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 has been 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 Internal Revenue Service 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.
I. Introduction
The United States is unique in how it taxes not just its residents but also its overseas citizens based on their worldwide income. As a result of the U.S. extraterritorial tax system, overseas Americans live under two tax systems: that of the United States and that of the country where they live. Living under two tax systems results in considerable hardships for overseas Americans: they are subjected to the most penalizing aspects of each system while simultaneously being denied the benefits of each.
A decade after the 1913 adoption of the 16th Amendment, a U.S. citizen residing in Mexico challenged the power of Congress to tax income received by a U.S. citizen who was residing outside the United States and whose income was derived from real and personal property located outside the United States. The plaintiff asserted that such taxation violated not only his rights under the Constitution of the United States, but also under international law. The U.S. Supreme Court disagreed. It justified its decision by citing a “presumption that government by its very nature benefits the citizen and his property wherever found [and] therefore has the power to make the benefit complete,” regardless of where the property is located or where the citizen resides.
This 1924 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 United States has the power to impose an income tax on the basis of citizenship alone, regardless of residence,” and, “It has long been established that the U.S. Constitution permits the federal government’s worldwide taxation of nonresident U.S. citizens.”
Despite reflexive deference to Cook as a foundation of the U.S. extraterritorial tax system, the justification the Court offered for its decision—the benefits rationale—has been soundly discredited, both before and after the decision was handed down. In discrediting Cook’s rationale, several alternative rationales have been offered. The rationales seek to explain why, even if Cook’s justification is flawed, it is appropriate for the United States to tax the worldwide income of overseas Americans.
This paper: (II) provides an overview of Cook’s benefits rationale and its alternatives, (III) examines each rationale in turn, and (IV) confronts the theory of the rationales with the reality of the U.S extraterritorial tax system in place today.
II. Cook’s Benefits Rationale and Its Alternatives: An Overview
In an article published immediately after Cook was handed down, Albert Levitt, then a professor at Washington and Lee University School of Law and later a candidate for the U.S. Senate, approved of the decision more emphatically than the Court itself. For Levitt, the Court’s rationale—that there is a presumption that overseas Americans benefit from U.S. citizenship and that those benefits should not be free—was a given. Levitt’s own rationale went further. He argued that as an “elemental principle of International Law,” every citizen of a country owes allegiance to that country: “Allegiance means that he is under the duty to support, protect and defend his country.” Levitt equated citizens of the United States with subjects of a sovereign. Quoting Joseph Story (a mid-19th Century legal scholar and U.S. Supreme Court justice), Levitt explained:
Every nation has hitherto assumed it is clear that it possesses the right to regulate and govern its own native-born subjects everywhere; and consequently that its laws extend to and bind such subjects at all times and in all places. This is commonly adduced as a consequence of what is called national allegiance, that is, of allegiance to the government of the territory of a man’s birth.
Levitt continued:
But if it is true that allegiance carries with it the correlative duties of support by the citizen and protection by the sovereign, it is rationally inconceivable that any protection can exist and be claimed by the citizen unless he fulfills his duty of supporting the government through the payment of such taxes as are imposed upon him.
Levitt made clear both his disdain for overseas Americans as well as his position on how they should be taxed: “selfish citizens of the United States [who] call loudly for their rights to protection when abroad […] should be compelled to pay for maintenance of that protection.”
It wasn’t until 1975 that the Court’s rationale in Cook was questioned, by Brainard Patton, an American lawyer then living in Paris. Arguing that the United States should tax only the U.S.-source rather than the worldwide income of overseas Americans, Patton observed “the days when United States citizens had need to call upon the government to come forth to protect their foreign personal and property rights are gone forever, at least at the level of the individual citizen in all but the most extraordinary cases.” For this reason, he argued, “it is inappropriate to attempt to justify the taxation of individual American citizens resident overseas on a quid pro quo theory. The tax dollar collected from the American resident overseas does not generate a benefit for him while he is a nonresident of the United States.”
Since Patton, other commentators have defended the taxation of overseas Americans based on their worldwide income but have found the benefits rationale offered in Cook to be inadequate. Accordingly, they propose what they consider to be better justifications:
Colon states that Congress “clearly” has the power to tax the worldwide income of its citizens, regardless of whether any benefit is conferred. He argues that the taxation of overseas Americans is most easily justified by the ability to pay and economic neutrality principles.
Zelinsky observes that, depending upon the country, the United States taxes overseas Americans differently for the same “benefits of citizenship.” (This is because the U.S. extraterritorial tax system interacts with the different tax systems of other countries in different ways). It is for this reason that Zelinsky finds the justification of worldwide taxation based on the benefits of citizenship to be “unpersuasive.”
Instead, for Zelinsky, the “attractiveness of citizenship as an administrable proxy” is sufficient justification. Taxation based upon citizenship is more “efficient” because it avoids “factually-complex inquiries” about taxpayers’ domiciles. At the same time, for Zelinsky, domicile and citizenship are in many respects interchangeable because: (i) citizenship is a “marker for domicile,” and (ii) “both focus upon permanent allegiance rather than immediate physical presence.” Zelinsky parrots Levitt in arguing that citizenship “embod[ies] permanent allegiance” to a nation, even if physically absent, and this, itself, is sufficient reason to impose worldwide taxation.
Kirsch argues that even if overseas Americans do benefit from U.S. citizenship, there are limits to the use of the benefits rationale to justify their taxation. This is in part because, if the level of tax is independent of the benefits received, there is no necessary correlation between the benefits and the taxes paid. Further, while the “existence of significant benefits” of citizenship might provide grounds to claim that overseas Americans should pay some level of tax, it does not indicate what the form or amount of that tax should be.
Kirsch also questions a rationale offered by Colon—the ability to pay. Kirsch questions it “because this principle raises the question of whose ability to pay.” Kirsch observes that since U.S. tax policymakers generally take a national perspective, it is not clear where overseas Americans fit: “Is their connection to U.S. society […] so substantial that fundamental fairness requires their net incomes to be compared with the net incomes of […] U.S. residents for purposes of making an equitable allocation of the tax burden under an ability-to-pay system?”
