Is the taxation of US citizens abroad constitutional?

The United States of America started as a country very sensitive to tax issues. Thirteen colonies of King George’s England rose up in unified rebellion because the Crown did not respect the rights of colonists. Furthermore, they resented this extra-territorial taxation and insisted upon a basic principle of English democracy, “No taxation without representation”. This protest was in spite of Parliament’s claim to have protected the Colonists in the war with France.  The slogan helped to incite the American Colonies to rebel against the King and to declare independence in 1776.

Now 235 years later, the numbers of Americans living in foreign countries has grown to six million and Congress believes that it has right to tax them because it “protects”  them (for a history of taxation of non-resident citizens see–mind you, Congress does not provide customary services, such as roads, post office, or social welfare, which are available to residents. I recently asked where the US Federal Toronto office for unemployment, food stamps and welfare could be located and found that no one has had a reply. Yet there are phone numbers to call for help from the IRS if you are living abroad.  It’s like that bad friend who borrows from you but never lends when you need help.

Now my question in this post is whether this extra-territorial taxation is legal in the first place.  From the standpoint of international law, it is highly suspect and the only other nation in the world which taxes its non-resident citizens is Eritrea, and most civilized people see Eritrea’s attempts to tax their citizens living abroad as “extortion“.  Yet since the US doesn’t care what the rest of the world thinks, we will get no where with that approach: you cannot shame this government.  But if we approach it from a constitutional perspective, then we have to deal with the superstructure of lower and Supreme Court case law wherein even legal experts disagree.  My contention in this post is that the Constitution belongs to the People and the People are the final arbiters of what it means. The Supreme Court gets its power from the Constitution and the Constitution gets its power from the People.  Therefore, if I can convince enough People that what I think it means is correct, then I will be satisfied.  Here then are my arguments:

Taxing people residing outside of the United States violates the fundamental right of “no taxation without representation”.   Very simply put, the US census doesn’t count those of us who live outside the United States and since the US Census determines the number of representatives for each state on the basis of population, the non-resident citizen does not have representation.  This is a fundamental principle of Constitutional law that extra-territorial taxation violates to the core.  I was alerted to this by a comment on Phil Hodgen’s blog (see below).

Applying the so-called exit tax, created by Heroes Earnings Assitance and Relief Tax Act of 2008, to non-resident former Americans is unconstitutional because it violates the fundamental right to expatriate.  From the standpoint of American law, the right to expatriate is supported by the Declaration of Independence.  It is also supported by an Act which Congress passed in 1868.  It says explicitly:

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That any declaration, instruc- tion, opinion, order, or decision of any officers of this government which denies, restricts, impairs, or questions the right of expatriation, is hereby declared inconsistent with the fundamental principles of this government.

Ironically, Congress was trying to protect those who would leave their countries to become citizens of the United States and to forbid other countries from not permitting their expatriation.  Now, the requirement that former U.S. citizens fill out Form 8854 to determine if they are covered expatriates or not, is a violation of this 1868 law, which to my knowledge has never been repealed.  I have other objections to the Form 8854: for one, it requires that I list all my assets, which I flatly refuse to do on the grounds that the IRS has no right to that information (has anyone in the IRS or Congress ever read the Fourth Amendment?).  But my understanding of fundamental rights, is that government is not allowed to tax you, require fees, or prevent you in any other way from exercising them.  For example, no impediment is allowed to hinder the right to vote.  This would apply also to the $450 renunciation fee, in my opinion, but you could whistle till you’re blue in the face, the State Department won’t budge.  The $450 is an impairment to expatriation and it is a violation of the 1868 law quoted above, which is based upon a “fundamental principle of this government”.  The exit tax is likewise an impediment.

Finally, in case anyone is worried that the Bill of Rights does not support the right to “no taxation without representation” or the right to expatriate, don’t ever forget that the Ninth Amendment covers those fundamental rights:

The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

Thus, the Bill of Rights supports these fundamental rights and the attempt by Congress and the IRS to collect taxes from non-residents and an exit from those who would renounce their citizenship, is in my opinion unconstitutional.  Class action lawsuit anyone?

See also:  William Thomas Worster, “The Constitutionality of the Taxation Consequences for Renouncing U.S. Citizenship“, Florida Tax Reviw 9 (2010) 923-1020 (can be downloaded at link: see “One-Click Download”).

