Citizenship-based taxation: Just the US and a war-torn country

Reporting from: Los Angeles, California

I love economic competitiveness among governments. That’s why I had always wanted to speak with someone from the only place on earth that shared the stage with my birth country for keeping a tight economic grip on its citizens wherever they went in the world.

My cab driver last night is from Eritrea, the East African nation which declared independence from Ethiopia in 1991 and broke off after a long and bloody civil war.

A year or so ago, Ethiopia began to rattle the saber again, accusing its smaller neighbor of undermining its economy and hinting at a return to arms.

For context, Eritrea is basically surrounded by Somalia, Sudan, and Djibouti – not exactly this year’s most romantic travel destinations.

And while I normally don’t put a ton of stock in the US State Department’s travel warnings, it’s diplomatic protection bureau released a warning about rebel activity in Eritrea’s capital, Asmara, two weeks ago.

Eritrea is notable as the only country in the world, besides the United States, to tax its citizens on the basis of their citizenship. Yep, Eritrea and the United States are the only nations on planet earth to have citizenship-based taxation.

If you’re a US citizen living abroad, you’re still on the hook to Uncle Sam. Ditto for Eritreans. Or so one would think.

While a quick internet search would reveal that the war-torn country of Eritrea’s tax on nonresident citizens is limited to a flat 2%, my inquisitive conversation with the cabbie would reveal a twist.

He was well versed on the issue and quick to correct me when I informed my fellow passenger about his native land’s shared trait with the land of the free. “Our citizen tax is not like yours,” he proclaimed.

For the remainder of our ride, he educated us about the differences between Eritrea and the United States’ policy. His main contention was that Eritrea only imposes the tax on citizens who return home and use government services, like to buy real estate or help a family member with a project or request documents from the government.

The country does not, he insisted, employ a team of pencil-pushers to track down Eritrean expats and demand they pay up.

He said that while he will pay when he goes home to visit in the future, he does not pay tax on his American cab earnings, nor has he ever received a demand letter from Eritrea’s tax authority threatening him to pay up.

It just doesn’t work that way.

Sure, the place has limited resources. But the tax authority’s website lists a scroll of images showing reasons to feel good about “pay[ing] your tax today”, like “providing water to the gate of every citizens”, and another proclaiming their use for “waste management” with an accompanying photo of people standing atop a landfill.

It’s funny that a cab driver from a small, impoverished country would be so knowledgeable about global taxation, but it highlights an important point.

The United States offers a distinct competitive disadvantage for its expats who go abroad to start a business or invest (or work, or retire, or join a liberation army…). The fact that the only other country pegged for economically enslaving its citizens with no possibility of an escape hatch really doesn’t do the same thing speaks volumes.

Who knows, maybe it’s because they’ve been in civil war thirty of the last fifty years. Nothing like a bloody skirmish to keep the tax collector down.

The fact that the country with the world’s second-lowest income per capita and a neighbor with the world’s highest number of pirates per capita gives it’s dual citizens a bit more of a break than the IRS makes you wonder.

Maybe the pirates could help collect the overseas tax.