Kirsch, a strong supporter of the worldwide taxation of overseas Americans, finally offers his own rationale. It returns to the benefits rationale that he also argues has its “limits”: He begins by referencing “distributional equity analysis,” but, in the absence of a definition, it is not clear what he means by it. He then asserts that the mere fact that an overseas American retains U.S. citizenship is reason enough to subject them to worldwide taxation. For Kirsch, the retention of U.S. citizenship is a “voluntary” expression of “identification with the United States” and a “self-identification with the population of the United States.” Or at least—and this is where Kirsch returns to the benefits rationale he simultaneously discounts—it is an expression of “the belief that the benefits of citizenship are worth the tax cost.”
Kirsch then engages in a discussion of the relationship between the U.S. citizenship of overseas Americans and membership in U.S. society. He argues that “recent technological developments” “strengthen potential ties” for overseas Americans to U.S. society. He further asserts that “citizens living within the United States often view U.S. citizens living overseas as part of the United States.” For Kirsch, these two factors (that, Kirsch neglects to mention, are outside of the will and control of overseas Americans) are strong indicators that overseas Americans do, indeed, remain part of U.S. society and that, as such, they can “be expected to help support that society apart from any direct benefits [they] may or may not receive.” Nielsen echoes this view, stating “it seems at least some U.S. citizens abroad do maintain the kind of substantial connections that justify membership in the American ability-to-pay taxing community on substantially the same terms while they reside abroad.”
III. Examining the Rationales
As outlined immediately above, since Cook was decided nearly 100 years ago, several rationales have been offered for why the United States should tax the worldwide income of overseas Americans. This Part III examines in greater detail the five most commonly offered rationales: (A) allegiance; (B) benefits; (C) membership in U.S. society; (D) “worth the cost”; and (E) administrability.
A. Allegiance Rationale
Levitt and Zelinsky perceive overseas Americans more as subjects than citizens. As subjects, the source of governmental power over them is, like the sovereigns of Europe, the state itself. Also, as subjects, overseas Americans owe “permanent allegiance” to the United States. This allegiance, Levitt declares and Zelinsky concurs, is sufficient reason to impose worldwide taxation, regardless of whether the sovereign fulfills any “correlative duties” of support and protection.
This concept of citizenship—subjectship—upon which the allegiance rationale is founded is not only outmoded but also has been rejected by the U.S. Supreme Court.
1. Outmoded
Levitt defines allegiance by quoting William Blackstone, an 18th century English jurist. It is clear from Levitt’s discussion of allegiance and sovereignty that he was heavily influenced by Blackstone and Edward Coke, an English jurist who pre-dated Blackstone by about a century and who, himself, heavily influenced Blackstone.
Levitt’s (1924) concept of “citizenship” is barely distinguishable from Coke’s opinion in Calvin’s Case (1608), in which Coke describes allegiance as the:
“…true and faithful obedience of the subject due to his sovereign. This ligeance and obedience is an incident inseparable to every subject: for as soon as he is born, he oweth by birth-right ligeance and obedience to his sovereign.”
Kettner explains that, for Coke, the obligation of allegiance was “natural and immutable, corresponding to the obligations a child owed his parents.” Further, “the bond between the subject and the sovereign mirrored the divinely ordained obligations of right and duty subsisting between the inferior and superior.”
While England’s Coke is perhaps the one who best articulated this concept of “citizenship” (subjectship), England was by no means the only country to adopt it. To the contrary, this concept or some variation of it was shared by many countries around the world. It explains the widespread aversion to dual citizenship, as surely allegiance—obedience—to two sovereigns was impossible. This aversion culminated in the 1930 declaration by the League of Nations: “All persons are entitled to possess one nationality, but one nationality only.”
Events of the first half of the 20th century led to the fundamental alteration of this concept of citizenship. During that period, when governments around the world sought to “control and craft” their populations, millions of persons were rendered stateless by denationalization or denaturalization. This included, as just a few examples, “White Russians” and Russian Jews, Turkish Armenians, Italians, and German Jews and other German “undesirable elements.” In some cases, they were stripped of their nationality as a precursor to deportation; in other cases, it occurred after they had left (fled), and thereby prevented their return.
The consequences of statelessness are, however, not limited to the inability to return to one’s homeland. It means the loss of all civil rights, such as the rights to reside, work, vote, and hold public office. This is because, as Hannah Arendt explains, while simply being a human being should be enough to protect fundamental rights, it is not. Because the modern institution of the state is grounded on the principle of national and territorial sovereignty, human rights can be protected only through citizenship of a state (country). Understood from this perspective, citizenship is “the right to have rights.”
This new perspective on citizenship is reflected in international human rights instruments adopted in the aftermath of World War II. Both the Universal Declaration of Human Rights (UDHR) and the International Convention on the Elimination of All Forms of Racial Discrimination (ICERD) declare the right of everyone to a nationality. The UDHR also provides “No one shall be arbitrarily deprived of his nationality nor denied the right to change his nationality.”
This transformation of citizenship from a nexus of obedience and obligations to a nexus of rights is also seen in the change of attitude towards dual citizenship. Rather than being considered an “offense to law and nature,” today it is widely accepted, and, in some contexts, encouraged. Spiro maintains that dual citizenship should be recognized as a human right. He argues this should be done through the optics of freedom of association and liberal autonomy of values: “citizenship comprises both a form of association and a vehicle for individual identity.”
In sum, the modern concept of citizenship has nothing to do with Levitt’s concept—echoed by Zelinsky—of “allegiance” entailing obligations and obedience. Instead, citizenship is a source of rights—a necessary precondition for all other rights.
