It is around this time of each year when all Americans with any source of income have one particular item their mind: filing their US tax returns and making payment in taxes to the US Internal Revenue Service by the deadline of April 15. It is also a stark reminder to “US persons” – American citizens and permanent residents (Green Card holders) – living and working anywhere in the world outside of the United States that they, too, are subject to the same tax regime as their domestic counterparts.
The logic of solely levying federal income tax on any form of income of US expatriates is questioned by every American taxpayer residing abroad, especially those who make a modest living and are without the means to make any market-shaking investment. Whether they owe anything in taxes to the IRS, they still have to file each year. The process of US tax filing itself is already expensive and time-consuming enough – it can be really expensive and time-consuming outside of the US.
The United States is indeed the only developed economy with a system of Citizenship-based Taxation in which Americans abroad are taxed on their foreign-earned income – be it from a regular job or any type of earnings. Yes, it somewhat makes sense because an individual, after all, can ultimately become a beneficiary of the US system that somehow needs to be paid for, even as the individual lives elsewhere in the world.
The only problem, though, is that it creates a “playing field” far from being “level” for Americans who are simply trying to make a living through their employment overseas and are much less likely to receive any kind of social welfare benefits. When there is a greater number of Americans working overseas, more jobs are also made available domestically. The notion of driving down unemployment by encouraging overseas employment in foreign countries for Americans should be given more credit.
Most Americans, unlike their counterparts of other nationalities, can’t afford to live abroad without having to work (perhaps with the exception of US students on scholarship or international study programs). In other words, they do not choose to live in Hong Kong, Tokyo, London, Frankfurt, Sydney or any other world cities for most, if not all, of the year simply to evade US taxes or hide their assets. Guess what? Traveling out of the country for a prolonged period is not a prerequisite for the criminal act of US tax evasion.
Worse yet is the liability to double taxation for which Americans abroad are essentially subject to getting taxed twice – once by the US and another by the country of their residence, unless there is a double taxation avoidance treaty with the country respectively. The maximum amount of foreign earned income which can be excluded from US tax liability under Section 911 of the Internal Revenue Code is US$100,800 for 2015, a relatively low threshold of deduction for those living in high-cost cities.
Every other country, including the wealthiest nations in western Europe as well as Canada, Australia and New Zealand, relies on Residence-based Taxation, meaning their citizens overseas are only taxed on a territorial basis by governments of countries in which they work and live, a system deemed “fair, equitable, and efficient.” Americans overseas, on the other hand, are “fiscally penalized” with their foreign tax-free pension funds (a taxable item under US law) and are “highly restricted” in making even the smallest investment.
With two vastly different taxation schemes side by side on a global basis, Americans – and the US economy – are at a huge competitive disadvantage in a “complex and costly” manner. It “discourages US companies from sending Americans abroad to promote US businesses, creates a major handicap for American entrepreneurs overseas and penalizes Americans working and living abroad.” The irony is that the US has always been an advocate of “leveling the playing field” in matters of international affairs, particularly in cross-border trade.
It is to the mutual advantage of all countries if the exchange of goods, capital and services in international trade is not unduly hindered by taxation. Excessive taxation – whether as a result of double taxation or not – can only discourage international businesses, including US multinational companies, from making further investment for long-term, sustainable development – a common goal highlighted repeatedly by governments around the world, including that of the US.
Without a comprehensive, simultaneous reform of the US individual and corporate tax codes, there will be no “level playing field,” effectively making US persons unemployable overseas and US companies reluctant to diversify their investment in foreign markets. It significantly undermines the global competitiveness and economic growth of the United States through a self-imposed ceiling – a barrier all Americans should be working to help break, and not build.