A Tax on your Nationality : can your country pull it off ?

The interesting example of France and what it can teach us about other countries

In the previous article, we plunged into the bowels of US nationality taxation, the only Western country to do so, and FATCA and its inglorious results.

One might think that the rather calamitous example of the USA, FATCA and accidental Americans would have somewhat dampened the ardor of other countries, but more and more of them are seriously considering taxing their citizens on their nationality too.

What's more, 3 factors combine to reinforce their motivation to set this up:

1. Western countries are increasingly indebted, and their economic outlook is not very optimistic, as they face a declining and ageing population that will weigh heavily on their social spending.

2. Their populations are increasingly mobile, thanks in particular to air travel and the Internet, which make it easier to travel and work remotely, and therefore to live abroad. And of course, the pandemic has introduced just about everyone to working remotely: hundreds of millions of people, probably more, have now experienced it.

3. And the richest and most mobile segments of the population contribute disproportionately to taxes: for example, in the United States, the richest 10% pay 73.7% of total federal taxes¹, and in France, 10.76% of tax households pay 70.42% of income tax².

   • All it takes is for a small proportion of a country's wealthiest 10% to decide to expatriate, and the country's finances become seriously unbalanced.

(We'll look at all these factors in detail, and how they're disrupting nation-states, in other Disruptive Horizons articles.)

Can France tax its citizens based on their nationality? (and what it can teach us about other countries)

In France, a regular far-left candidate for the French presidency, Jean-Luc Mélenchon, has brought the idea of taxing French citizens wherever they live into the public debate for over a decade, to the point that the National Assembly set up a commission to study the possibility, resulting in a 98-page report in 2019³.

Jean-Luc Mélenchon, an outspoken critic of tax exiles - Photo : Thomas Bresson

It's an interesting case, because France, as a major power, but far behind the United States in terms of GDP, population and influence, shows what a powerful country that isn't the United States can do on this subject.

I'll spare you the suspense: the commission explains throughout the report that it would be impractical for France to to tax its citizens according to their nationality, but that more subtle forms of global taxation are possible, for several reasons.

1. Introducing such a tax would create inequalities

Taxing French people who use the infrastructure they finance (those living in France) and those who don't (expatriates) at the same rate would be unfair, especially as many countries, such as Canada, explicitly cited in the report, do not offer very extensive public social protection.

What's more, in a 2015 report⁴, the Cour des Comptes (France's supreme audit institution) noted: "the poor quality of services provided to non-residents".

It's a problem that also affects many countries.

2. France will have to renegotiate all its tax treaties, which could take well over a decade, and other countries will want something in return.

This point is important: if tomorrow France decides that its citizens must pay income tax wherever they live, for example, those who live in a country that has a tax treaty with France (121 countries at the time of writing⁵) will be protected, as international treaties take precedence over local laws.

Each of these treaties will therefore have to be renegotiated, a Dantean task which, as the report points out, "for certain conventions, would not be in [France's] interest", as many countries would demand concessions in exchange.

This problem is also universal among countries tempted to introduce nationality taxation.

3. France does not have the same power and influence as the United States

It will therefore be very difficult for it to impose the same conditions, which would considerably increase the difficulty of collecting the same information as FATCA.

The CRS, the automatic exchange of information implemented worldwide, was designed to identify people who evade taxes with bank accounts located abroad, while remaining in their country, not to identify expatriates who should be paying taxes in their country of origin.

All countries are less powerful and influential than the USA, and are therefore affected by this. China and certain supranational entities could be an exception, which I discuss below.

4. It's doubtful that FATCA actually brings in more money than it costs, and since its implementation the number of Americans opting out each year has risen significantly.

As we saw in detail in the previous article.

5. It would be contrary to the EU's fundamental right to freedom of movement, so if it is implemented, it will not apply in the EU.

This would create enormous opportunities for tax exile and legal loopholes, especially as the majority of French expatriates live in EU countries such as Belgium, Germany, Spain and Italy⁶.

And that's not counting Switzerland, 1^st host country for French expatriates, who are often among the wealthiest, and which although not part of the EU, belongs to the European Free Trade Association and the Schengen area, which would create complications for taxing the French living there.

What's more, French nationals wishing to escape this nationality tax could simply take up another European Union nationality by moving to any EU country for a sufficient number of years, and renounce their French one, thereby retaining the right to return to France whenever they wish without being subject to this tax, which would create new inequalities.

Here we see another loss of power for many nation-states, as they cede part of their lawmaking power to supranational bodies such as the EU, but also organizations like the OECD and the WTO.

