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Residence-Based Taxation: A Necessary and Urgent Tax Reform
almost 5 years ago
# Executive Summary
American Citizens Abroad (ACA) recommends that the International Tax Reform Working Group of the Ways and Means Committee review and adopt residence-based taxation (RBT). Americans abroad would be taxed on the same basis as non-resident aliens, primarily through a system of withholding taxes on passive U.S. source income (dividends, rents, pensions, etc.) and capital gains taxes on U.S. real estate; income earned in the United States would require filing a 1040NR. Americans abroad would remain subject to U.S. estate taxes on U.S. situs assets, including real estate and securities. The RBT proposal provides extensive and comprehensive anti-abuse measures together with a precise transition roadmap.
This win-win RBT solution will:
- increase Treasury tax receipts by an estimated $30 billion over ten years, whether RBT is drafted as a voluntary program or the default tax system;
- provide for fair, equitable and efficient taxation of Americans abroad;
- empower Americans abroad to sell U.S. goods and services overseas, boosting export performance, particularly of small and medium-sized companies;
- create better employment opportunities for Americans, both domestically and internationally;
- align U.S. law with that of virtually all other nations;
- liberate overseas citizens from a legislative straightjacket caused by the toxic combination of citizenship-based taxation, FATCA and FBAR reporting requirements.
The current Citizenship-based taxation (CBT) is an ineffective mode of raising taxes on Americans abroad. It brings little money to the Treasury (ACA estimates $3 to $6 billion annually) as most of the tax base is pre-empted by the countries of residence; under the present rules, 82% of overseas filers owe no U.S. tax and much of the tax paid relates to clear instances of double taxation. CBT is very complex and costly to administer for both the taxpayers and the IRS. CBT is grossly unfair as Americans abroad can pay taxes twice, while the U.S. provides them little or no services (education, infrastructure, healthcare, etc.). Furthermore, due to the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank Account Report (FBAR) combined with CBT, overseas residents are being denied access to banking and other financial services as well as employment and investment opportunities, to the point that increasing numbers are compelled to renounce their U.S. nationality to be able to lead a normal life. Reform is essential since tax revenue collected under the current CBT regime is absolutely insignificant in the U.S. budget while the negative consequences of CBT for U.S. economic welfare are huge.
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