Can the US afford Residency Based Taxation?
Since the American Civil War onwards, and without interruption from 1913 up until the present day, Americans have been taxed on their worldwide income and gains regardless of where they live or where the income or gain arises. This is called Citizen Based Taxation (CBT) and the United States is one of only two countries that tax in this manner, the other being Eritrea. The original intention of this system was to catch out individuals who dodged the draft by moving away and did not contribute to the Treasury and thus the Union. In 2017 approximately 9 million Americans live overseas and they clamour for a “normal” Residency Based Taxation (RBT) that is familiar to the rest of the world. Such a transition in the US tax system would not be overly complex to implement but is there a political will and can the US actually afford to adopt RBT?
The US federal budget deficit for the fiscal year 2018 (October 2017 – September 2018) is $440 billion. This deficit occurs because the government spends more ($4.094 trillion) than its revenue ($3.654 trillion)*. Such deficits occur because there is an exceptional call for money to be spent, extra military spend for the war on terror for example or the enormous economic stimulus package that was unleashed following the global financial crisis in 2008. Also, government spending requirements increases are often mandatory, for example benefit payouts for social security. Governments also overspend to stimulate the economy and create jobs because that is what gets them elected.
All being said, the deficit is reducing and the Office of Management and Budget forecasts that there will be a surplus by 2027. Such an ambition will either require spending cuts or tax hikes, neither of which is palatable to an incumbent government – who would vote for those guys? With Trump’s administration talking tough on repatriation of taxes from the big global companies and passing on this windfall to the US, it feels like tax cuts are more likely than cutting off a source of revenue from 9 million Americans abroad.
*Source: Office of Management and Budget, March 2017
Risk Warnings and Important Information
The value of investments can fall as well as rise. You may not get back what you invest.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.