The U.S. Congress might have a range of incentives to shift from citizen-based taxation to residency-based taxation for Americans living overseas, though such a move would be complex and could face significant challenges.

Let’s break down the potential incentives of changing the Residency-Based taxation system:

1. Simplification and Reduction of Compliance Costs

Currently, U.S. citizens abroad are subject to the same tax laws as those living in the U.S., meaning they must file tax returns and potentially pay taxes on their worldwide income, even if they live and work abroad. Many of these Americans face high compliance costs due to the complexity of U.S. tax laws, including the need to file additional forms like the Foreign Bank Account Report (FBAR) and Form 8938 for foreign assets.

Switching to residency-based taxation could reduce these compliance burdens, as individuals who are truly residing outside the U.S. (but aren’t otherwise involved in U.S. business or economic activity) wouldn’t be subject to U.S. tax laws. This could make life easier for U.S. expats, reducing the tax burden on those living abroad in situations where they don't use U.S.-based public services.

2. Improved International Relations

Many other countries use residency-based taxation, and the U.S. system can sometimes cause tension with host nations. Some countries may view the U.S. tax laws as an infringement on their sovereignty. By aligning more closely with the global norm (residency-based taxation), the U.S. could improve diplomatic relations, reduce friction with other governments, and encourage more favorable trade and tax agreements with its allies.

3. Encouraging Americans to Stay Abroad or Return

The U.S. tax system has been criticized for incentivizing U.S. citizens abroad to renounce their citizenship. A shift to residency-based taxation could reduce this "taxation without representation" sentiment and make it easier for Americans to live and work abroad. This might help retain highly skilled workers, business owners, or retirees in foreign markets who might otherwise seek to abandon their U.S. citizenship due to the tax burdens.

4. Attracting Foreign Investment and Talent

With residency-based taxation, U.S. citizens living and working abroad wouldn't be double-taxed, as is often the case now with foreign earned income exclusions or foreign tax credits. This could help U.S. businesses hire talented people who may not otherwise want to deal with the complexities of U.S. taxes. It could be a boon for innovation and attract entrepreneurs or professionals from around the world to consider moving to the U.S., knowing they wouldn't face complicated tax rules if they worked abroad.

5. Political Pressure from Expats

Expats and organizations like the American Citizens Abroad (ACA) have long lobbied for a shift to residency-based taxation. If Congress is swayed by these lobbying efforts, it could create political momentum to adopt this model. Expats make up a significant voting bloc in certain states, particularly in areas with large overseas communities (e.g., California, New York), and they may push lawmakers to consider reforms.

Challenges & Risks:

.Overall, there are clear incentives for Congress to move towards residency-based taxation, especially for easing the burden on Americans living abroad and reducing compliance costs. However, it would require careful analysis of the trade-offs and adjustments to the broader tax structure to ensure it remains fair and sustainable.

1. Loss of Revenue

   One of the primary concerns for Congress in shifting to an RBT system is the potential loss of tax revenue. Under CBT, the U.S. taxes its citizens on their worldwide income, which provides an extensive revenue base from its citizens living and working overseas. Moving to RBT would mean that the U.S. could lose the ability to tax income earned abroad by its citizens. While there are proposals to address this through other forms of taxation, the short-term impact could be significant.
   

2.  Impact on Government Spending and Social Programs

   A reduction in tax revenue could have far-reaching implications for government spending, particularly for social programs that depend on federal income. Any decrease in tax receipts could lead to cuts in essential services or force Congress to find alternative revenue sources, potentially raising taxes on domestic residents, which could have political consequences. 
   

3. Political Resistance from Conservatives and Nationalists

   For some lawmakers, particularly those with conservative or nationalist ideologies, the concept of taxing only residents may seem to undermine U.S. sovereignty. They might view the current CBT system as a way of maintaining control over U.S. citizens and protecting national interests, both economically and politically. Moving to RBT could be perceived as ceding ground in terms of U.S. citizenship and weakening ties between citizens and their country of origin. 
   

4.  Complex Transition Process

   Changing from CBT to RBT is not an easy or quick process. The U.S. tax system would need to be overhauled, and the IRS would have to implement new mechanisms for determining residency status and ensuring that income is reported accurately. This would require significant investment in administrative changes and could create a period of uncertainty for taxpayers and tax authorities alike. There is also the possibility of increased lobbying from special interest groups and corporate stakeholders who may resist changes to the status quo. 
   

5. Impact on U.S. Citizenship as a Global Financial Asset

   U.S. citizenship offers individuals significant financial benefits, such as access to American financial markets and investment opportunities. Some critics argue that switching to RBT could lead to a perception that U.S. citizenship no longer carries the same value, as individuals might have fewer obligations to the country in exchange for living abroad. This could alter the perceived value of U.S. citizenship in global markets, which some lawmakers might find problematic.

Conclusion

The debate over whether to shift from citizenship-based taxation to resident-based taxation is multifaceted. On one hand, such a change could significantly reduce the tax compliance burden for Americans living abroad, improve U.S. diplomatic relations, and enhance global competitiveness. On the other hand, the move could result in lost revenue, raise questions about U.S. identity and sovereignty, and require a difficult and costly overhaul of tax policy. For Congress, the challenge lies in balancing these competing interests and determining whether the long-term benefits of reform outweigh the short-term costs. 

Ultimately, any change to the tax system would require careful consideration of the financial, political, and diplomatic implications. Given the complexity of the issue and the potential resistance from various factions, Congress will likely approach this topic with caution, weighing both the incentives and disincentives as it moves toward reform.

Sources: 

1. OECD (2023). Taxation and Migration: A Global Perspective. OECD Publishing. 2. U.S. Internal Revenue Service (IRS). Tax Guide for U.S. Citizens Abroad. 3. KPMG (2022). Residence-Based vs. Citizenship-Based Taxation: A Global Comparison. 4. World Bank (2020). Global Taxation Trends and Policy Reform.