2. Rejected by the U.S. Supreme Court
In the 1950s and 1960s the U.S. Supreme Court adopted a series of decisions, culminating in Afroyim v. Rusk, which formulated the legal doctrine that Weil has coined “the sovereign citizen.” According to this doctrine, the source of all governmental authority lies not in a monarch or even in Congress, but in the citizens: it is “the people […] with whom the sovereign power is found.” Further, the Court, manifestly influenced by Arendt, also described citizenship as “the right to have rights.” These decisions struck down federal laws that led to the “forcible destruction of… citizenship,” with the effect of both limiting statelessness and permitting dual citizenship. With these decisions, the Court rendered obsolete Coke’s and Blackstone’s concept—parroted by Levitt and Zelinsky—of citizens who owe “permanent allegiance” and a “duty to support” in return for protection from the sovereign, replacing it with a concept of the citizen as sovereign and citizenship as a source of rights.
B. Benefits Rationale
As mentioned above, the Court in Cook assumed that overseas Americans benefited from U.S. citizenship and considered this sufficient justification for taxation by the United States. The Court assumed this, however, even though the benefits rationale had already been discredited as a justification for income taxation.
Edwin Seligman, a leading proponent of the 16th Amendment, described the benefits rationale as “indefensible” because “it is absolutely impossible to apportion to any individual his exact particular share in the benefits of governmental activity. The advantages are quantitatively immeasurable.” For Seligman, the benefits rationale could make sense for the limited purposes of tolls or fees for government services rendered for a specific individual, but the rationale could not make sense with respect to public goods and services that could not be divisible within a community at the individual level. For that context, the appropriate justification was faculty, or the ability to pay. Accordingly, Seligman was a strong proponent of progressive taxation, and his principles for progressive taxation were those adopted by Congress upon the passage of the 16th Amendment.
Others also reject the benefits rationale. For example, Buchanan rejects it not based upon Seligman’s reasoning—which Buchanan describes as the “the difficulty of individual isolation of specific benefits”—but based upon “the unacceptability of the ethical ideal of the individual quid pro quo.” Vogel is astounded that justifications “formulated 100 years ago or more apparently still are considered sufficient.” Vogel rejects not only the benefits rationale but also ability to pay. In doing so, he agrees with the 19th Century German economist Lorenz von Stein that both are “odd” and “theoretically and practically worthless.” Vogel further agrees with Stein that income taxation is justified because it “returns to the State a portion of the economic value that the State assisted in producing.” Vogel clarifies, however “that this justification includes an element of reciprocity should not deter us. Quid pro quo measurement of taxes according to particular benefits received is neither intended nor implied.”
In sum, both before and since the Cook decision, the benefits rationale has been rejected as a justification for income taxation. These rejections relate not specifically to the taxation of overseas Americans but to income taxation more generally. Given this general rejection, it is no surprise that it is also rejected as a justification specifically with respect to the taxation of overseas Americans. And, it is rejected not only by those who do not support their taxation, but also by those who do.
However, even if extensive analyses dating back at least to the 19th century have discredited the benefits rationale, the rationale, nevertheless, maintains a reflexive appeal among casual commentators seeking to defend the U.S. extraterritorial tax system. They make remarks such as:
Give up your citizenship and the benefits that come with it if you [don’t] want to pay for them. Easy choice. The only way you wouldn’t is if you value [being] American as an identity or […] the things you receive from being a citizen.
And:
It is not wrong to tax Americans who wish to keep their citizenship and their U.S. benefits. If they do not wish to keep their U.S. citizenship, they are not taxed. This is not complicated.
Because the benefits rationale continues, nearly 100 years after Cook was decided, to maintain this reflexive appeal among casual commentators, the proposition that overseas Americans should be taxed in “exchange” for the benefits they are purported to enjoy as U.S. citizens needs to be addressed in substance. What are the benefits in question? The Court in Cook assumes that they exist, without providing any examples. As a result, we can only guess as to what the Court might have had in mind. Was it:
1. The Right to Vote?
As Cabezas and Mason highlight, when Cook was decided in 1924, Americans had no possibility of voting from overseas. The Soldier Voting Act of 1942 enabled members of the armed forces overseas during wartime to vote in federal elections. It wasn’t until 1975, with the Overseas Citizens Voting Rights Act, that the ability to vote in federal elections was extended to all overseas Americans, including civilians. During all this time overseas Americans remained subject to U.S. federal taxation.
The 24th Amendment abolishing poll taxes was ratified in 1964. It provides that the right of citizens to vote in a federal election shall not be denied or abridged by reason of failure to pay a poll tax or other tax. Conditioning the voting rights of overseas Americans upon the payment of federal taxes—indeed, conditioning anyone’s voting rights upon the payment of federal taxes—violates the spirit, if not the letter, of the 24th Amendment.
Further, federal elections are managed not on the federal level but by the 50 states, the U.S. territories, and the District of Columbia. While they are required to implement the provisions of federal law addressing voting by overseas Americans, the states still control significant aspects of voting eligibility and the registration and voting process. As a first example, some U.S. citizens who have never lived in the United States are not able to register to vote. This is because their voter eligibility is dependent upon the rules of the state where their U.S. citizen parent was last registered to vote. While 37 states allow U.S. citizens who have never resided in the United States to register in that state provided one of their parents was last registered there, 13 states do not. So, if the U.S. citizen’s parent was last registered to vote in one of those 13 states, those citizens are out of luck; they cannot register to vote in the United States.
As a second example, many states block traffic to their voter registration websites from IP addresses that are outside the United States. Election officials defend this practice as a required “balancing act between voter access and defending our election systems from bad actors.” The result is to greatly complicate the process for many overseas Americans to request an absentee ballot, making it difficult (if not impossible) for them to vote.
In sum: (i) the right of overseas Americans to vote was not established until 1975—51 years after Cook; (ii) the 24th Amendment prohibits conditioning the right to vote upon the payment of a tax; and (iii) some overseas Americans are outright barred from voting while many others face substantial obstacles that all but prevent them from voting. The right to vote is not a “benefit” of U.S. citizenship justifying the taxation of overseas Americans.