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The New Berlin Wall IV: A reader’s comment

The United States government is acting like a trapped animal in a desperate attempt to keep capital in the United States.  The New Berlin Wall consists of the various laws, many of them recent, which attempt to force American citizens and companies to keep their capital in the United States.  But instead of having success, these laws will cause many to leave permanently, with no intention of ever returning.  It will eventually result in a mass exodus if the U.S. doesn’t begin to implement measures that tries to entice capital to stay rather than measures that try to stop it from leaving.  The exodus of capital is already occurring.

A reader responded to my first New Berlin Wall with the following comment, which I edited to protect her and myself from a rapacious evil government (I’ve changed the identity of her country to X and omitted her name):

I am in the exact same situation as you. I have lived in X for thirty years. I have been told by the IRS when I call as I have been a stay at home mom of a disable X-IAN child that I did not have to file since I did make enough to file but, that I might want to fine and use my husband *who claims me as a dependent** income, he is X-IAN. I do not have to file her as “American for tax purposes” but, was told I could. Why would I want to do that?

My health is not good and this is such a royal pain. It is exceedingly confusing. This year I inherited some money when my mother passed away. I will of course report it but, it’s right in the middle of this U.S. tax change for citizens residing in other countries.  …

Why should people of lower middle income be subjected to this after living outside the country for so long. I no longer have any desire to be American because of these draconian practices. It puts such hardship on law abiding citizens. I want to renounce. The stress of it all is too much. I am only worried about being able to visit my family in the U.S. occasionally but, have no desire what so ever to EVER live there again.

Shame on you United States for this monetary slavery. We are not rich and my husbands income supports me *I have lupus and RA* AND my son with disabilities. Now you want me to feel like I’m a servant to you though I’ve done nothing wrong. This puts such a hardship on people.

I have already applied for my X-ian citizenship, I want to renounce American citizenship and not be penalized for traveling on my X-IAN passport. Thirty years of not living in the U.S. and we still have to contend with this ridiculousness.

Of course now that I will be travelling on Canadian passport, I can still visit the US but I can’t reside there any more.  But expatriation and the relinquishing of my US citizenship is what I had to do to avoid the stupid and draconian legislation against Americans who live outside the country.  The government is attempting to stop millionaires from expatriating their capital and is instead making life hell for stay-at-home mothers.  Shame on you indeed.

The New Berlin Wall series

The New Berlin Wall: Heroes Earnings Assistance and Relief Tax Act 2008

Yesterday I sent my application for Canadian citizenship via registered mail to the Sydney, Ontario, Processing Centre.  An American citizen from birth, I’ve lived outside the USA, first as a student then as a permanent resident of Canada, since 1986.  I’ve never really felt that I needed Canadian citizenship.  My reason for applying now is that it is inconvenient being an American living in Canada.  So before my citizenship ceremony in a year or so, I will be renouncing my US citizenship.  Likely, for a few days while awaiting the ceremony, I will be a stateless person. [actually, I became a Canadian on February 28, 2011, and informed the US Consulate in Toronto of my relinquishment on April 7, 2011]

The United States is the only country in the world that requires that all its residents and all its citizens, even if living abroad, pay tax, though there is an earned income exemption of $70,000 [over 90,000 today] and foreign tax, dollar per dollar, credit.  The threshold for filing is ridiculously low.  As a married person filing a separate return, I must file if I make more than $2000; this despite the knowledge that as a resident of Canada, it is difficult to imagine very many scenarios where I might be liable for tax, since the rate here is higher than in the USA, particularly for lower income earners.  But it is a hassle to file every year, and it creates a lot of anxiety for me.  Last year, my accountant forgot a certain form and he was sick when I was required to send the amendment, and so I had to do it myself and that created a huge headache.

So I am not going to renounce my citizenship because I owe tax.  I am liable to the IRS for nothing.  I am doing it first of all because I am tired of filing a frivolous return to the IRS each year; frivolous because I owe nothing, and cannot possibly owe anything living here in Canada.

But there is another even more important reason which I call the “New Berlin Wall”.  Since 2008, the US has placed particular restrictions on wealthy people who wish to expatriate.  If I were to own 2 million in assets or if my average net income tax liability over the last five years were $139,000 , I would be a “covered expatriate” upon renouncing my citizenship.  The law penalizes these individuals with exorbitant expatriation tax that boggles the mind.  Why?  To keep them in the USA.  So it is a Berlin Wall designed to keep people from leaving the US.

I am long way from being a covered expatriate.  But with the devaluation of the dollar due to hyperinflation, I foresee being there soon.  Therefore, I’ve decided to leave before the law applies to me; because it was much easier to leave East Berlin before the Wall was built.

Oh and by the way, Go Canada Go!!!

[corrections, 20 April 2011]