Edward A. Zelinsky (Cardozo), Defending U.S. Citizenship-Based Taxation in Theory and in Practice: An Essay on Fiscal Citizenship in a FATCA World, 46 Cardozo L. Rev. ___ (2025):
U.S. taxation of its citizens living abroad is better in practice and sounder in theory than the critics maintain. While the U.S. is the only nation which uses legal citizenship to tax the worldwide incomes of its citizens living abroad, other nations’ residence-based tax systems also often reach extraterritorially by taxing the worldwide incomes of overseas citizens as continuing residents of their home countries. U.S. citizenship-based taxation reaches similar results more efficiently by avoiding factually complex determinations of individuals’ domiciles or residences. When opponents of current law call for the U.S. to adopt residence-based taxation, they do not acknowledge the extent to which existing residence-based tax systems in practice also tax citizens living abroad extraterritorially on their worldwide incomes by deeming them to still reside in their respective home nation.
Moreover, under Section 911 of the Internal Revenue Code, the U.S. abates its taxation of its citizens living abroad through a generous and unique exclusion for foreign earned income in addition to the income tax credit available to all U.S. taxpayers for foreign income tax paid on foreign-source income.
The upshot of this exclusion and credit is that, in practice, relatively few U.S. citizens living abroad actually owe net taxes to the U.S. Those who do tend to be more affluent individuals, not rank-and-file taxpayers. While the critics deploy the label “unique” as a term of disapproval, the U.S. exclusion from income taxation of its overseas citizens’ foreign earned compensation is uniquely taxpayer friendly in comparison with the tax laws of other nations. Just as the critics of U.S. law understate the extent to which other nations’ residence-based tax systems often tax the worldwide incomes of their citizens who living abroad, the critics of U.S. law tend to slight the Section 911 exclusion.
Good does not mean perfect. Critics of the status quo validly point to flaws in current law as it taxes U.S. overseas citizens. The critics cite these flaws to further their argument that the U.S. should abolish citizenship-based taxation. In contrast, I observe that these flaws are remediable. These defects in current law should not be used as excuses to abandon citizenship-based taxation. Rather, these flaws can and should be corrected to improve the equity, efficiency and administrability of the United States’ taxation of its citizens who live abroad.
On a theoretical level, the United States’ citizenship-based taxation compellingly implements what tax scholars increasingly designate as “fiscal citizenship,” “contributing one’s appropriate share – however modest – toward the financing of the political community of which one is a member.” Other nation’s income taxes define such membership via domicile or residence. From the vantage of fiscal citizenship, an individual’s permanent home is a political community to which that individual, by virtue of his membership in that community, owes an obligation of tax support in accordance with his ability to pay wherever that individual may live. A U.S. citizen who lives abroad is, by virtue of her U.S. citizenship, a member of the national political community of the United States. As a normative matter of fiscal citizenship, this overseas citizen (like a citizen living at home) is properly called upon to support that community through her tax payments based on her total, worldwide income.
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