggernaut for those of us in the ‘external revenue’ free-fire zone (consider the terrifying recent experience of one of my fellow US citizens in Sweden). However, it is ultimately the IRS’ masters in Congress and the Executive Branch (ahem, Mr. Obama) that have given these dubious tendencies ample room to breathe.

For those of you interested (academically or personally), there is lots of good information out there on the internet. A few starting points include the Isaac Brock Society representing the enormous population of affected people in Canada, as well as the more academic Federal Tax Crimes blog. Peter Spiro also provides a helpfully contextualized running commentary on these issues on Opinio Juris. However, the most important player is American Citizens Abroad (ACA), an organization that provides updated advice on navigating the double taxation labyrinth while actively seeking to replace it with an ordinary system recognizing residence-based taxation that would let Americans abroad get on with raising families and engaging in the private diplomacy and trade promotion we provide our country with every day (at zero cost to any taxpayer!)

If you surf this topic a bit, you will probably find yourself scratching your head and wondering how this could have come to pass. Foreign banks to refuse to open accounts for US citizens as a matter of policy? Struggling US citizens abroad put to the rack for the sins of fat-cats with undeclared Swiss bank accounts who are mostly US residents anyway? (I mean, who really thinks the Swiss care where you live if the numbers add up?) US citizens lining up to renounce their citizenship because their own government is shaking them down in a desperate and legally questionable attempt to fill the deficit gap?

In the cold light of day, this stuff should not stand up for a single Congressional term, particularly in a Congress now dominated by politicians dead-set on (1) reining in out-of-control Federal agencies, and (2) cutting tax burdens on productive citizens come hell or high water. For the first time in my memory, I may actually passionately agree in principle with my conservative delegates to Congress, at least as far as this issues goes. So why does it just get worse?

My considered opinion after some self-interested research is that affected people have been kept so busy sweating over personal compliance that they have had very little energy left over to focus on political message. There are lots of complaints about how the US media seems only too happy to fall into line with the IRS’ implicit assumption that living outside the US is in itself a form of tax evasion. However, beyond the ACA’s important efforts, there doesn’t seem to be much systematic advocacy. So let me take a first stab of my own. Why should the average US citizen care about the fiscal fates of their brethren abroad?

First, double-taxation is unfair. Other than predatory states like Eritrea, all other states in the world leave their diasporas alone as long as they are satisfied that they are complying with their legal obligations in their current place of residence.  In my case, Sweden has every incentive to tax me and does so with aplomb. I pay for the extensive services I receive here to the tune of fifty percent of my income.

Granted the US *only* double-taxes high salaries as well as non-salary income, but the compliance cost alone is extremely burdensome. I struggle through at least seven separate forms and schedules every year. Others hand the mess over to a tax lawyer and pay thousands of dollars every year simply to demonstrate compliance without bringing a penny to the IRS. No other western country imposes this kind of bureaucratic yoke on citizens that are busy consuming government services and providing corresponding revenue elsewhere.

For an analogy, imagine that every state in the US could force you to continue filing state tax forms every year for the rest of your life after you left that state and imposed its own taxation (on top of that of your state of current residence) on income over a certain level and capital gains anywhere else in the country. Now imagine that such states also required you to report bank accounts in other states but never informed you of this rule. Add to that a snap-enforcement campaign where they proposed to charge you $10,000 per account per year for every single unreported out-of-state account, retroactive six years. Welcome to US citizen life abroad.

Second, double taxation is preconditioned on lack of representation. If any US state seriously proposed the kind of scheme laid out in my hypothetical above, the elected Federal (and state) representatives of each and every other US state would scream bloody murder and that would, in all likelihood, be that.

However, there is no dedicated representative for the estimated five to seven million US citizens abroad. In terms of the size of this population, the margin of error alone is equivalent to the population of New Mexico, and if we do clock in at the high end, that makes us equivalent to Virginia, the 12th largest state in the Union. However, in political terms we are five to seven million fish in a barrel, subject to an arcane and burdensome taxation regime imposed by a system bereft of institutional means of taking our collective interests or concerns into account.

Lack of representation for US citizens abroad means that little serious scrutiny is given to perhaps the most salient arguments against double-taxation. For instance, the ACA argues that adopting residence-based taxation would not only be revenue-neutral but bring new economic advantages to the US. Double taxation, in other words, has an economic opportunity-cost – even if the lack of representation of US citizens abroad means there is little political opportunity-cost attached to retaining it.

Finally, the double taxation regime gives rise to a worrisome scope for arbitrariness. My intuition tells me that no ordinary citizen abroad can really be expected to fully understand all the incredibly cumbersome filing requirements associated with the current regime of double taxation. We all do our conscientious best to comply or throw a lot of money at tax lawyers. Almost all of us, despite our best efforts, may reasonably suspect that we may nevertheless find ourselves held in violation of various arcane rules that are written at a level of complexity far beyond what any fair due diligence requirement could demand.

Writing on the current ultra-nationalist government of Hungary, one observer recently made a basic observation on the rule of law that I increasingly feel applies to my own personal situation with regard to the IRS:

If no one knows what is legal, then no one can know what is illegal. And when no one knows what is illegal, then anything, essentially, can become illegal. Through this rushed and inconsistent process of lawmaking, what has emerged is the deliberate creation of a climate of absolute legislative uncertainty (and thus of fear). In this context, the ordinary citizen can rely only upon arbitrary mercy by the relevant authorities to avoid being unjustly persecuted.

And so it goes. For me, renunciation of my citizenship is unthinkable because being American is so much a part of my identity. After 12 years of residence in Europe, I am still a US citizen only, and have taken active steps to pass this legal status – and sense of identity – to my dual citizen children. Moreover, as an American, I feel it is both my privilege and my obligation to actively seek to change a political situation that arbitrarily disadvantages me, long before considering opting out. Hence, this posting.

However, as a politically unrepresented American navigating an arbitrary legal regime, I have grounds to fear that the exercise of my rights may have negative consequences for me. In a democracy, my fellow citizen may disagree with me but will go to the wall for my right to express my opinion. In an autocracy, the nail that sticks out gets hammered down. Lets see where we stand.