Originally from International Liberty
When I write about America’s awful tax code, I generally focus on anti-growth policies such as high tax rates, the bias against saving and investment, and nightmarish and costly complexity.
But there’s actually a fourth problem of “worldwide taxation” that deserves more attention. The U.S. has the world’s most aggressive and obnoxious system of extraterritorial taxation.
This means American taxpayers who earn money outside of America’s borders are subject to taxes where they earn their money, but then the IRS gets to take a second bite at the apple.
- When American businesses earn money in other nations, that income is subject to tax by governments in those other nations, but that income can then also be taxed by the IRS.
- When American investors earn money in other nations, that income is subject to tax by governments in those other nations, but that income can then also be taxed by the IRS.
- When American workers earn money in other nations, that income is subject to tax by governments in those other nations, but that income can then also be taxed by the IRS.
The solution to all these problems is the common-sense notion of territorial taxation, which simply means that governments don’t tax outside their borders.
All good tax systems, such as the flat tax, are based on territorial taxation.
Now that we’ve explained the issue and considered the theoretical implications, let’s now look at a real-world example.
A new Pope was just elected and he’s the first American to fill that role.
That’s newsworthy from a religious perspective, but it also has some major tax implications (and could cause some major tax headaches), as explained by Victoria Craw and Julie Zauzmer Weil in a report for the Washington Post.
Here are some excerpts:
“Pope Leo XIV, the newly elected pontiff, must answer to at least one more higher power: the IRS. The United States generally requires all citizens to file an annual tax return, even those who live out of the country. But assuming he doesn’t renounce his U.S. citizenship, Leo…has special tax considerations, both as a clergyman and now as the head of a foreign government. …many countries do not assess taxes on citizens living abroad. “Recent popes from Poland, Germany and Argentina were not taxed by their home countries,” said Jared Walczak, a vice president of the Tax Foundation… The pope’s job as a member of the clergy does not exempt him from U.S. taxes. American citizens abroad must generally file tax returns…according to the Internal Revenue Service. …That means Leo will need to calculate the value of his earnings. The pope does not earn a set salary, but the Vatican covers his housing, food, travel and health care, and provides a monthly stipend for personal expenses. …Leo probably will need an accountant to determine how to translate such benefits into income for a U.S. tax return.”
None of that would be necessary, of course, if the U.S. had a sensible tax code.
By the way, U.S. extraterritoriality could be a headache in other ways for the Pope.
“Since 2015, the Vatican has been affected by a U.S. federal law that requires financial institutions around the world to report to the IRS details of accounts held by U.S. clients… U.S. citizens living abroad have to file a report with the Treasury Department’s Financial Crimes Enforcement Network if they have “signature authority” — meaning control over the use of funds or other assets — over foreign bank accounts whose total value exceeds $10,000 according to Brittany Benson, an analyst with the Tax Institute at H&R Block. “This would likely apply [to Pope Leo XIV] if he has signature authority on Vatican accounts,” Benson said… Edward A. David, an assistant professor in the department of theology and religious studies at King’s College London, said..it’s hard to predict how the unprecedented situation will work in reality. “U.S. tax law is very far-reaching. And while there might be an exemption for heads of state, this is brand-new territory.”
For what it’s worth, Trump claimed during the 2024 campaign that he wanted to get rid of worldwide taxation for people like the Pope. Sadly, there’s been no follow-through since the election.
Let’s hope that changes, and that he gets rid of FATCA as well.
P.S. America’s extraterritorial tax mistake doesn’t just penalize citizens. It’s also a problem for foreigners (including famous ones) who choose to live in the United States.
P.P.S. This is why I’ve explained that Trump’s plan for a “Golden Visa” won’t be very successful unless he gets rid of worldwide taxation