2. Access to Consular Services?
By 1924, the United States had a consular presence in numerous countries around the world, including Mexico, where the plaintiff in Cook lived. However, the primary purpose of U.S. consulates was to promote trade export from the United States. The Consular Act of 1792, the governing legislation for the consular service for a century, mentioned nothing about assisting distressed American civilians abroad. Prior to the 20th century, few resources were devoted to providing services to U.S. citizens. Further, most consular offices were established on the condition that they be self-sufficient. Those serving as consuls received no salary or other compensation from the United States; they were expected to extract whatever commissions or other payments they could from their positions.
Throughout the 19th century, U.S. consular officers held a widespread reputation as incompetent, corrupt, and “unregenerate alcoholics.” The 1906 Lodge Act sought to address the situation by professionalizing U.S. consular services: it placed consular officers on salaries while establishing that all fees collected for consular services be directed to the U.S. Treasury. The 1924 Rodger Act merged the Consular and Diplomatic Services into the U.S. Foreign Service and established a merit system for both entry and promotion.
During these extensive changes, one element remained constant: U.S. consulates continued to charge fees for the services they provided to overseas Americans. While the recipient of the fees changed, the fact that fees were charged did not.
The requirement that consular services be funded by “user” fees was ultimately enshrined in Circular No. A-25. First adopted in 1959, it requires federal agencies to charge a fee for all services which “convey special benefits to recipients above and beyond those accruing to the public at large.” The fee charged must recover the full cost to the federal government of rendering that service. Further, for services where the government is not acting in its capacity as sovereign, the Circular requires that “market prices” be charged.
Accordingly, the Bureau of Consular Affairs continues today to be totally fee-based. The fees are calculated to take into account the salaries of the consular section, the overhead, and other expenses. Indeed, not only are the consular services provided to U.S. citizens not funded by federal taxation, but 13% of the fees collected are remitted to the U.S. Treasury, with the balance being paid to the State Department.
The fees charged for consular services are notoriously high. For example, the application fee for a Consular Report of Birth Abroad (a U.S. birth certificate for a U.S. citizen born outside the United States) is $100, and the fee to request a Certificate of Loss of Nationality is $2,350. The Bureau of Consular Affairs holds a monopoly with respect to the notarization of documents outside the United States. Its monopoly is reflected in its fees: the notarization of one document costs $50, compared to a nominal fee in the United States of $5 to $10, if not free of charge.
Further, the Bureau of Consular Affairs reserves the right to deny consular services to overseas Americans, seemingly arbitrarily. For example, throughout 2021 and early 2022, when the first draft of this paper was being prepared, many U.S. consulates around the world were continuing to deny appointments for renunciation of U.S. citizenship despite having resumed many other consular services in the wake of the Covid-19 pandemic, including the issuance of immigrant visas. In addition, many consulates were offering few or no appointments for the issuance of Consular Reports of Birth Abroad and child passports.
In sum, when Cook was decided in 1924, consular services for overseas Americans were still nascent. Today, as the denial of renunciation and U.S. child passport appointments evidence, overseas Americans do not have a right to consular services by the United States; they are provided at the discretion of the State Department. Also, at the time Cook was decided, to the extent consular services were available to overseas Americans, it was only for a fee. This situation continues today: As a general matter, U.S. consular services are not funded in any significant manner, if at all, by federal taxation. To the contrary, today a percentage of the fees collected by the Bureau of Consular Affairs are turned over to the U.S. Treasury. Access to consular services is not a “benefit” of U.S. citizenship justifying the taxation of overseas Americans.
3. Emergency Evacuation?
Prior to 1924 the United States had carried out few evacuations of overseas citizens in emergency situations such as war, civil unrest, or natural disaster. Most remarkably, at the start of World War I in 1914—just ten years before Cook—there were tens of thousands of Americans stranded in Europe. They besieged U.S. consular offices seeking repatriation assistance, but the U.S. government had nothing in place for them. They were finally assisted by private means: a group of American businessmen organized for their compatriots an emergency relief of food, temporary shelter, financial assistance, and steamship tickets.
At least since 1956 and possibly as long ago as World War II, the U.S. Department of State asserted that it had the authority to require citizens to reimburse the expense of their evacuation from another country. However, even if it had the authority, it reportedly did not always do so. This likely explains, at least in part, why legislation adopted in 1983 now requires the State Department to obtain reimbursement “to the maximum extent practicable.” Unsurprisingly, the requirement is controversial, as it is seen to place money in the way of Americans’ safety. As a result, from time to time and with respect to specific evacuations, members of Congress seek an exception to the general requirement of reimbursement. Tellingly, however, Congress has not ended the requirement altogether.
The 1983 legislation requiring reimbursement contains a significant limitation: regardless of whether the State Department will ultimately be reimbursed, it may not make expenditures for the evacuation of U.S. citizens unless such expenditures will “serve to further the realization of foreign policy objectives.” In other words, the State Department is not authorized to organize the evacuation of Americans if doing so does not serve a U.S. foreign policy objective. This may explain, at least in part, why the State Department sometimes declines to evacuate Americans in distress. For example, in 2015 the United States chose not to evacuate U.S. citizens from war-torn Yemen, instead calling upon other countries to assist U.S. citizens along with their own. Further, as recent examples of China and Afghanistan demonstrate, when the United States does finally take steps to evacuate U.S. citizens from an unsafe situation, it often does so after having initially resisted, finally reversing its position only in response to public pressure.
In sum, when Cook was decided in 1924, the United States lacked a credible record with respect to the evacuation of U.S. citizens. Today overseas Americans have no guarantee that the United States will evacuate them from any given emergency situation. On those occasions when Americans are evacuated, the State Department is required by law to seek reimbursement. The possibility of an emergency evacuation is not a “benefit” of U.S. citizenship justifying the taxation of overseas Americans.
4. Protection of Person and Property?
History is replete with examples of U.S. military operations in other countries. A report of the Congressional Research Service last updated in March, 2022, lists hundreds of them from 1798 to the present day. In nearly each case, the principal if not sole purpose of the intervention was to assert or defend a U.S. commercial, political, consular, military, or imperial interest. The overwhelming majority of these interventions had little to nothing to do with American civilians residing overseas on a long-term basis. Save for a relatively small number of evacuations (for which, as discussed immediately above, Americans are required by law to reimburse the State Department), few were undertaken with the principal purpose of protecting or otherwise benefitting them in any manner. Further, to the extent U.S. operations overseas were unwelcome and resented by the local population, the operations, rather than protecting overseas Americans, created danger for them as they are easy targets for the expression of such resentment against the United States.
