American Citizens Abroad reports about over 40 years of us economic self-destruction.
(emphasis mine) [my comment]
The worldwide tax system currently employed by the United States is the world's most unusual self-destructive economic weapon. The damage this export tax on U.S. citizens causes is immense and grows greater each year.
The decision to introduce this new tax system was brought to Washington with the wave of innovative enthusiasm of the early days of the Kennedy administration. Curiously, it has become so mesmerizing that no Republican or Democratic successor administration has seriously considered just eliminating it.
Thus, despite calls to repeal this tax, even by the President's own Export Council, it has survived and continues to severely damage the American economy, year after year. To justify such a tax despite its obvious negative consequences, the Treasury Department [the treasury department should be abolished (yes, I know this isn't possible)] and many in the Congress have now been reduced to alleging that overseas Americans are at best just simply "irrelevant" to U.S. trade.
THE NATURE OF THE LEVEL PLAYING FIELD CHALLENGE
How the Major Trading Nations Have Never Used an Export Tax on Their Overseas Citizens To Impede Their Ability to Compete in World Markets
The major trading nations of the world, most of whom are members of the Organization of Economic Cooperation and Development (OECD), have adopted three basic approaches to the concept of a level worldwide playing field.
Positive Tilt Countries: These countries believe that their overseas citizens should enjoy a privileged competitive position in world trade. Citizens of these countries enjoy the enviable status of "most favored competitors" in all world markets. None of the "positive tilt" countries taxes the foreign source income of its overseas citizens. Furthermore, they have established special benefits that give their citizens considerable advantages in competing when abroad. Such benefits include, for example, subsidizing schools abroad and making provisions for overseas citizens to receive social security and unemployment benefits.
Level Playing Field Countries: Other countries believe that international competition should be fair and equal for everyone working in the same local market environment. Citizens of these countries enjoy the ubiquitous status of "equal opportunity competitors". They do not make any special provisions to provide their overseas citizens with special competitive advantages, but they try to ensure that their overseas citizens do not suffer any competitive disadvantages either. The "level playing field" is assured because these countries do not tax their overseas citizens on foreign source income while they are living and working abroad.
The Negative Tilt Country: The United States alone puts its overseas citizens into a severely handicapped position in world markets. For more than forty years, the U.S. has implemented a worldwide taxation system for individual U.S. citizens (and green card holders) living outside the United States. With this self-imposed negative tilt in the playing field, citizens of the United States, endure the unique status of "least favored competitors" in world markets. This has been a triumph of dogma over competitive equity and common sense. Despite repeated calls to repeal this economically self-destructive tax by the President's own Export Council, by many American companies, and especially by many overseas American organizations, this stubborn dogma has continued to dominate the debate and damage the American economy.
THE DIMENSIONS OF THE CHALLENGE
From a domestic economy perspective, foreign trade today represents about 25% of U.S. Gross Domestic Product (GDP). This means that nearly one in every four jobs in the United States now depends directly or indirectly on imports or exports. The United States has now accumulated a trade deficit of more than $ 3.5 trillion, currently growing at a rate of over $500 billion per year. The U.S. trade deficit is now running at more than 5 % of US GDP, an alarmingly high level which continues to grow every year. We are, in effect, becoming increasingly dependent on the generosity and indulgence of foreign investors and suppliers to our domestic economy. So far, they have been willing to accept U.S. dollar surpluses, but they also increasingly control the fate of our economy and our future financial stability.
WHAT CAN BE DONE?
Turning this situation around will be very difficult as many dynamic forces of international competition are at play. But one key factor is essential to help reverse the trade gap. The United States must recognize that its overseas citizens in the private sector are its finest and most effective assets in the promotion and protection of American interests everywhere in the world, and treat them accordingly. It should simply give them once again the chance to compete everywhere without any U.S. Government imposed handicaps.
"THE UN-LEVEL PLAYING FIELD"
How the Export Tax on U.S. Citizens Tilts the International Playing Field to the Disadvantage of all Americans and What to do About it
The export tax on U.S. citizens that is used today by the United States is the most unusual form of self-imposed competitive handicap the modern world has ever seen. The damage it causes is immense and grows greater and greater each year. Most remarkable of all, this punitive legislation it is not targeted against any enemies of the United States, but only against our own citizens. The damage, however, affects our entire n ational economy, and our ability to promote and sell American products and services in foreign markets.
But it is not just a question of economic competition, or export related jobs, either. It also affects the ability of U.S. citizens, of working age and retirees, in all walks to life, to be able to live and work among all of the peoples of the world, learning from them, sharing our ideas and ideals with them, and helping to bring peace, democracy, understanding and multiple dimensions of prosperity and tranquility everywhere.
