The Swiss just abolished a deeply unfair tax. Could the United States be next?

For over a century, if you owned and lived in a house in Switzerland, the government would add a fictional amount to your taxable income. This "imputed rental value" was considered a benefit to be taxed. As a result, your income tax was calculated on more than what you actually earned.

By Karl Steinke

On September 28th, the Swiss people voted to abolish one of the world's most peculiar and unfair taxes: the "imputed rental value" tax.  This century-old levy, which taxed homeowners on a fictional income—the rent they would have to pay if they were renting their own home—is on its way out. This great news for Swiss homeowners should serve as an inspiration for U.S. lawmakers looking for ways to end the unique and unjust taxation of Americans living abroad.

The Swiss problem (A perfect analogy)

For over a century, if you owned and lived in a house in Switzerland, the government would add a fictional amount to your taxable income. This "imputed rental value" was considered a benefit to be taxed. As a result, your income tax was calculated on more than what you actually earned. This was a confusing, bureaucratic, and often costly system.

Take the example of a U.S. citizen living in Switzerland with an income of 100,000 Swiss Francs. If their home had an imputed rental value of 50,000 Francs, they would pay Swiss income tax on 150,000 Francs.

The U.S. tax trap

The problem is compounded for Americans. Unlike most countries, the U.S. taxes its citizens on their worldwide income, regardless of where they live. So, our hypothetical U.S. citizen must then file a U.S. tax return even if they have no U.S. income.  The U.S. provides a Foreign Tax Credit (FTC) to prevent double taxation. But the credit only applies to taxes on "income." And a tax on a fictional, "imputed" benefit isn't considered a tax on income by the IRS.

The Swiss tax authority doesn't provide a breakdown. It just sends a bill. This forces Americans into a legal and financial quagmire, trying to argue what portion of their Swiss tax bill is creditable in the U.S. It's a question so complex that tax experts charge hundreds of dollars an hour and may still provide five different answers.

This is just one example of the fundamental incompatibility between the U.S.'s citizenship-based taxation and the rest of the world's residence-based taxation systems. It forces millions of Americans living overseas—whether they're expats, military families, or dual citizens—into a labyrinth of complex and often unfair tax rules.

An outdated, burdensome system

The Swiss government recognized that taxing a fictional benefit was an outdated and burdensome system. The fact that they are now moving to abolish it is a testament to their commitment to tax fairness and simplicity.

For too long, the U.S. has clung to its anachronistic tax laws for Americans abroad. The Swiss referendum shows that a democracy that respects its citizens can and should reform its tax code to be more equitable. Let's hope that the U.S. government will take a page from the Swiss playbook and finally get rid of the unfair and burdensome extraterritorial taxation of Americans living overseas.

A proposal to this end is already making its way through Congress: Rep. Darin LaHood’s Residence-Based Taxation for Americans Abroad Act, which gives Americans overseas the option of asking the IRS to leave them alone. It answers a campaign pledge of President Trump to end the double taxation of Americans abroad, and recently won the support of none less than President Trump’s former IRS Commissioner, Charles Rettig and his then-counselor, Tom Cullinan, both of whom have posted about this on social media this week, as well as Senator Todd Young of Indiana. 

Tax Fairness for Americans Abroad urges Congress to start coming to grips with the many injustices of the current U.S. tax system for Americans abroad now so that it is ready to debate and vote on Mr. LaHood’s proposed solution in the months to come.