As regards consular or diplomatic protections, the 1930 Hague Convention’s Article 4 establishes the principle that a country may not afford diplomatic protection to one of its nationals against a country whose nationality such person also possesses. While this principle is not always strictly applied, it has been interpreted to mean that dual citizens living in one of the countries where they hold citizenship cannot, in that country, avail themselves of the consular protections of their other country of citizenship. This means that Americans residing in another country where they also hold citizenship will likely be denied any U.S. consular protections they may seek.
Do a series of Bilateral Investment Treaties that the United States has concluded with different countries serve to protect the property of overseas Americans, thereby justifying their taxation based on worldwide income? At least two commentators assert this is the case. However, this ignores both the purpose and the effectiveness of such treaties. To begin with, they are intended to protect corporations and residents of one country when they invest in the territory of another country (that is, a country other than the country of incorporation or where the investor lives). Such treaties typically do not concern the investments and other financial activities in a country by persons (foreigners) who live legally in that country. This is logical because, in most countries, legal residence accords to foreigners (except those from the United States) the same banking and investment rights and protections accorded to resident citizens. The exception of overseas Americans to this general rule evidences that, if Bilateral Investment Treaties were meant to protect them, they have failed spectacularly: they do nothing to remedy the widespread difficulties overseas Americans have making investments and opening and maintaining financial accounts both in the countries where they live as well as in the United States.
The Covid-19 epidemic offered an opportunity for the United States to demonstrate its willingness to protect overseas Americans: In 2021 the United States embarked on massive campaigns to offer Covid-19 vaccinations, as well as Covid-19 testing, to “every American.” Each was provided free of charge, funded by the federal government and included significant funding from the Federal Emergency Management Agency (FEMA), the federal agency charged with disaster relief in the United States.
Throughout 2021 the United States kept an oversupply of Covid-19 vaccines, to the point it was accused of hoarding them while they expired, at the expense of many other countries who were not able to secure sufficient doses to vaccinate their populations. Those populations included Americans unable to travel to the United States: they, too, had no access to vaccines. They made many appeals to the State Department requesting its assistance to access vaccines.
Americans living in Thailand, a country that faced challenges securing the vaccine, were particularly vocal, calling for the United States to establish a pilot program there. They explained that not only did Thailand not have enough vaccine doses, but that also it was prioritizing the vaccination of Thai nationals over the vaccination of foreigners present in the country. The requests of these Americans for protection from the United States fell on deaf ears. The White House Press Secretary stated that the United States has “not historically provided private health care for Americans living overseas, so that remains our policy.” In the meantime, the French consulate in Thailand contracted with local hospitals to vaccinate French citizens and their spouses. The United States eventually rolled out vaccination programs overseas, but only for its consular and military personnel and their families; overseas American civilians were excluded.
In sum, while the United States engages in many overseas operations, few are undertaken for the purpose of protecting American civilians living overseas on a long-term basis and some serve to endanger them. Depending upon the circumstances, the United States may refuse protection to dual citizens. Bilateral Investment Treaties, purported by some to protect the property of overseas Americans, in effect serve no purpose for them. When the United States was recently called upon to take specific actions to protect overseas Americans—actions that another country that does not tax its overseas citizens successfully implemented—the United States refused, offering the excuse that it has “historically” not offered such protection. The protection of person and property is not a “benefit” of U.S. citizenship justifying the taxation of overseas Americans.
5. Right of Entry and Freedom from Deportation?
The 1920s—when Cook was decided—have been described as “the high-water mark for immigration restriction in the 20th century.” Even so, there were entire populations to which the restrictions did not apply. Notably, the quotas contained in the Emergency Quota Act of 1921 and the Immigration Act of 1924 exempted persons from the Western Hemisphere. This meant that there were few, if any, legal restrictions on immigration to the United States from Canada, Mexico, Cuba, and Central and South America. This continued until the Immigration Act of 1965 added quotas for immigration from the Western Hemisphere to those already in place for the Eastern Hemisphere (Europe, Africa, and Asia).
The fact that so many non-citizens by law had the right to enter the United States did not mean, however, that their U.S.-born—so, U.S.-citizen—children have always been allowed to remain. For example, during the Great Depression of the 1930s and again in the 1950s, persons of Mexican ancestry were considered to be an economic threat to the United States and were encouraged to leave “voluntarily.” This involved the cooperation of local, state, and federal government officials who raided public places where persons of Mexican ancestry were known to congregate to round them up and immediately transport them to the border. In the 1930s an estimated one million persons—approximately one-third of the persons with Mexican ancestry living in the United States at the time—were deported in this manner. An estimated 60% of those deported were U.S. citizens. It also resulted in the terrorization of those who remained in the country, who understood that even as U.S. citizens they could be deported at any time. Since the 1950s, raids of Latin American communities in the United States have occurred with regularity. The result is that persons of Latin American ancestry in the United States—regardless of their citizenship status—live under the constant threat of deportation.
Several studies demonstrate that U.S. immigration law offers few protections against deportation and those that do exist are often ignored. While vulnerability to deportation is endemic to the Latin American population of the United States, no U.S. citizen is immune. Rosenbloom explains: “Incidents in which U.S. citizens have been subject to deportation or prolonged detention are often characterized as mistakes or outliers. [Rather] than relegating such incidents to the margins, we should recognize the extent to which they are woven into the fabric of immigration enforcement.” Persons with mental and physical disabilities are especially vulnerable because of the added difficulties they have to defend themselves.
Finally, U.S. citizenship does not always guarantee the ability to enter the United States. For example, when in November 2021 the United States loosened restrictions on the entry of vaccinated non-citizens, it reminded U.S. citizens, regardless of vaccination status, that if they are in countries where adequate COVID-19 testing is not available “[they] should be prepared to remain in place until such time as they can meet the requirements.” The State Department denied any responsibility to assist overseas Americans to obtain the needed testing, stating the Department “does not provide direct medical care to private U.S. citizens abroad.” This was the case even though FEMA and other federal agencies funded extensive testing programs throughout the United States.