The decision to introduce this new draconian approach to expatriate treatment was made early in 1962, but it had been discussed for quite some time, ironically even as a potentially clever way to protect domestic jobs. Today, it has become so enshrined in American practice that no subsequent administration has been able to eliminate it, despite its many evident negative consequences.
Consider, just for starters, the following results from an export and jobs perspective:
¨ Worldwide taxation creates an un-level playing field everywhere in the world except the United States itself, and the victims of this competitive infirmity are not foreigners but only Americans.
¨ Worldwide taxation is nothing other than "an export tax on American labor". As such, it gives a very strong incentive to both U.S. and foreign corporations to reduce to a minimum the number of U.S. citizens on their payrolls abroad.
¨ Because of this passport related penalty, more and more overseas entities of U.S. and foreign corporations are being manned and run by non-Americans.
¨ This tax led to the massive destruction of jobs for U.S. citizens abroad. More than twenty years ago estimates of the scale of such job loss put the total in the many tens of thousands. Today they are easily in the millions.
¨ This loss of jobs feeds back into the manufacturing and service industries within the United States. Americans working abroad help market and sell American products and services overseas. Loss of jobs hampers the competitiveness of American companies against foreign competition.
¨ There is a growing impoverishment of foreign experience within the American workforce itself. More and more domestic U.S. corporations now have to compensate by hiring foreign employees with international market experience to fill export related jobs even in the United States. We are insourcing foreigners to fill jobs that Americans are no longer qualified to fill at home because there are so few with actual overseas experience. [This is truly sad]
¨ Important decisions about purchasing raw materials and components for assembly by American companies abroad are now being made more and more by non-Americans. These inevitably lead to preferences for suppliers from the home countries of these foreign buyers. This, in turn, means that many jobs that could and should have been created in the United States for inputs to American corporate activities abroad are killed before inception.
¨ The United States today has the world's largest and most chronic trade deficit which aggregates now to more than $3.5 trillion. It is growing at an annual rate of over $500 billion. In comparison, the revenue gain to the United States from the taxation of the overseas income of US citizens is trivial, equivalent to less than one half of one percent of our current trade deficit, and only about one-tenth of one percent of total annual government revenues.
¨ The very concept of worldwide taxation of American citizens is the ultimate irony. The Revolutionary War, which gave birth to the United States, was sparked by a dispute between British expats and their home country over exactly this same issue. It was not right or beneficial then when the stakes were so much smaller. It is truly suicidal today.
In this brief paper, a few of the dimensions of this novel form of self-destructive behavior will be addressed. Such a study should make it clear why no other country in the world has ever been tempted to impose on itself such conditions.
One of the challenges of trying to tax the income of individuals living in other countries lies in defining what income to tax and how to define this income so as to be relevant to U.S. tax rules and practices. After wrestling with this for several years, it was finally decided that the currency you use on a daily basis abroad does not matter; as a U.S. taxpayer you live in a dollar world. Essentially what you earn or spend in a foreign currency is actually taking place in dollars, in an amount that must be defined at a rate applicable for the day each transaction takes place. There is a massive accounting and bookkeeping challenge involved here.
But this also raises the thorny question of how to treat fluctuations in exchange rates during a given year? For example, during the last couple of years the dollar has risen and fallen considerably within the space of any twelve-month period. If you are paid in a foreign currency and the dollar falls with respect to this currency, it will appear as an increase of taxable income. Meanwhile your foreign situation has not changed at all. In economic reality terms your daily life has not changed - your income is the same and so are your expenses. But once these are translated into U.S. do llars the amounts may change considerably.
If it appears that your income has gone up, your U.S. taxes will follow likewise. Hence, overseas Americans are not only subject to double taxation but are also required to assume a foreign exchange risk to cover their tax obligations. Lest this be considered but a trivial problem, exchange rates in Europe and Asia have recently moved up or down by more than 20% in any one year. During the 2 year period from the end of 2001 to the end of 2003, the value of the dollar against the Euro changed by 40%! And in 2004, the dollar declined another 7 % against the Euro.
2. BLOCKED INCOME
Another problem can arise when an overseas American is living and working in a country whose currency is not legally convertible into dollars. While U.S. tax laws recognize that problems can arise in such a situation, they also view the use of any blocked income to pay for your normal living expenses as the act of its unblocking. Once unblocked, this foreign currency is subject to U.S. tax payments, which must be paid in U.S. dollars and without delay. In reality terms, however, such a unilateral decision by the U.S. Government does not change the problem: the foreign currency is still blocked and still not legally convertible. If the government of the country of residence does not follow the same bizarre logic and suddenly allow conversion into dollars, what are you supposed to do? There is still no sensible answer today. An overseas American in such a case is forced to violate either the laws of his country of residence, by obtaining dollars on the black market to pay the IRS, or of the United States, by not paying the tax. [... A government which places its citizen in these types of situations deserves to collapse...]
