Would Individuals Renounce Their US Citizenship to Avoid Tax Compliance Costs? An Experiment on the Impact of the Foreign Account Tax Compliance Act (FATCA)

Abstract

The cost of compliance is an essential variable to consider when administering a tax system. One recent study estimates that the yearly federal tax compliance burden in the US exceeds $431 billion dollars, and this cost does not include the potential greatest cost of all – changes in taxpayer behavior that reduces economic efficiency (Laffer, Winegarden, & Childs, 2011). One example of such behavior is the renunciation of US citizenship due to the impact of the Foreign Account Tax Compliance Act (FATCA) reporting requirements. Using this context, our study examines how FATCA compliance costs can affect taxpayer behavior in a manner that reduces economic efficiency. We collected responses from 197 experienced US taxpayers living in the US. Our study finds that when tax compliance costs are high, taxpayers may be more likely to renounce their citizenship to avoid FATCA reporting requirements. We further learn that tax compliance costs may increase the likelihood of citizenship renunciation even in the presence of a minimal US tax burden. Supplemental mediation analysis demonstrates that one's perceived fairness of compliance does not mediate the effect of high compliance costs on a taxpayer's renunciation decision; however, one's perceived fairness of compliance and fear of sanctions, collectively, partially explain the effect of tax burden on the renunciation decision. In addition, we find that ethics, the perceived probability of detection, and average income level affect the decision to renounce citizenship. Our findings suggest broader impacts of tax policy and provide a foundation for future research to further explore domestic and foreign tax compliance behaviors.

Citation

Lee, J.E., Correia, C., Correia, J. and Axelton, Z. (2023), "Would Individuals Renounce Their US Citizenship to Avoid Tax Compliance Costs? An Experiment on the Impact of the Foreign Account Tax Compliance Act (FATCA)", Hasseldine, J. (Ed.) Advances in Taxation (Advances in Taxation, Vol. 30), Emerald Publishing Limited, Leeds, pp. 105-144. https://doi.org/10.1108/S1058-749720230000030004