In sum, for much of the history of the United States—including periods after Cook was decided—the right to enter the country has not been exclusively reserved to U.S. citizens. Further, while U.S. citizenship should assure the ability both to enter and to remain in the country, it does not. Right of entry and freedom from deportation are not “benefits” of U.S. citizenship justifying the taxation of overseas Americans.
The benefits rationale offers reflexive appeal to casual commentators seeking to defend the U.S. extraterritorial tax system. It should not. The rationale has been soundly discredited for more than 100 years, and there is no benefit to which they can legitimately point that would justify the current extraterritorial system.
C. Membership in U.S. Society Rationale
For Colon, ability to pay based upon worldwide income is the “norm” for taxation; he sees no reason why it should not apply to citizens residing overseas in the same manner as U.S. residents. After all, according to Colon, the worldwide income of a non-resident U.S. citizen affects their ability to pay U.S. taxes in the same manner as the worldwide income of a U.S. resident.
While few commentators on the U.S. extraterritorial tax system expressly disagree with Colon’s explanation, they appear to believe it is insufficient. Kirsch, for example, explains that the ability to pay is determined in a national rather than multinational context. How can it be equitably determined to what extent a person is (or not) able to pay U.S. taxes when they live outside the United States, and so outside that national context? Going further than Kirsch did, overseas Americans are subject to an entirely different context with its own economy and own tax system. Their ability to pay U.S. taxes cannot—or, at least, should not—be determined in a vacuum, as if that entirely different context did not exist.
Further, the question of ability to pay begs the question of whose ability to pay? Citizenship status—as opposed to country of residence—has no bearing on a person’s ability to pay. A lack of U.S. citizenship makes a person no more and no less able to pay U.S. federal income tax.
This is probably why Mason sees the ability to pay rationale as inseparable from the membership in society rationale, and why Kirsch does not clearly separate them. According to this rationale, as members of U.S. society, overseas Americans can be expected to “help support that society,” independent of any benefits they may or may not receive.
Kirsch asserts that “there are strong arguments” for treating overseas Americans as “members of U.S. society.” He considers this question from two perspectives: of overseas Americans, on one hand, and of U.S. residents, on the other:
From the perspective of overseas Americans, for Kirsch, the mere fact of retaining U.S. citizenship while living overseas is sufficient proof of “voluntary identification” with the United States, as well as “self-identification with the population of the United States” in a manner that justifies subjecting overseas Americans to U.S. taxation. The facts that overseas Americans identify as Americans, teach their children American culture, and have sought to be counted in the U.S. census demonstrate membership in U.S. society justifying U.S. taxation. Kirsch cites “recent technological developments,” which “reinforce the ties between citizens residing abroad and those in the United States,” as further evidence of membership in U.S. society and, so, further justification for U.S. taxation.
From the perspective of U.S. residents, Kirsch asserts that they view overseas Americans as “part of the United States.” The only example of this he offers, however, is “times of crisis overseas,” when, he states, “media in the United States often focus on the plight of U.S. citizens, thereby strengthening the view that overseas citizens remain a part of U.S. society.”
In sum, Kirsch argues that overseas Americans should be subject to U.S. taxation because they see themselves as Americans and because U.S. residents see them as Americans. This argumentation ignores reality in several ways:
To begin with, many U.S. citizens living overseas do not identify as American. These persons are commonly referred to as “Accidental Americans.” They were born in the United States to non-U.S. citizen parents, and they left the United States as children (many as babies) with their families. Many speak neither English nor Spanish; prior to the implementation of FATCA, many did not realize the United States considered them to be U.S. citizens.
As regards overseas Americans who grew up in the United States and left the country as adults: how should they be identified by others, and how should they identify themselves, if not as Americans? Should their residence in another country necessarily entail rejection of American culture and isolation from family members and friends in the United States? For Kirsch, U.S. taxation is the price overseas Americans should be required to pay simply for being who they are—Americans—and for seeking to maintain relationships with their loved ones in the United States.
Kirsch’s assertion that U.S. residents view overseas Americans as “part of the United States” is even more baffling. He cites just one example to support this assertion: the coverage by U.S media of efforts by the United States to evacuate Americans from Lebanon in 2006. This one example—selected from all of U.S. history and limited to nothing more than media coverage of just one event—is manifestly insufficient to demonstrate any kind of sentiment on behalf of the U.S. government, or its residents, that overseas Americans are “part of the United States.” Further, Kirsch ignores a plethora of evidence demonstrating the opposite—that overseas Americans are often rejected as members of U.S. society. Here are just a few examples:
1. Excluded from U.S. Financial Accounts
Since the 2001 adoption of the Patriot Act, many overseas Americans have been unable to open or maintain a financial account in the United States. While the Patriot Act does not expressly prohibit U.S. financial institutions from having overseas customers, many institutions have interpreted it as effectively doing so, given the Act’s enhanced due diligence (know-your-customer) requirements. Treasury has been made aware of this problem, but has taken no effective steps to end the discriminatory treatment of overseas Americans by U.S. financial institutions. (While there are many reasons why an overseas American would need a U.S. bank account, one is that the IRS requires the use of U.S. dollars for both receiving and making payments. At the same time, although the IRS only accepts overseas payments from certain banks, overseas taxpayers typically incur high fees to make such payments, and the IRS refuses to make payments to accounts outside the United States. In sum, without a U.S. bank account it is often difficult and expensive, if not impossible, for an overseas American to transact with the IRS).
2. Limited Access to U.S. Tax-Advantaged Retirement Plans
U.S. rules do not recognize non-U.S. tax-advantaged retirement or other savings schemes. At the same time, there are many restrictions placed upon 401(k), IRA, and Roth IRA accounts such that most overseas Americans are unable to participate in them. Or, if they opened an account before leaving the United States, they are unable to contribute to it once they have a non-U.S. address.
