Taxation, vol. 1 (1980). 197 As far as non-residents (and non-citizens are concerned) tax may be imposed on some economic gain as long as there is a minimum territorial connection. Id. ("While the discretionary limits on construing such a link are wide, there must at least be some territorial connection, however, small.") The question usually is addressed by asking whether it is reasonable to view the taxing country as being a "source" of the income being subject to tax, even if another country also has sufficient contacts to the same income that it too asserts tax jurisdiction. See Ross, "United States Taxation of Aliens and Foreign Corporations: The Foreign Investors Tax Act of 1966 and Related Developments," 22 Tax L. Rev. 277, 363-65 (1967); Norr, supra, at 438 (nexus or minimum connection issue is more relevant to the question of enforcement and "tax jurisdiction in practice" rather than the issue of "tax jurisdiction in theory"), 198

Inevitably, under all global income and estate tax systems (i.e., those that tax world-wide income or assets), tax consequences flow from an individual's exercise of his right to emigrate (and, in the case of the U.S., the exercise of the right to citizenship), because the jurisdiction of a tax system itself hinges on whether a person is a resident (or citizen) of the taxing country. In contrast to other human rights recognized under international law, it is not possible to divorce tax consequences from a person's exercise of his right to remain in, or exit from, a country (or retain or renounce citizenship). Thus, just as it may be reasonable for a country to provide special tax rules when a person or property enters the jurisdiction of its tax system (such as a step-up in basis 199), one could argue that so also is it proper under international law-i.e., not “arbitrary" for special rules to apply when a person or property exits the jurisdiction of the country's tax system, so long as the special rules are not irrational when compared to the aggregate tax system (i.e., income, estate, and gift taxes) and the underlying motive is to protect the integrity of the system rather than to penalize or prohibit the exercise of the right to emigrate or expatriate.200 The fact that the expatriation tax proposals apply only to built-in gains and exclude real estate (which cannot be removed from U.S. jurisdiction) and parallel the estate tax by providing for a $600,000 ex

197 See also Choate, Hurok, and Klein "Federal Tax Policy for Foreign Income and Foreign Taxpayers-History, Analysis and Prospects," 44 Temple L. Q. 441 (1970) general principles of international law preclude some forms of taxation, similar to the due process limitation in the U.S. constitution that prohibits taxes that are so irrational as to be a "taking" of property); United States v. Bennett, 232 U.S. 299 (1914) rejecting due process challenge to Federal Government's power to tax property owned by U.S. citizen, even though property was outside geographic limits of the United States and had its permanent situs in a foreign country).

198 There is no support for the proposition that, under international law principles, the Macomber concept of "realization" is a limitation on the meaning of the "source" of income for purposes of tax jurisdiction. In order to assert tax jurisdiction, only a minimal nexus is required between the income or property being taxed and the taxing country. See Burnet v. Brooks, 288 U.S. 378 (1933)(finding no constitutional or international law violation where the United States levied an estate tax on foreign securities owned by a deceased non-resident alien simply because stock certificates and bonds were in the possession of other persons located in the U.S. who collected dividends and interest from such foreign securities and deposited the dividends and interest into U.S. bank accounts).

199 Commentators generally have supported the step-up basis provision of the expatriation tax proposals that would apply when aliens enter the U.S. tax jurisdiction.

200 See Letter from Professor Anne-Marie Slaughter, Harvard Law School, to Leslie B. Samuels, dated May 22, 1995 (concluding that S. 700 is consistent with international law: "To the extent that expatriation is a means to the end of tax evasion, it is reasonable and legal for a government to qualify or condition the right of expatriation in such a way as to prevent it from being used for such purpose.")

emption is indicative of an underlying motive to protect the comprehensive U.S. tax system against tax deferral being converted into tax exclusion, rather than an attempt to penalize the exercise of human rights. It is also relevant for international law purposes (even if the logic is somewhat circular) that other countries, such as Australia, Čanada, and Denmark provide for somewhat analogous rules that deem certain assets to be sold when a person is exiting the tax jurisdiction of the country. (See Appendix B infra.) Moreover, the absence of any special rules to make adjustments when a person exits the jurisdiction of the United States tax system could be viewed, in present-value terms, as the imposition of a burden on those who do not exit the jurisdiction of the system because they exercise their human right to retain U.S. citizenship or residency. In sum, viewing the objective and design of the proposals as an attempt to neutralize the tax consequences that flow under United States tax laws from the decision to retain or renounce citizenship,201 it is difficult to conclude that the proposals would be an arbitrary infringement under international law, even though some techniques remain for those who retain citizenship to effectively exclude some gains from Federal income or estate taxation.202

