I think the statement that US citizens have to pay US taxes on income earned outside the US, even if they are living outside the US is inaccurate.
I believe a more accurate statement is that all US citizens have to file a US tax return annually and whether (or not) they have to pay US taxes is determined by their overall tax status.
It is my understanding that if the citizen is permanent resident outside the US (let me say Canada) and all their income is earned in Canada, then that income is taxed in Canada first and that money goes to the Canadian governments (federal and provincial) first. When the citizen files the US tax return (IRS form 1040), the taxes paid to the Canadian governments become a tax credit on line 47 of IRS form 1040.
If the taxes paid in Canada exceed the taxes are calculated for the form 1040, then no taxes will be due to the IRS. If the taxes paid in Canada are less than the taxes computed on the IRS form 1040, then the US citizen will have to pay the difference to the IRS.
There are tax treaties between numerous countries and the US to this effect.
Given that the US has one of the lowest personal income tax rates on the planet (at least for developed countries) and almost every socialist democracy has much higher personal tax rates than the US, it is almost certain that any US citizen living in a socialist democracy will not be paying US taxes --- but will still be required to file their annual IRS tax return.
I assume a US citizen resident in Mexico might not pay as much income taxes as they would if they were in the US.
And if a person earns income in a country where they are a non-resident, there is often a "withholding tax" applied in the country of earnings - which again goes on line 47 of the IRS tax form.
Its about having a cake and eating it too ...
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