The Case for Citizenship Taxation

The coronavirus pandemic is marred in many controversies. The international community stands divided about its origins, who is to blame for its harrowing ramifications, and how best to treat it. However, one conclusion remains immune from gainsayers: this outbreak has severely debilitated the global economy, dealing a palpable blow to the region of Europe. The Deutsche Bank purports that the eurozone is likely to endure a diminution of 11.4% in its GDP in the second quarter of 2020 without recovering from this economic dip until at least 2022. The United Kingdom registers a similar set of pessimistic predictions, as the nation’s estimated GDP has already plunged by 2.0% in the first three months of this extremely challenging year. The widespread loss of jobs and the concomitant need for governments to ramp up their expenditure, whether for bailing out businesses or bolstering payments to the essential workers and the unemployed, is draining Europe of its financial resources and is conducive to bringing about increases in taxation in the post-pandemic world.

These could take many forms. The populist proposals for progressive taxation, so pervasive within the circles of the UK Labour Party and its continental left-wing counterparts, will only recrudesce and gain political ground, as increasingly more voters are witnessing their living standards drop due to the current crisis. Under such despairing circumstances, calls to make the arbitrary ‘rich man’ pay will feature far more regularly in the public discourse, no matter the potentially divisive implications on society. Although it might be easy to sell this approach to the average Joe, it is undoubtedly not without limits, even if those on the political right, having previously been at the loggerheads with left-wing hardliners, embrace fiscal pragmatism to prolong their tenure in power. To the conservative forces of Europe, undertaking such a volte-face in their economic outlook constitutes a betrayal of their political values, and correspondingly of the voters who share them, thereby rendering this decision dangerous in the long run.

But the impending budget deficit of the future will not disappear by itself. Action must be taken to mitigate its effect. Cuts in government expenditure on social services risks becoming a haphazard electoral strategy, akin to reversing the right’s attitude towards progressive taxation. Today’s volatile conjuncture has certainly lowered public confidence, as such, we might expect a lack of entrepreneurial spirit and slow increases in productivity in the immediate aftermath of the pandemic. Therefore, alternative revenue sources are crucial. Herein, I argue in favour introducing citizenship-based taxation.

I am not alone in stressing its significance; a member of the ruling Canadian Liberal Party, Chandra Arya, has recently submitted a piece to the Institute for Research on Public Policy, in which he outlines a similar idea. In his article, he points to circa 3 million Canadians residing abroad who, according to him, enjoy the same rights as Canadian residents and therefore must “face the same obligations”. Whilst I disagree that the mere fact that they have assured access to their motherland’s health care and education systems somehow justifies imposing taxes on them, his overall commentary is convincing. As those people have the right to vote and count on visa-free travel and diplomatic protection, they are extracting dividends from their passports. Moreover, the cohort of high- and medium-income individuals choosing to resettle is constantly increasing. In fact, almost one in ten Brits permanently lives abroad. Another large European economy, Germany, registers a net outflow of 60,000 people each year, with more than 5% of Germans already residing outside their country’s boundaries. Obviously, this has a profound impact not just on those individuals, but on their home states. As increasingly more British nationals depart in pursuit of self-improvement, the country gradually loses cultural homogeneity and develops a strong attachment to migrant labourers, prompting criticisms from the milieu of those who opted to stay.

Even if this policy fails to change that situation substantially, it is still worth pursuing. After all, Europe’s recovery will involve budget deficits across the region, affecting the heavily crippled United Kingdom as well as those states that managed to evade a grave and uncontrollable outbreak. Our public debt may exceed all previous values, whilst the internal tax base will attempt, step by step, to regain its pre-lockdown size. It is precisely in this respect that citizenship-based taxation provides vital assistance to our economy. By artificially expanding the tax base, this scheme is bound to generate additional revenue, plenty of which will be invested in saving economically-depressed communities throughout the UK. This money may prove cathartic to the already poverty-stricken North, or assist the bailout of the construction sector, whose output has fallen by more than 70% since the start of the lockdown.

Moreover, citizenship-based taxation is not completely novel; the United States levies taxes on its citizens, even if they happen to live outside the nation. Even the 2017 Republican tax reforms chose not to challenge this system, expanding it in an attempt to coerce big businesses into repatriating their profits. The practice of taxing American citizens, irrespective of where they take residence, dates back to the US Civil War. In 1861, the Congress argued that American citizens living outside the country were evading their duties to the nation in a time of need and required that these citizens make up for their civic disengagement by paying a higher tax rate on their US-source income. Three years later, the law was reformed: in lieu of paying higher rates, all non-resident citizens had to pay taxes on their worldwide income, and in the 1924 Supreme Court case, Cook v. Tait, this principle was vindicated. The court might not have invoked the same notion of mandatory patriotic duty, yet it nonetheless upheld the constitutionality of citizenship-based taxation. Its verdict mentioned the “inherent benefits” that accompanied one’s loyalty to the Stars and Stripes flag. Throughout time, sticking to this approach has helped the US government cut taxes for residents, thereby incentivising domestic investment and economic growth. Likewise, the US has been more successful than Europe in bringing its citizens back; whilst an estimated 8.7 million Americans live and work abroad, this represents a much smaller proportion than the aforementioned number of non-resident UK passport holders.

Of course, blind imitation of the American model is not the answer. The Conservative government should first take into account the existing fiscal policy differences between countries and determine how to soften what would otherwise appear to be a radical move. Perhaps, the inaugural step in the direction of citizenship-based taxation could involve extrapolating upon the Spanish model. Spain taxes its resident-citizens who migrate to tax havens, such as Monaco, for five years after their departure, which represents a far more moderate alternative to the US model. Promulgating a comparable tax may not only encourage investment to Britain’s own off-shore zones, namely Jersey, provided they are exempt from the tax, but also generate revenue for the Treasury. Such a symbiosis of citizenship-based taxation is relatively commonplace: Portugal and Mexico are already copying Spain, whereas Finland and Sweden require citizens to prove that they no longer possess any ties to their home countries prior to receiving fiscal exemption, after three and five years respectively. Evidently, London ought not to be worried about pioneering this strategy; other European economies, devastated by the virus outbreak, will definitely follow suit at some stage. With the rising demand for government services, provoked by the economic crisis, as well as the return of many British expats to domestic safety, some form of citizenship-based taxation is becoming a necessity for the Conservative government. It will be more popular with the party base than progressive taxation, as it will not involve betraying the fundamental postulates of capitalism, and it will be more popular with neutral voters than cutting public spending. One could shift the public perception from a contentious policy to a patriotic move, designed to help the running of the NHS, other social services, and the general economy. “Not for the few, but for the many.” If done correctly, the implementation of citizenship-based taxation would benefit Britain both financially and socially.

Written by Dan Mikhaylov.

The ideas represented in this article are not reflective of the values held by UCL Conservatives. The opinions expressed in this article are solely representative of the author.

Leave a Reply

Your email address will not be published.

eight + two =