Public perception issues

In view of the lack of clearly defined, objective standard for judging whether the expatriation tax proposals constitute an arbitrary infringement on the rights to emigrate or expatriate recognized under international law-and the difficult conceptual issues in examining the present value of future tax burdens-it seems inevitable that debate will continue as to whether the proposals amount to "exit taxes" that conflict with customary international law. Even if a general consensus is reached on the issue among academic scholars, differences in opinion will undoubtedly remain among others. Accordingly, as some observers have noted, Congress may wish to consider how the proposals will be perceived in comparison to the rights to emigrate and expatriate, even if a close examination of the issue leads to the reasonable conclusion that there is no technical violation of either right. Efforts by the United States, other countries, and private organizations to promote adherence to human rights principles could be undermined by the mere fact that

201 Tax consequences (taking into account global tax consequences from all potential tax jurisdictions) from the decision to retain or renounce U.S. citizenship may be neutralized in the case where a person is considering relocating to a tax-haven country; but this would not be true if an expatriate moves to a country with a tax system comparable to that of the United States and mechanisms are not available to prevent double taxation. See Part V.F infra. In the latter case, one could argue that the combined effect of the two countries' overlapping tax rules as applied to a particular case could constitute an arbitrary burden on the right to emigrate or expatriate. Such an argument would be somewhat novel in view of the historical position taken by commentators that double taxation does not violate principles of international law. See footnote 188 supra.

202 It would be difficult to argue that special tax rules which end tax deferral at the time of exit are "arbitrary" under principles of international law on the ground that they do not take into account that, despite the general rules of the income and estate tax regimes, there are tax planning techniques available for those who remain within the system to effectively convert tax deferral on some economic gains into tax exclusion. Stated in a different way, it is difficult to say that it is "arbitrary" for international law purposes to prevent expatriation from being a route to tax exclusion merely because limited routes to tax exclusion are available, under certain fact patterns, for those who officially remain within the jurisdiction of the U.S. tax systems. The existence of "loopholes" in a system should not elevate the conversion of tax deferral to tax exclusion to the level of a right under international law.

some will argue that the expatriation tax proposals are analogous to "exit taxes" or other practices engaged in by regimes that historically have not respected the right to emigrate or expatriate under international law. 203 Thus, in examining the policy issues weighing for and against the expatriation tax proposals, 204 Congress may wish to add to the list of policy issues weighing against the proposals the possible detriment that could result to the promotion of human rights merely from how enactment of the proposals would be perceived throughout the international community.

203 See Testimony of Rabbi Jack Moline before the Subcommittee on Oversight, Committee on Ways and Means, March 27, 1995 (“For while we Americans may understand the fine lines we draw regarding income, assets, capital gains and tax liabilities, foreign dictators will find them irrelevant."); Letter from Professor Abram Chayes, Harvard Law School, to Honorable Daniel Patrick Moynihan, dated March 30, 1995 (“If the United States now adopts this restrictive approach, it will give oppressive foreign governments an excuse to retain or erect barriers to expatriation and emigration."); Letter from Professor Robert F. Turner, U.S. Naval War College, to Honorable Daniel Patrick Moynihan, dated April 29, 1995, at 4 ("If the United States can by act of law pretend that its expatriates 'sold' their property, what is to stop other States from pretending that their expatriates 'donated' their property to the State? I don't see the distinction.")

204 Another issue of public perception that Congress may wish to consider could include the positive effects on the United States Government's image from enacting legislation that is designed to prevent tax evasion which could result under present law when persons renounce U.S. citizenship and move to a so-called "tax haven." See Norr, supra, 17 Tax L. Rev. at 458-59 (referring to enactment of CFC rules in 1962: "[T]he effect of the anti-tax-haven legislation on the American image abroad may be salutary. We must recognize that there is an image abroad of the American as tax-avoider. . . .Thus, the proposed legislation would seem to be not only constitutional, but would seem to be desirable in the national interest as well."); Ross, supra, 22 Tax L. Rev. at 342 (referring to enactment of 1966 Act, including section 877: "[T]he practical impact of the new rules will be largely to demonstrate that the United States does not permit itself to be used as a 'tax haven'").

