How the United States is taxing some expatriates out of their citizenship

Oct 19, 2020 | 23 comments

By Ann Marie Miller

You might not know it, but U.S. citizens are ditching their status as Americans in droves. “Citizide” is a dramatic term for what’s really just renouncing one’s citizenship, a step that a rapidly increasing number of U.S. citizens living abroad are taking to avoid the complicated and expensive tax burdens imposed on them by their home country. In the first half of 2020 alone, almost 6,000 people renounced their U.S. citizenship, a tenfold increase from one year prior.

It’s unclear whether this surge is due to the pandemic, political uncertainty, or to something else, but it’s clear that having citizens abroad who remain U.S. citizens is beneficial, enriching the lives of those at home through the exchange of ideas and cultures. With the inevitable rise of virtual work and education, and with many countries now offering remote work visas for U.S. citizens, tax code innovation must keep up to avoid punishing those who choose to roam. Failure to do so will only increase citizide.

The U.S. is one of only two countries in the world (the other is Eritrea) that uses citizenship-based taxation. This means that U.S. citizens living in any country are subject to U.S. taxes on income earned anywhere in the world. Most other countries, such as the United Kingdom, Canada, and Australia, use residence-based taxation, where residents only pay taxes on the income earned from the country in which they are living. U.S. citizens, on the other hand, are often subject to double taxation, as well as complicated reporting measures. Those living abroad must also pay capital gains tax on property sold, which, if they get caught on the wrong side of an unfavorable exchange rate shift, can lead to even greater losses. Imagine paying taxes for gains you never actually made.

These policies provide a harsh reality for Emilie Dye, a U.S. citizen living in Australia. Emilie graduated from college in 2019 and moved to Australia with the intention of only staying a couple years before returning to the United States. However, after falling in love with an Australian, her future remains uncertain. “I love the United States and want to remain a citizen. However, if I do choose to stay in Australia long-term, that may not be financially viable.” She told us, “Taxes more than any other factor influence personal decisions like how I will save for retirement, where my partner and I will purchase a home, or choose to raise kids.”

The U.S. benefits from having citizens abroad, and citizens benefit from having the option, but this is lost if a burdensome tax system causes them to renounce their citizenship or to avoid making the move abroad altogether.

Knowledge and wealth generated abroad often find their way back to the U.S. Many expatriates are working for American businesses, from investment banks and tech giants to hotel chains and media companies. Their support helps these U.S. companies expand internationally. Having an international presence is hugely beneficial for these companies, which in turn brings innovation and wealth back to the U.S. Working for a U.S. company abroad leads to knowledge sharing between foreign and local workers and the generation of new ideas and insights that benefit both countries.

We also can’t forget that people want to live and work abroad and are happy to do it. Often, the motivation for their move is something more emotional than a promotion or a bigger paycheck. The InterNations Expat Insider Survey found that the most common reason for Americans to move abroad is love, with 17% of American expatriates moving for a partner (higher than the global average). Quality of life and work is also a driving factor. A study by MetLife found that expatriates tend to be happier in their jobs than those working domestically, as well as being twice as likely to recommend their workplace to someone else. Policy that makes living and working abroad harder for Americans is an infringement upon their liberty to follow their hearts, chase their dreams, and pursue their happiness.

As of June 2020, more than 40% of the U.S. labor force was working remotely full-time. As the future of work becomes more remote, living and working abroad, at least temporarily, will become more enticing to average Americans, and those of us who stay will be better off due to the ideas, cultural influence, and experience travelers “import” back stateside. An estimated 8.7 million citizens live abroad, and at the alarming rate they’re renouncing their citizenship, we don’t know what we’re losing.

Our current tax policy treats Americans abroad as criminals instead of as assets for all they provide to us back home. This undermines our basic rights to life, liberty, and the pursuit of happiness, whether we find that at home or abroad.

Ann Marie Miller (@annmillerecon) is a Young Voices contributor and economist. She writes on urbanism, development, and regulatory reform. Alice Calder (@AliceCalder) is a contributor for Young Voices and TradeVistas, writing on issues in trade, the future of work, and the intersection of economics and culture.


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