A Coherent Policy for U.S. Residence-Based Taxation of Individuals

Abstract

Taxation of the worldwide income of U.S. citizens has been a feature of the U.S. income tax since the Revenue Act of 1913. This Article proposes that the United States abandon its imposition of income tax based on citizenship and institute a new system for taxing individuals based solely on residence. This includes (1) a revised definition of “residency status” that would be based on physical presence and be monitored through an entry-exit system, (2) a proposal for an exit tax imposed on termination of residence with respect to unrealized appreciation accrued during the period of residence, and (3) new transitional treatment of residents who have left the United States within the past three years but have not yet made a decision to break off residential ties. These proposed rules are designed to achieve more uniform compliance, to reduce the administrative burden for U.S. taxpayers, and to facilitate IRS efforts to enforce U.S. tax obligations.