3. Excluded from Advanced Child Tax Credit
The 2021 American Rescue Plan expanded the child tax credit, including the implementation of advance payments. However, to qualify, at least one of the child’s parents must have lived in the United States for at least half the year. Further, the credit applied only with respect to children who had a valid Social Security Number; many U.S. citizens living overseas do not meet the requirements to pass U.S. citizenship to their children born outside the United States and, thus, those children are ineligible for Social Security Numbers.
4. Excluded from Earned Income Tax Credit
To be eligible for the Earned Income Tax Credit, a taxpayer must meet certain requirements which operate to exclude overseas Americans. Notably, the taxpayer must not claim the Foreign Earned Income Exclusion and, depending on the circumstances, may not use the filing status of married filing separately.
5. Excluded from the Work Opportunity Tax Credit
Eligibility for the Work Opportunity Tax Credit is structured in a manner that makes it all but impossible for an employer or employee located outside the United States to qualify. For example, the employer’s application for the credit must be certified by a state workforce agency. These do not exist outside the United States.
6. Excluded from IRS Services
The IRS provides a panoply of services to U.S. residents, regardless of citizenship. These services include: (i) in-person assistance via taxpayer assistance centers (TACs), Volunteer Income Tax Assistance (VITA), and Tax Counseling for the Elderly (TCE) programs; (ii) toll-free telephone service; (iii) on-time postal communications; (iv) the availability of e-filing; (v) access to online accounts; and (vi) the ability to communicate in several of the languages most commonly spoken in the United States (English, Spanish, Korean, Chinese, Vietnamese, Russian).
None of these services is available to overseas taxpayers: (i) in 2014 and 2015 the last four remaining IRS outposts in overseas consulates were closed, leaving overseas taxpayers with no access to in-person assistance from the IRS; (ii) overseas taxpayers are responsible for the cost to telephone the IRS from outside the United States; (iii) overseas taxpayers routinely receive postal correspondence from the IRS with delays of more than 50 days, well after the deadline to respond that is indicated in the correspondence (and while interest accrues), subjecting these taxpayers to penalty for failure to act by the deadline; (iv) overseas taxpayers do not have reliable access to e-filing their U.S tax returns—often they are barred from doing so because, for example, their non-U.S. citizen spouse does not have a Social Security Number, or because the overseas taxpayer does not have a U.S. phone number; (v) most overseas taxpayers are unable to access their online accounts with the IRS because they lack a U.S. phone number, as well as U.S.-based debt, such as a mortgage or credit card; for those who are able to access their accounts, the IRS deliberately reduces the functionality of their accounts because of their non-U.S. address; (vi) many U.S. citizens living outside the United States do not speak any of the six languages that are most commonly spoken in the United States, but they are nevertheless expected to understand and comply with their U.S tax obligations.
The IRS has been called upon to address these and many other discriminatory practices involving overseas taxpayers. In each case the IRS has refused to do so, stating that it is “unfeasible,” not technically viable, “would increase the overall cost,” or would require modification to a contract.
7. Excluded from COVID-19 Assistance
As discussed above, even though the United States is using federal funds to provide both vaccinations and testing to U.S. residents free of charge, it has expressly refused to provide any such assistance to overseas Americans other than consular and military personnel, stating that it “does not provide direct medical care to private U.S. citizens abroad.”
The above demonstrates that overseas Americans are deliberately excluded from essential—if not life-saving—rights, services, and federal funding that are provided to U.S. residents, regardless of citizenship. They are excluded for no reason other than their residence outside the United States. These exclusions belie the suggestion that the U.S. government and U.S. residents more generally consider overseas Americans to be part of U.S. society in a manner that justifies subjecting them to federal taxation.
In sum, overseas Americans are purposely excluded from: (i) critical aspects of the U.S. economy, (ii) multiple advantageous elements of the U.S. tax system, and (iii) federally funded emergency health care assistance touted as being available to “all” Americans. These deliberate exclusions demonstrate that, regardless of perception, overseas Americans are not permitted full membership in U.S. society.
D. “Worth the Tax Cost” Rationale
Kirsch asserts an additional rationale for the taxation of overseas Americans that combines the benefits rationale (which he had previously described as limited in use) with the membership in U.S. society rationale. According to this additional rationale, the fact that an overseas American retains U.S. citizenship instead of renouncing it demonstrates “the belief that the benefits of citizenship are worth the tax cost,” and both a “voluntary” expression of “identification with the United States” and a “self-identification with the population of the United States.” Organ echoes Kirsch in stating: “[The fact that there are overseas Americans who do not renounce U.S. citizenship implies that] for those individuals the maintenance of U.S. citizenship [is] worth incurring the resulting financial and hassle costs of complying with [their U.S. tax obligations], and thus that they place a relatively high value on U.S. citizenship.”
The expression of this rationale is not limited to academic literature; it is also frequently asserted by casual commentators in social media, with statements such as: “I guess people think having US citizenship is worth the price of filing extra taxes—otherwise they would renounce the citizenship.” And:
Your voluntarily remaining a US citizen is your consent to the terms of the contract detailing your responsibilities ie taxes and the benefits you receive […] You are free to renounce your citizenship at any time.
This rationale ignores the realities both of citizenship and of renouncing U.S. citizenship:
1. Citizenship is a Human Right
Citizenship is not (or, at least, should not be) something that one purchases. It is not (or, at least, should not be) something that a person is entitled to have only if they are willing and able to “pay the price.” To the contrary, citizenship is a fundamental human right. As “the right to have rights,” it is the necessary foundation upon which all other human rights exist. Understood in this context, the suggestion that citizenship is “voluntary” and “worth the tax cost” is abhorrent. It is a manifest rejection of the important advances in the understanding and protection of human rights that took place in the aftermath of World War II.
2. Citizenship and National Identity Are Not Interchangeable Concepts
If this were the case, then the many American immigrants who were brought to the United States as small children and who have never known any other country would be granted U.S. citizenship as a matter of course—if not a matter of right—rather than being threatened with deportation.
