Taxation and Representation

Janet Flanner, Expatriate in ParisMany people have asked me what it’s like living in Switzerland, and how life differs from that of outside the United States. Some of the big differences are how one interacts with the U.S. government itself, and with the States. Let’s discuss two examples over the next few days and whether or not they are fair, the first one being everyone’s favorite subject, taxes.

Here’s one way things don’t change: no matter where you live in the world, if you are a U.S. citizen who receives any sort of income above a very minimal amount, you have to file a tax return. U.S. stands alone in this nearly unique way among other governments. In most other cases you only file taxes (if required at all) in the country in which you reside. However, just because one has to fill out paperwork doesn’t mean one ends up paying the same taxes one would pay as a resident.

The U.S. philosophy is basically this: if you’re paying taxes somewhere else, and you’re not actually working in America, then you can reduce your tax burden by the amount paid. That means that if you never travel to America and the tax rate is higher than what you would pay as a U.S. resident, you pay nothing. On the other hand, if you do visit and work during that visit, then that money is subject to tax. And if the American tax rate is higher than the country in which you reside, you end up paying the difference. It’s more complicated than that (there are housing credits, limits on those credits, an income exclusion, etc), but that’s the jist.

Is any of this easy? No. The amount of paperwork expatriates often have to complete for taxes can measure into the kilograms, just for simple returns. In addition, different tax systems may cause substantial amounts of confusion due to when obligations occur, and when tax bills are finalized, requiring substantial revision over time. And don’t even get me started if you have a more complex situation, like say stock options, whose value has to be accounted for between the time they were granted and the amount of time you’ve spent in the states.

Is this fair? It says that as a U.S. citizen you still have a societal obligation no matter where you live. If you are a citizen and have never lived in the U.S., it may seem unfair. But the government is supposed to be there to protect you if you get into trouble; and you also get to vote for your senator, congressman, and in the presidential race. Certainly to me this seems fair. Citizenship has its responsibilities. In Switzerland, for instance, male citizens must serve in the armed service. It would be unfair if expatriates had to pay a higher rate than other citizens. Depending on your point of view, that has in part taken place, but not to the point that it has impacted me personally.

The IRS has attempted to simplify things somewhat, and you can see their attempt here.

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