Residence-based tax regime 'would be revenue-neutral' for US: research

clock • 3 min read

If the US were to replace its citizenship-based taxation regime with one that is based on an individual’s jurisdiction of residency – like almost the entire rest of the world uses – it could be “revenue neutral”, a just-released survey commissioned by the  American Citizens Abroad Global Foundation has found.

The findings are seen as of potentially major significance for the estimated 9 million American expatriates, as well as for such organisations as the ACAGF, the American Citizens Abroad (ACA) and other organisations that represent American expats, because they come at a time when US lawmakers are finalising their plans for a major reform of the US tax system.

These organisations and large numbers of expatriate Americans have been urging their Congressmen and President Donald Trump to include the change to a residence-based system in their tax reform package.

As reported here last week, advocates of a move to a residence-based tax (RBT) system on the part of the US were encouraged that the House of Representatives’ first draft of the long-awaited tax reform bill, published on 2 November, said nothing one way or other about the taxation of individual Americans who don’t reside in the US. This, they said, meant the door was still open to a change to an RBT regime.

And that matters because, as the Financial Times reported on 25 October, Kevin Brady, the powerful Republican head of the House Ways and Means committee, which is currently drafting the tax reform bill, confirmed to its journalists that Congress was actively “considering” a measure that would see the US move to a territorial taxation for individuals regime, and that Washington’s lawmakers were taking “seriously” the call for a shift away from the citizenship-based income tax system.

Today, Marylouise Serrato, executive director of the American Citizens Abroad, said that although the organisation and its advisers had “thought for some time” that a residence-based tax system  need not cost the US Treasury anything in the way of lost revenues, “we are very pleased to have this confirmed”.

The analysis was prepared by District Economics Group (DEG), a Washington, DC-based economic consulting group, and crowd-funded by the ACAGF. Work began in late May 2017, and was completed last weekend, the ACA said.

In carrying out its research, the DEG constructed a baseline picture of publicly-available data on the taxes currently paid by non-resident Americans, and analysed the revenue effects a middle-of-the-road, “vanilla” approach to RBT would have, according to the ACA.

It said this baseline technique is “in several respects unique, principally because not only does it draw upon previously unavailable information, but it also contains several newly-developed data pieces” which “significantly advances the analysis of the taxation of Americans overseas”.

Under an RBT system, qualified US citizens resident overseas would no longer be subject to US taxation on all their foreign income, for their entire lives, unless they renounced their citizenship.  Instead, they would be taxed in much the same way as non-resident foreign
individuals are.

Currently, every other country in the world, with the exception of Eritrea, taxes individuals on the basis of residence rather than citizenship.

‘Ten-year congressional budget window’

The DEG study estimates that a revenue neutral budget score for RBT can be arrived at within the ten-year congressional budget window of 2018 through 2027.

Charles Bruce, chairman of the ACA Global Foundation, says the analysis of the ACA ‘vanilla’ approach had yielded “a great deal of information about the sensitivities of revenue costs and distributional effects of the various working parts of a RBT proposal”, and that this “should prove invaluable for decision-makers” in Washington.

ACA officials agreed, and said they are looking forward to presenting over the next few days, in partnership with the DEG, the DEG’s research findings to the Joint Committee on Taxation staff
and other interested parties on Capitol Hill and in the US Treasury Department.

To read the ACA’s statement unveiling the research on the ACA’s website,   click here.

To see an up-to-date comparison between the current US tax regime and an RBT system, as compiled by the ACA,  click here.

To see a summary of the DEG’s analysis of how a residence-based taxation system might work,  click here.