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March 13, 2014
Tax History: Why We Tax Everyone on Everything
Joseph J. Thorndike

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Expatriate Americans have always complained about the income tax. Like their fellow citizens living at home, they've found it complex, inquisitorial, and time consuming. But they've also complained about issues particular to citizens abroad, especially the attempt to tax worldwide income.

The 1913 income tax applied to all citizens of the United States, including those living abroad. Moreover, the tax was levied on "the entire net income arising or accruing from all sources," including income from foreign sources.

This treatment struck many overseas Americans as grossly unfair. It was not, however, unprecedented. The Civil War income tax applied in a somewhat similar fashion, initially to overseas citizens on income from "property, securities, or stock owned in the United States." As legal scholar Michael S. Kirsch has pointed out, this provision seems like it might have been a favor for overseas citizens, because it failed (probably for reasons of administrative feasibility) to tax their foreign-source income. But in context, the law was clearly intended to establish a claim on the income of overseas citizens. Lawmakers provided that the income of expatriates would be taxed at a higher rate than income earned by resident citizens, and they denied overseas citizens any sort of exemption amount.1

This punitive treatment was intended to send a message. And in 1864, lawmakers sent another one, removing the rate disparity but extending the tax base for foreign citizens to include foreign-source income.2

Civil War lawmakers were clearly suspicious of Americans who chose to live overseas, especially during the nation's most desperate hour. In his fascinating study of citizenship-based taxation, Kirsch offers a particularly apt quote from one Union lawmaker: "If a man draws his income from our public debt, or from property here, and resides in Paris, skulking away from contributing his personal support to the Government in this day of its extremity, he ought to pay a higher income tax."3

The Civil War income tax disappeared in 1872, but when lawmakers tried to revive the levy in the 1890s, they reasserted their right to tax citizens living abroad. The enacted-but-overturned income tax of 1894 was also imposed on the worldwide income of U.S. citizens, regardless of where they lived.4 And again, lawmakers couched their decision in starkly moralistic terms. As Republican Sen. George Hoar of Massachusetts explained in 1894, taxing worldwide income was the only way to ensure that "if an American citizen went abroad and carried the protection of his country, of his citizenship with him, he did not escape its burdens."5

In fact, Hoar was convinced that expatriates were trying to pull a fast one. He continued:

    There are a great many people, I am sorry to say, who go abroad for the very purpose [of avoiding tax], and some of them went abroad during the late [Civil W]ar. They lived in luxury, at the same time at less cost, in a foreign capital; they had none of the voluntary obligations which rest upon citizens, of charity, or contributions, or supporting churches, or anything of that sort, and they escaped taxation.6

On balance, the 1894 law was designed to ensure that overseas Americans did not escape their responsibilities. As Kirsch has concluded:

    The legislative history of the Civil War tax acts and the 1894 legislation reflect unfavorable views of citizens living abroad, portraying them as living in luxury while avoiding the burdens of citizenship. Unlike the original tax acts in 1861 and 1862, which purported to penalize citizens abroad by subjecting some of their income to higher rates, the subsequent nineteenth-century provisions focused on equity, attempting to ensure that citizens abroad did not receive more favorable treatment than those at home.7

Tax Expatriates

The 1913 income tax law continued the tradition of taxing overseas residents on their worldwide income. And this time, perhaps because the world was already well down the road toward economic globalization, the attempt drew heavy fire from expatriates.8

"There is a widespread revolt against the new American income tax by the wealthier American residents of London," reported one newspaper. "Two prominent Americans, as protests against the tax, have already become British subjects."9 Ironically, one of these protesters was Isaac Seligman, uncle of the prominent American economist and ardent income tax champion Edwin R.A. Seligman. The elder Seligman, a prominent banker long resident in Great Britain, was joined by former Standard Oil executive Frank E. Bliss in abandoning his U.S. citizenship.

Numerous Americans in London signed a letter of protest against the new income tax, and especially its insistence on taxing worldwide income. The secretary of the American Society of London, F.C. Van Duzer, warned that many signatories were prepared to follow Seligman and Bliss into the arms of a willing Great Britain.

"There is no objection on the part of Americans in London to paying a tax on incomes received from the United States, but there certainly is an objection by American business men who come abroad and develop new fields of industry to being penalized for increasing American prestige and trade," Van Duzer said. "I confidently prophesy that if the memorial is not heeded a large number of Americans here will follow the example of Messrs. Seligman and Bliss and become British subjects, much as we dislike to do so."10

Among those lining up to abandon their citizenship was Harry Gordon Selfridge, the former Chicagoan who went on to establish a retail empire in London. "Of course I am willing to pay a tax on any income which I receive from the United States," he was reported to have said. "But the act demands that you pay a tax on your total net income, no matter where it is derived. Ridiculous! I will not pay it."11

When asked if he feared legal penalties, Selfridge said, "That does not frighten me." Paying would be simpler, but also intolerable. And ultimately, maybe even unnecessary. "I prefer to fight the tax," he said. "There is considerable doubt in my mind as to whether such provisions of the law will be found to be constitutional."12

Selfridge -- who eventually did renounce his citizenship, but not until 1937 -- may have had his doubts, but the Supreme Court did not. In its 1924 decision in Cook v. Tait,13 the Court upheld citizenship-based taxation, noting that "the government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete."14

And with that, citizens overseas were left with only one choice: pay up or get out.


1 Kirsch, "Taxing Citizens in a Global Economy," New York University Law Review, May 2007, 443-530 at 449-452.

2 Id.

3 Id. at 451.

4 Id. at 453.

5 Id.

6 Id.

7 Id.

8 Id. at 454-455.

9 "Drop Citizenship Over Tax," The Washington Post, Mar. 6, 1914.

10 "Income Tax Roils Anglo-Americans," The Chicago Daily Tribune, Mar. 6, 1914.

11 Id.

12 Id.

13 265 U.S. 47 (1924).

14 Quoted in Kirsch, supra note 1, at 456.