Here, the problem primarily affects EU member countries (still 27 of the wealthiest countries in the world !), but it could also affect members of other unions, such as Mercosur.

What's more, the report itself notes that "tax competition has been a growing phenomenon since the early 1980s, under the dual effect of open borders and the liberalization of capital flows".

We could add: and the Internet.

Another problem not mentioned in the report

This is because, if more and more countries introduce such a tax, it will create an incalculable number of unpredictable interactions with the tax systems of other countries, particularly for people with multiple nationalities: if France introduces a tax based on nationality, would this mean that a Franco-American living in Spain would have to declare and pay taxes in the USA, France and Spain?

Imagine the mess caused by dozens of states implementing such nationality taxes, burdening the world with their desperate attempts to raise money.

In such cases, there would probably be double taxation treaties, just like people who are tax residents in two countries today. It would then suffice to acquire a more advantageous passport than the other to be partially or totally protected.

What about supranational entities?

If a country like France finds it impossible to tax its citizens based on their nationality, partly because it lacks the power and influence of the United States, what about larger entities that might approach the necessary critical mass?

The report doesn't mention it, but today I'm thinking of 3 possible entities:

The European Union

The EU represents the world's 3^rd economy, just behind the USA and China, and could have the necessary size to implement taxation of its citizens wherever they live, and try to enforce it.

But :

• At present, none of its member countries apply this form of taxation.

• EU citizens pay no taxes directly to the EU⁷ : member countries finance its budget

• No EU-wide tax policy can be passed without the unanimous agreement of all its members⁸ : good luck getting that unanimity to pass this measure!

  • For years, however, European politicians have been talking about moving to qualified majority decision-making in certain areas of EU tax policy.

  • A change of policy that would, however, require... a unanimous vote to be implemented.

• Citizens' adherence to the EU, rather than to their respective countries, remains fragile, as the Brexit made clear: this is one of the reasons why they don't pay direct European taxes, whereas the lion's share of taxes paid by Americans goes to the federal state rather than the state in which they live. Introducing European taxes could trigger major resistance movements.

All these elements make me think that, if the EU ever has the political will to implement such a tax, it won't be for several decades, when the great forces currently at work to disrupt nation-states will have had even more time to do their work.

The OECD

As we'll see later on in this blog, the OECD has been successfully coordinating the tax approaches of many countries for several years, and recently succeeded in endorsing a major agreement to introduce a 15% minimum corporate tax for certain companies.

Could it also ensure sufficient coordination to introduce such a universal citizenship tax? Perhaps, but several factors make me doubt this:

• As we'll see in detail in another article, implementing this agreement is a real challenge, taking much longer than expected and having to be negotiated down - the rate initially proposed was 21%.

• Game theory shows that cartels tend to become less effective over time, or even dissolve altogether, as members are tempted to cheat in order to pocket large short-term gains. More on this later.

• The thresholds for the two pillars - 20 billion euros in sales for pillar 1 and 750 million euros for pillar 2 - show just how challenging it is to implement them, even for large groups. These thresholds will probably be lowered, but there's a long way to go before the OECD reaches the level of individuals!

The UN

This may startle you, but the UN has actually proposed a global tax, in competition with the OECD⁹ !

It also has a committee on tax cooperation, and would like to play a greater role at this level¹⁰.

For the time being, however, the UN's proposals on this subject are not being taken very seriously by the countries likely to implement them.

The interesting case of China

2^nd world economic power, maybe soon to be 1^st, home to just under 20% of the world's population, China could theoretically introduce worldwide nationality taxation.

Yes, but that's without taking into account the fact that this country is considered a dictatorship by the West: it seems unlikely that democracies will let China tax its citizens wherever they may be, given that it could take advantage of the situation to try and catch up with all those "exiles" with punitive taxes. 

One could also imagine a "dissent tax", whereby anyone who criticized the regime would have their taxes increased - or be unable to use a discount otherwise available to other Chinese citizens abroad.

Certainly, we wouldn't be on the level of the 1712 edict by the Chinese emperor K'ang-hsi declaring that his government "will ask foreign governments to have the Chinese who have been abroad repatriated so that they may be executed¹¹”...

But the danger is clear, especially as China has already demonstrated its irresistible desire to control its nationals living outside its territory, notably with the establishment of clandestine Chinese police stations to monitor and punish critics of its regime in the USA, Canada, Germany, the Netherlands, Italy, France, Great Britain and probably other countries¹².

And this brings us to an interesting point: all this financial transparency, this data automatically exchanged between countries, these global taxes are a godsend for totalitarian regimes, who thus have new means of surveillance and pressure against their exiled dissidents.

