Buying In: Residence and Citizenship By Investment
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Italy recently announced a new immigration program that invites certain high net worth individuals to make Italy their country of residence, enticing them with the right to pay a “substitute tax” of €100,000 per year on their foreign income and gains. For those already residing in Italy, the highest marginal tax rate on income is 43%, with additional regional and municipal rates bringing the rate closer to 50%; capital gains are subject to a reduced rate (about half the regular rate). Assuming eligible immigrants have significant foreign income and gains that would otherwise face the highest marginal rates of tax, the new program’s outcome would seem to ensure that prior residents face a significantly higher overall tax bracket than their new neighbours (unless of course, such individuals use other mechanisms and programs, whether in Italy or elsewhere, to also reduce their own tax rates).
Why would Italy design a tax scheme that appears to privilege certain immigrants over its other taxpayers in this manner? In reporting on the program for Forbes, journalist David Schrieberg stated that “[s]ome observers speculate that the new tax regime is aimed particularly at super-rich individuals considering a Brexit-induced change of residence.” Schrieberg further acknowledged that Italy is not innovative in this respect: “Various countries including Portugal, Malta, Cyprus and Ireland have been chasing high net worth individuals with various incentives.” In fact, much of the world is engaged in an intense competition to make wealthy individuals their own tax residents, luring them away from rival countries.
International law and political theory scholars have long wrestled with the normative implications of commodifying citizenship and access to immigration with pay-to-play visa programs, but the analysis does not typically consider the role the tax system plays or could play in valuing these schemes, nor how such schemes might impact the tax regime in terms of gross revenue or distributional effect. Yet governments increasingly appear to view their tax systems as a means of potentially increasing the value of residence and citizenship in their countries. The decision to define nationality to fulfill strategic aims may be viewed as consistent with the principle in international law that states are free to define their nationality as they see fit, and that other states should recognize these determinations unless they conflict with other international legal principles.
Given the cost involved in forfeiting revenue from those arguably most able to pay, whether the programs actually produce the predicted outcomes, is one obvious question to be asked. Even if the programs, in fact, achieve their goals, questions surely arise regarding the normative justification for using the tax system to lure the wealthy away from other countries in this manner. Does the normative case differ when applied to humans as opposed to companies, which are routinely lured by many countries with various kinds of tax incentives? Does it differ when the luring state is richer or poorer relative to the countries of origin of prospective immigrants? Sketching out a framework for analyzing these questions from a normative perspective requires a sense of the various competing programs on offer.
This Essay takes a first step by comparing national programs that use their taxing power in some manner to attract immigration. The aim is to highlight some of the factors that raise normative questions about the appropriate design and uses of a tax system. The Essay concludes that these questions are worthy of further study as increased competition to attract the wealthy is likely to continue going forward.
*H. Heward Stikeman Chair in the Law of Taxation, McGill University Faculty of Law. This research was assisted by a grant from the Social Science and Humanities Research Council of Canada. Thanks for helpful comments on an early draft are due to Montano Cabezas, David Lesperance, Henry Ordower, Peter Szigeti, and the participants of the Sanford E. Sarasohn Conference on Critical Issues in Comparative and International Taxation II: Taxation and Migration, Saint Louis University, 31 March 2017; as well as to Jake Heyka and Stephen Albers for excellent research assistance.