76 Pages Posted: 7 Dec 2012 Last revised: 17 Dec 2012

Date Written: October 1, 2012

Abstract

One of the most notable examples of U.S. tax exceptionalism is the taxation of U.S. citizens and legal permanent residents (LPRs) on their worldwide income, regardless of residence. The United States also imposes broad and increasingly onerous tax and financial reporting obligations on its citizens and LPRs. Worldwide taxation of U.S. expatriates dates to the Civil War. Although it may have been justified in the past, it is very difficult to justify and increasingly dysfunctional today. It is difficult to justify on economic or equity grounds, it is difficult if not impossible to enforce against many expatriates, and it sends the wrong message regarding the value of U.S. citizenship.

The United States should eliminate the worldwide taxation of expatriate citizens and LPRs and replace the exit tax on those renouncing U.S. citizenship or relinquishing LPR status with a departure tax regime that would apply to all changes of tax residence. The proposed new tax regime would be more equitable and more enforceable. It would also be more consistent with international tax norms and with the purposes of U.S. nationality and immigration law.