The fact that citizenship and national identity are not interchangeable concepts is also reflected in how many Americans who have renounced U.S. citizenship describe their experience. As discussed further below, they report feeling “angry,” “sad,” and “devastated.” One stated:
When I realized I would be forced to renounce, I was extremely depressed and felt nauseous for a long time. I had trouble sleeping for several months. I am still distressed at having had to give up my US citizenship since at my core I felt (and still feel) American. These politicians had a hand in taking away what was one of the most precious things I ever had.
And another:
Renouncing was absolutely devastating for me […] I lived in the US until I was 22 and still feel like I’m an American. I love the culture, the landmarks, national parks, friendliness of random people, and the food. [I feel that I was] coerced by the US government into giving up [my] citizenship.
These are the words of people who, even if no longer U.S. citizens, continue to identify with the United States and its population.
3. There are Multiple Obstacles to Renouncing U.S. Citizenship
To begin with, to renounce U.S. citizenship it is necessary to be a citizen of at least one other country. There are countries where naturalizing is a difficult and lengthy process or may not be possible at all. For Americans living in those countries and who have no other citizenship, renunciation of U.S. citizenship is not an option.
Next, renunciation of U.S. citizenship is expensive. The consular fee alone is $2,350. Because renunciation can be done only in-person at a U.S consulate, those living at a distance must also factor in the cost of travel. For those with assets of greater than $2 million—something easily achieved merely by owning a home and having a pension, especially in countries with a high cost of living—an exit tax is also due. Depending upon the American’s circumstances, this could be as high as 39.6 percent of the value of their assets. Given these considerable expenses, many overseas Americans cannot afford to renounce U.S. citizenship. (A few, nevertheless desperate to do so, have sought the funds via GoFundMe).
Finally, as noted above, during the Covid-19 pandemic U.S. consulates around the world suspended all but emergency U.S. citizen services. When they re-opened, they continued for many months to deny renunciation appointments despite having resumed most other consular services, including visas. Several of the consulates that have resumed renunciation appointments have announced waiting periods of 12 to 18 months.
In sum, the “worth the tax cost” rationale rejects important advances in the understanding and the protection of human rights, wrongly equates citizenship with national identity, and ignores the considerable—for some, insurmountable—obstacles to renunciation of U.S. citizenship.
E. Administrability Rationale
For Zelinsky, it is simple. If overseas Americans were not taxed by the United States based on citizenship, then it would be necessary, on a person-by-person basis, to engage in fact-intensive determinations of permanent residence. Citizenship-based taxation eliminates this administrative burden. While Zelinksy accords that the result is “sometimes overinclusive,” this is justified because, he argues, “domicile resembles citizenship since both emphasize permanent allegiance rather than immediate physical presence.” In essence, for Zelinsky, taxing overseas Americans based on their worldwide income is administratively expedient: “citizenship, as a marker for domicile, implements residence-based taxation in an administrable manner.”
This “justification” is strikingly microscopic. To begin with, it is no justification at all. It flouts the teaching of tax scholars over decades—centuries—that taxation is legitimate only when levied for a purpose. Those purposes include limiting inflation, addressing inequality, and encouraging or discouraging specific behaviors. Taxing a given population—such as overseas Americans—simply because it is (arguably) administratively expedient to do so is not a purpose, let alone a legitimate one.
Further, this rationale focuses on one small aspect of tax administration—determination of domicile—while ignoring at least two other larger and considerably more consequential aspects. The first regards the IRS: The imposition of worldwide taxation, according to U.S. tax rules, on the income of persons who do not live in the United States, requires administration different to that required to administer a purely domestic tax system. In order to comply with the Taxpayer Bill of Rights, it requires, as examples: (1) an understanding of how the U.S. tax system interacts with each of the tax systems, typical business structures, and normal investment and retirement accounts of all the other countries in the world and of the consequences of those interactions for the taxpayers living in those countries; (2) the ability to communicate with taxpayers living around the world in a secure, timely, reliable, and inexpensive manner, and during normal hours in all the countries where overseas Americans reside; (3) the ability to generate up-to-date written materials in each of the multitude of languages spoken natively by taxpayers living around the world (taxpayers who do not speak English or Spanish), as well as the ability to interact with taxpayers in each of those languages; and (4) the ability to receive payments from and make payments to taxpayers in all other countries (notably, taxpayers with no bank account in the United States) without incurring more than de minimis fees. That is, the U.S. extraterritorial tax system requires an administration that is vastly more complex and resource-intensive than mere determination of domicile. Today the IRS is demonstrably unable to fulfil these administrative duties.
The second aspect regards overseas Americans: Their tax returns are so complex few have the requisite knowledge to complete them correctly. Accordingly, over 55% engage the services of a professional tax preparer; of those, at least 34% paid fees of more than $1000. This can be compared to domestic U.S. taxpayers: just 8% engage a professional preparer and their fees average $175-$275. In spite of the complexity and expense, 55% of U.S. tax returns filed from outside the United States show no tax is owed.
Finally, as mentioned above, the U.S. extraterritorial tax system inflicts considerable damage upon overseas Americans: the penalizing nature of the taxation imposed on overseas Americans, the inability to make investments and save for retirement, the inability to hold title to family assets, the denial of bank accounts and other financial services, and the denial of employment, entrepreneurial, and community service opportunities. This is a wildly disproportionate price to pay in exchange for reducing factual inquiries regarding domicile, regardless of how extensive any such inquiry may be. It prioritizes so-called administrative convenience over human rights and the Taxpayer Bill of Rights.
In sum, the rationale of administrability says nothing about the legitimacy of the U.S. extraterritorial tax system. Further, the system is not “administrable:” the IRS is demonstrably unable to administer it, and, for overseas Americans, compliance is difficult and expensive—considerably more than for U.S residents—even when no tax is owed. The possibility of limiting factually intensive inquiries regarding domicile in no manner justifies either the administrative burdens placed upon the IRS or the damages inflicted on overseas Americans by the U.S. extraterritorial tax system.
