Even Americans living in low-tax countries get taxed twice—just for being American

“You should only pay taxes where you reside, contribute, generate income and derive benefit. Anything else is confiscation.”

— William Koutney

Dear Members of Congress,

Just because I live in a low-tax country does not mean that I don’t pay taxes. In fact, as an American citizen, I get taxed twice.

My name is Will. I was born and raised in a suburb of Tampa, Florida playing basketball and baseball. I attended college in Gainesville, Florida, then worked as a Certified Public Accountant (CPA) for five years in Jacksonville, Florida. Then after the 2008-2009 global financial crisis I had a “crazy” opportunity arise to grow my career further in public accounting in a sun-soaked island in the Caribbean called Grand Cayman. I moved abroad in the fall of 2010 and have called the Cayman Islands home ever since. I met and married the love of my life here, started a home and have had two beautiful sons. We love and visit America three or four times a year for baseball and football games and to see family at Thanksgiving and Christmas.

The Cayman Islands is a unique place – we’re very small both geographically (about 100 square miles) and population-wise (a little over 80,000 citizens and residents). Our main exports, if you will, are tourism for luxury beach and dive vacations and as a cruise ship stopover, as well as a globally tax-neutral financial center. We don’t produce much in the way of manufactured goods nor do we grow much in the way of agriculture. Our government is well-managed and operates at a surplus—counter to most other nations. We do this by imposing a 22% tariff on most items imported into the country and a similar tax on work visas. Approximately half of the island’s workforce hails from abroad, including myself, and requires both a work visa and for their employer to foot the bill of its cost. 

Double-taxed for being American

I’ve laid out these points as they are important to understand when considering that the Cayman Islands imposes no personal income tax. As an American citizen, however, I do have to declare my income—to the United States, where I haven’t lived since 2010. That’s because the United States imposes an income tax on her citizens living abroad, the only such first-world nation on Earth to do so. The effect of this is Americans living in the Cayman Islands must go through an arduous tax preparation and filing process, writing a check to the U.S. Treasury every three months for estimated taxes, then truing this total up at the end of each year for either an owed amount or a refund.

This might all sound quite commonplace to an American who has never lived abroad, but the effect for us who do is that we end up paying the U.S. government thousands of dollars per year to pay for things such as roads, schools, police, parks, medicare/Medicaid and defense from which we get precisely zero use. I may not cut a sympathetic figure as I live on a tropical island, but I suspect if you put yourself in my shoes, you could imagine the gall of paying taxes somewhere where you derive no benefit. The effect is double taxation as I’m paying both locally where I live and back in America, where I was raised.

The system I’ve described is called citizenship-based taxation (CBT), and the only other nation that uses this system is an African autocracy called Eritrea. 

CBT vs. RBT

As my wife is Canadian, she left Vancouver in 2009 for her job here in Cayman (how locals refer to the Cayman Islands). Upon leaving she filed a form with the Canadian equivalent of the IRS to state she’d no longer have a tax nexus in Canada, submitted a few documents to prove as such (i.e. that she had no ongoing revenue-generating business in Canada, didn’t maintain a home or car, didn’t plan on living in Canada for any significant portion of the year) and she was off the tax rolls. This system is called residence-based taxation (RBT) and commonplace in every other first-world nation because, quite frankly, it’s the only one that makes sense. You should only pay taxes where you reside, contribute, generate income and derive benefit. Anything else is confiscation. 

It's also important to note that this CBT system has caused many Americans that consider themselves to be patriots to seek to renounce their citizenship. I’ve described the financial impact to me and my family, but CBT creates other hardships in that it imposes a huge administrative burden in not only filing complex taxes (there are all sorts of additional forms and calculations when you live abroad), but also in filing your overseas banking information. This creates additional friction for Americans living abroad as most banks are dis-incentivized to take Americans as customers as the United States requires the banks to disclose reams of data about them. Some estimates say these compliance nightmares have cost financial institutions 5-10x annually the amount of taxes that are even collected from American expatriates. Truly the tail wagging the dog.

Head-scratcher

I feel fortunate that (besides being generally happy and healthy) I’ve been trained in financial matters and can navigate my personal filing requirements without paying thousands to a CPA. Still, the burden is heavy and troubling as an ordinary co-owner of a small business to try to guess each year if I’m going to owe more tax than I have cash available all to pay for the roads and schools that I can’t drive on or attend. All which serves to make you scratch your head about the true purpose of US extraterritorial taxation in the first place and why it wraps its arms around normal, proud people who simply don’t reside in America any longer. Luckily, we can very easily right this wrong by supporting Congressman LaHood’s Residence-Based Taxation for Americans Abroad Act to eliminate double taxation!

Sincerely,

William Koutney