And Western countries are well aware of this: for example, in April 2022, two months after the outbreak of war in Ukraine, the USA suspended the exchange of tax information with Russia¹³.

Among the reasons given by the IRS was that they did not want to "facilitate in any way the persecution of Russian dissidents".

In peacetime, however, this doesn't seem to be a problem. Go figure.

Western countries should be ashamed of having given all these dictatorships such weapons.

Once again, we see a trend towards total control as the principal means of combating the disruption threatening nation-states, reducing the legitimacy of democracies and giving dictatorships powers worthy of 1984.

That’s a topic we’ll explore more in future articles.

Other ways to tax expatriates

The example of France is very interesting, because being a major power, we can consider that if its government considers that it is not possible for it to implement taxation on nationality, this conclusion applies to all countries that are less powerful and influential than the United States... i.e. all other countries.

But one clear principle that history teaches us through numerous examples¹⁴ is that "the power of governments is based on the immobility of their subjects", and the fact that if its population starts to leave, a government will always be tempted to limit its freedom to do so¹⁵.

The temptation will only grow stronger as more and more of the population realizes that the Internet and expatriation offer far superior value for money in most cases, and as governments find it increasingly difficult to finance promises based on a world that no longer exists.

But, if a tax on nationality is difficult to implement, other forms of disincentive are possible.

Here are a few examples cited by the report, some of which have already been implemented by other countries:

Taxation remains effective for a certain number of years in the country of origin, if the departure takes place to a "privileged" tax country.

For example, Portugal and Spain have such a "black list of tax havens", that any Portuguese or Spanish citizen moving to one of these countries must - in theory - continue to pay taxes in their country of origin for 5 years.

Continue to consider each citizen as a tax resident of the country of departure, until proven otherwise

Finland and Sweden, on the other hand, consider citizens leaving their countries to remain tax residents for 3 and 5 years respectively, unless they can prove otherwise.

It should be noted, however, that this rule, as well as the previous one, do not apply in the European Union (as they would be contrary to the free movement of persons), and that they can be overridden by a tax treaty.

And then, of course, there's the question of effective enforcement. In practice, these rules are designed more for citizens who move abroad temporarily, before returning home. Those who leave permanently, leaving nothing behind in their native country, risk very little.

Introduce a special tax on citizens living abroad whose income exceeds a certain threshold.

The report, very ironically, mentions a proposal made in 2010 by the then French Finance Minister, no less than Jérôme Cahuzac, who became famous for committing tax fraud and attempting to hide the fruits of this fraud abroad (he was sentenced to 4 years' imprisonment, 2 of which were suspended, a 300,000 euros fine and five years' ineligibility¹⁶).

This tax would have been a "national solidarity contribution" of 5% on income over €240,000.

It would have required French residents abroad to declare their income each year to the French tax authorities, in addition to declaring their income to the tax authorities in their own country. The question also arises as to how the French tax authorities would have verified the veracity of the information provided.

In the end, this tax was not adopted at the time, but other countries may be thinking of a similar mechanism, and the report recommended that the French government reconsider it (it has not been implemented at the time of writing).

It would also probably be contrary to European law, which would once again open up a host of ways of evading it.

Introduce an exit tax, or extend and strengthen it where it already exists.

It is very interesting to see this proposal in a French report when an exit tax was instituted in France in 2012 under the Sarkozy presidency - and we can therefore examine its results :

It was expected to bring in 200 million euros a year¹⁷.

In fact, it raised between 10 and 15 million euros a year¹⁸, an absolutely ridiculous figure: in France, a tax raising less than 150 million euros a year is considered "low yield", and many of them were abolished in the 2010s and 2020s¹⁹.

It should be noted, however (as the report does), that the potential yield of this tax is estimated at between several hundred million and up to 6 billion euros²⁰. 

Potential = that would be realized if all those who have gone abroad :

1. Sold enough assets to fall within the scope of this tax

2. Before the date after which this tax is no longer due (between 2 and 15 years) and

3. Declared everything.

But (and it's always the same story), as former Court of Auditors reporter François Ecalle puts it, "tax collection from non-residents is very complicated. We set up this tax, but the State is incapable of controlling it. [...] [The measure] is symbolic²¹."

And that's if the expatriate has filed his or her tax return correctly when leaving! In reality, many people "forget" to do so.

And of course, this is without counting the number of entrepreneurs who choose to set up their business outside of France, to avoid this exit tax, and the foreign investors to whom it can frighten, which justified its considerable reduction in 2018²².

