What gives the IRS the authority to tax US citizens on income earned outside of the United States? Or anywhere else in the Universe for that matter?
The authority does not come form the 16th Amendment, that law that authorized the income tax.
In 1862, The Revenue Act was passed by the US government. It was the first income tax in the nations history; a tax intended to pay for the Civil War. That is, the income tax was a war time measure.
One of the issues going on at the time were draft riots. Exacebating the problem was that many wealthy men could escape the draft. This new tax was propopsed to tax worldwide income. IT was not so much to raise revenue, but so that "Draft dodgers" leaving the US could not escape the US tax system.
When reconstruction ended, so did the Revenue Act of 1862. As the income tax was a war time measure and the war was over, it was held to be improper.
But the government seems to really enjoy getting peoples money, so a new income tax was proposed. The proponets finally got thier wish when the 16th Amendment was passed along with the Revenue Act of 1913.
The Revenue Act of 1913 was silent as to universal tax jurisdiction, so how did this change?
Enter Cook v. Tait 265 US 47 (1924). Mr. Cook was a US citizen living in Mexico City. He had what appeared to be rental income on property located in Mexico City. The IRS said he owed taxes. Mr. Cook said he didn't, as the property was located outside the United States.
This is how the Supreme Court reasoned that worldwide income is taxable:
In other words, the principle was declared that the government, by its very nature, benefits the citizen and his property wherever found, and therefore has the power to make the benefit complete. Or, to express it another way, the basis of the power to tax was not and cannot be made dependent upon the situs of the property in all cases, it being in or out of the United States, nor was not and cannot be made dependent upon the domicile of the citizen, that being in or out of the United States, but upon his relation as citizen to the United States and the relation of the latter to him as citizen.
The Supreme Court claimed (and still does) that for every US citizen, the US government is making earning money anywhere in the world possible. Therefore, it is only fair to tax worldwide income.
Of course this is a terrific lie, but a lie the Court probably did not think twice about — worldwide income is taxable. That's just the way the US does it.
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