E. Possible Effects on the Free Flow of Capital into the United States and on the Free Trade Objectives of the United States

1. Overview

There has been no systematic study of the economic effect of the existing exit taxes (e.g., Canada and Australia 205) or of regimes that attempt to tax former residents after they have taken up residence in another country (e.g., Germany,206 present law in the United States). The experience of countries that currently impose exit taxes or that currently attempt to tax former residents may be of limited utility in analyzing the Administration proposal, the Senate amendment to H.R. 831, or S. 700 and H.R. 1535, because those foreign countries' tax provisions relating to expatriates are of more limited scope, sometimes applying to a narrower class of assets or the provisions operate in a substantially different context. For example, the Netherlands' provisions apply primarily to sales of substantial interests in a business and France's taxation of expatriates applies only to those former residents who relocate to Monaco, while the exit taxes in Australia and Canada operate as part of tax systems that tax accrued capital gains upon the death of the taxpayer, but otherwise do not impose an estate tax.

In general, exit taxes or tax systems that tax former residents may be expected to affect taxpayers' choice of their country of residence and their country of citizenship. The movement of individuals from one country to another may affect the supply of labor and labor income, in both the country gaining the individual and the country losing the individual. However, the aggregate effects are likely to be small unless the migration plans of a large number of individuals are affected. As individuals migrate, they may or may not relocate their physical and portfolio assets to their new country of residence. Again, the aggregate effects are likely to be small unless the migration plans of a large number of individuals are affected. Moreover, while labor income can only be earned at the physical location of the migratory taxpayer, investment income reed not be earned where the migratory taxpayer is located. The Administration proposal regarding the taxation of certain expatriating citizens and residents would not be expected to have significant effects on the flow of investment funds into or out of the United States.

The United States has long been an advocate of free and open trade in goods and services among countries and has promoted the free flow investment among countries. The United States also long maintained that income resulting from such trade and investment may legitimately be subject to tax both by the United States and foreign countries, and has entered into tax treaties providing for equitable taxation of such income. 207 The Administration proposal,

205 Denmark also recently has imposed what might be considered an exit tax. For a description of the tax regimes of Australia, Canada, and Denmark, see Appendix B.

206 Appendix B describes the tax regimes of those countries that attempt to tax former residents.

207 See Part V.G. for a discussion of the potential interaction of existing U.S. tax treaties with the Administration proposal.

while it may alter the pattern of international investment, does not close U.S. borders to the flow of goods, services, or investment.

2. Cross-border movement of individuals in response to tax changes

a. In general

Some economists have argued that among the many factors influencing an individual's choice of residence is the mix of taxes the individual must pay and the public services he receives. If different jurisdictions offer differing amounts of public services and taxes, then one could conceive of individuals "shopping" among jurisdictions to select their most desired package of taxes and public services.208 An implication of this analysis is that a change in either the taxes assessed or public services offered, all else equal, may change the locational choice of some individuals. The Administration proposal would change the "tax" component of the U.S. fiscal package leaving unchanged public services and other factors that might influence an individual's locational decision.

Treating taxes and public services in different jurisdictions as packages between which potential migrants might choose suggests that there will always be some migration motivated by comparison of different countries' fiscal packages. Moreover, unless all countries charged fees based on the cost of government services provided, or if all countries imposed the same taxes and provided the same government services, there is no policy, either tax or spending, that one country could unilaterally impose that would eliminate migration motivated by individuals shopping for a different fiscal package. The problem does not arise solely because the tax base is broader in one country than another, although such differences could affect the incentives to migrate. The potential for migration arises because the time at which the taxes are collected is not the same time at which the public services are provided and some of the taxes collected may provide no public services but rather be transferred to other individuals.209 If for example, the public services are provided to individuals early in their life (e.g., education) while the taxes are collected late in their life (e.g., estate taxes) in country A while country B collects payroll taxes on young workers to provide medical care for the elderly, an individual could benefit by working and attending school in country A and retiring to country B.

Any change in the package of taxes and public services potentially affects the locational decision of two different individuals: individuals in the United States who might consider emigrating from the United States and individuals outside the United States who might consider immigrating to the United States.

208 Charles Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy, 64, 1956, pp. 416-424.

209 See Jagdish N. Bhagwati and John Douglas Wilson, "Income Taxation in the Presence of International Personal Mobility: An Overview," in Jagdish N. Bhagwati and John Douglas Wilson (eds.), Income Taxation and International Mobility, (Cambridge: The MIT Press), 1989, pp. 5-6, for a discussion applying the benefit principle of taxation on a lifetime basis as compared to the ability-to-par principle.