And the fact that, depending on its parameters, it may be incompatible with European law, and in particular the sacrosanct freedom of movement of people and capital²³.

We can therefore conclude that the French exit tax has had more than limited effectiveness, but that many countries have introduced or will be tempted to do so, and despite the abysmal results, the report recommends that it be strengthened.

Quantify, in the form of a government loan, all the services that have been used by a citizen, and demand repayment of this loan from any citizen who leaves France and 1) moves to a low-tax country or 2) earns more than 100,000 euros a year.

The notion that public services are provided to all citizens, regardless of the level of taxation they pay, is here somewhat shaken...

And quantifying the services rendered by a state in monetary terms would open a Pandora's box of questions as to whether the price asked is really worth it.

Strangely enough, the report doesn't seem to realize that these two proposals are blatant contradictions to the notion of public service.

Nor that, by definition, expatriates will stop using the infrastructures and services of the countries they are leaving...

This just goes to show how desperate many states are to find justifications for limiting their citizens' mobility - we always come back to this historic principle.

In conclusion: a rather quixotic temptation, but one that will never go away.

An American-style nationality tax therefore seems unlikely in the next two decades for any country other than the United States.

But some alternative ways of taxing non-resident citizens have already been put in place in some countries, and many will be tempted to follow suit.

So the earlier you leave, the less likely you are to have to jump through hoops in order to expatriate.

And here you see a principle we'll come back to later: while most countries fight to attract you and roll out the red carpet, the only country that takes you for granted and tries to force you to contribute, rather than accept competition and offer you excellent service with the best value for money, is your home country.

We'll come back to this in the article on international “flags”.

You can see how difficult it will be for nation-states to hold back their increasingly mobile populations by force, even as their economies and finances are increasingly challenged.

This will be the subject of (many) articles on this blog, whose raison d'être is to share how nation-states are going to be disrupted by the Internet. Stay tuned ! (and follow Disruptive Horizons on Twitter to find out when an article is published and discuss topics)

1. "Summary of the Latest Federal Income Tax Data, 2023 Update", Erica York, Tax Foundation

2. "Statistiques : Qui paye l’impôt sur le revenu ? Combien ? Quelles inégalités selon les tranches de revenus", Guillaume Fonteneau, 2017

3. "Rapport d'information déposé en application de l'article 145 du Règlement par la commission des finances, de l'économie générale et du contrôle budgétaire en conclusion des travaux d'une mission d'information relative à l'impôt universel", no less!

4. "La gestion des impôts dus en France par les non-résidents", Cour des Comptes, 2015.

5. "Les conventions fiscales internationales", Cour des Comptes, 2019

6. "Distribution of the number of French expatriates worldwide in 2020, by host country", Statistica

7. "Towards fair, efficient and growth-friendly taxes", official EU website, 2023

8. "Unanimity", Eur-Lex website, 2023

9. "Global Tax Proposal Gains Ground At Un As OECD Plan Falters", Spencer Woodman, International Consortium of Investigative Journalists, 2022

10. "Strengthening UN Role in International Tax Cooperation", Department of Economic and Social Affairs, UN

11. "Imagined Communities", Benedict Anderson, 1983

12. "Explainer: China's covert overseas 'police stations'", Amy Hawkins, The Guardian, 2023

13. "U.S. suspends tax information exchange with Russian authorities", Reuters, David Lawder, 2022

14. As I'll explain in a future article

15. Here are just a few examples, which we'll look at in more detail in a futur article : Diocletian's decrees binding the peasant to his field and the worker to his workshop until all debts and taxes had been paid; the maximum wage, set at its pre-Black Death level in the Workers' Ordinance of 1349; the Iron Curtain and Berlin Wall; exit-taxes.

16. "Jérôme Cahuzac condamné en appel à deux ans de prison ferme pour fraude fiscale", France Info, 2018

17. “Pécresse: "Nos mesures ont profité à tous les Français"“, Libération, 2012

18. "Fin de l'exit tax : à combien la facture ?", Lilian Alemagna, Libération, 2018

19. "Taxes à faible rendement : l'Etat les supprime... doucement", Olivier Delahaye, Le Progrès, 2022

20. See footnote 17

21. "How much does the exit tax bring in for the French state each year?", Emma Donada, Libération, 2018

22. "Qu’est-ce que « l’exit tax », que Macron souhaite supprimer ?", Jérémie Baruch, Le Monde, 2018

23. "L’Exit Tax est-il euro compatible ?", Richard Gaudet, Bayet Avocats, 2016