Every year, millions of Americans living abroad suffer a profound administrative indignity: complying with a US income-tax regime that treats them like miscreants and complicates the lives even of those who owe nothing.
President Donald Trump has suggested he’d like to ease their burden. It’s a great idea.
The US is almost unique in the world of international taxation. Outside of Eritrea, it’s the only citizenship-based regime — meaning that all Americans, even those who live overseas and have no US income, must file returns and possibly pay up. The rules were largely unenforceable until the 2010 Foreign Account Tax Compliance Act required financial institutions to disclose US taxpayers’ overseas assets. Since then, the estimated 5 million to 9 million US citizens abroad — including many with only tenuous ties to the country — have faced much greater pressure to comply.
In practice, however, the setup is a disaster. Aside from the usual complexities of the US tax code, overseas Americans must navigate added exclusions, credits and a phalanx of rules — including FATCA and a thing called GILTI — aimed at wealthy tax cheats and multinational corporations. They can’t have more than $10,000 in a foreign financial account, invest in a local mutual fund or open a café without triggering prohibitive reporting requirements and risking life-changing penalties. Banks shun them. These burdens — together with the costs of the inevitable professional help — fall mostly on people who end up owing little or nothing.
Trump hasn’t elaborated on what he intends to do, beyond pledging to end “the double taxation of overseas Americans.” Just about any of the existing reform proposals, including a Republican bill introduced last month, would be an improvement. Ideally, though, the goal would be to liberate the vast majority of Americans abroad from burdens that generate almost no income for the US government while doing a better job of collecting from the minority who are actually seeking to exploit low-tax locales.
To that end, the US should combine the best of the residence and citizenship regimes. If Americans live and pay tax in countries with rates broadly equal to or higher than the US’s, allow them to declare non-residency, thus freeing themselves of all US requirements related to their foreign income and finances (after paying US taxes accrued).
For the rest, simplify and better focus demands — for example, by vastly increasing the $10,000 threshold for bank-account reporting and treating small businesses, basic mutual funds and retirement savings as they would be in the US. Also, reduce the cost and complexity of forfeiting citizenship, particularly for “accidental Americans” who have spent no meaningful part of their lives in the US.
Slash bureaucracy, make millions of Americans’ lives easier and potentially reap added tax revenue. What’s not to like?
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