3. DEFINING CAPITAL GAINS
Another problem arises when you purchase an asset or some physical property abroad, for example a house. For capital gains purposes, you are assumed to have purchased this asset in dollars at the exchange rate in effect on the day of purchase. But, when you sell the asset you are assumed to have carried out the transaction as of the exchange rate in effect on the date of sale. What happens if you actually lose money on the transaction, but appear to have made money when the purchase and sale are calculated in dollar equivalent values on different dates? You could well end up paying a significant amount of capital gains tax on a gain that in economic reality terms never existed. One interesting example of how this works concerns homes purchased entirely with borrowed money. The amount of phantom capital gain on the sale of a home, which appears when the buying and selling are converted into dollars, is held to be validly taxable. However, the phantom capital loss on the payback of a loan in a foreign currency (with the same exchange rate difference but in the opposite direction) is deemed invalid. The Tax Count has ruled that these are separate transactions and one could not offset the other. This is voodoo taxation of the first rank.
4. DEFINING FOREIGN TAX CREDITS
Ideally, to be really equitable, U.S. tax laws should take into account the economic reality of local conditions in each country of the world. This would be a nearly impossible burden on the IRS, of course, so instead some general rules are used which though relevant in some countries are very inappropriate in others. For example, what foreign tax already paid abroad can be used to offset taxes due to the United States on the same foreign source income?
In some countries, value added taxes are used as the primary source of revenue and may be imposed at a rate of more than 20% of the value of a transaction. Many of these countries collect much more revenue per capita today through these indirect taxes than via any direct income tax. But the United States does not recognize this kind of tax payment as creditable against U.S. tax liabilities on the same income. The U.S. feels it is being consistent with practices in the United States. This may be correct, but it is a comparison of apples and oranges; comparing the U.S. to the U.S. is not a relevant frame of reference for life in a foreign country. In terms of economic reality, such circumstances lead American citizens overseas to be taxed twice on the same income, without any U.S. tax credit given for these foreign tax payments. Another example concerns individuals living in countries where capital gains are not taxed, but where total wealth is subject to annual taxation. Because the United States taxes capital gains but not wealth, the U.S. citizen will have to declare and pay a U.S. capital gain on all relevant transactions, but cannot claim any credit for taxes that have been paid on their wealth. Here again, in economic reality terms, the U.S. taxpayer is subjected to incompatible norms and comes out the loser, even compared to Americans back home.
THE IMPACT OF WORLDWIDE TAXATION ON CORPORATE PERSONNEL DECISIONS
While corporate personnel decisions are never made solely on the basis of whether or not an individual has a double tax liability, this can nevertheless play a significant role in such decisions.
ŕ Americans vs. non-Americans as job candidates: Consider, for example, the following case. Two individuals have nearly identical educational backgrounds, skill sets and experience. Both have the same gross foreign salary. But one gets to take home a lot more money than the other because one has an income tax obligation only to his foreign country of residence, while the other has a double taxation obligation to two sovereign countries. This may not only leave the overseas American with less take-home pay, but actually make it impossible to survive abroad.
ŕ Reimbursement: If the corporation tries to be fair and guarantees all of its employees the same take home pay for the same gross salary, then the corporation has to step in and pick up the additional U.S. tax liability of its overseas American employee. Not only is this an extra cost, but it is escalating with every passing year. When this U.S. tax is reimbursed to the U.S. employee the following year, it too is deemed to be taxable income — a tax must then be paid on the reimbursed tax. Such a process has no end making reimbursement in effect impossible.
ŕ Allowances: In addition, many overseas assignments are in conditions that are far below those that a U.S. citizen would have had back home. Corporations, therefore, frequently offer extra allowances for the education of children, home leave, etc. But, here again, these allowances cannot be used to their full value because the U.S. Government wants its share of all of this too - the home leave value, the value of the child's education grant, etc. So these also have to be grossed up. Even modest base incomes abroad, therefore, can quickly become much greater taxable income amounts when these allowances are added in.
ŕ The only rational choice for corporations: Now, consider the temptation of a corporate manager abroad under pressure to maintain profitability. By merely replacing an American with someone of any other nationality, a company can save perhaps 30-40% in the personnel budget. This may not only be hard to resist, but might also be essential for the business to remain competitive and survive. And this incentive to get rid of the U.S. employee is due exclusively to the export tax on American labor that has been imposed unilaterally by the U.S. Government.
One only has to look at how the structure of the executive ranks and the work forces of American companies have evolved during the last couple of decades to see how effective this disincentive to hire a U.S. citizen for employment abroad has been. According to the U.S. Department of Commerce, the number of U.S. citizens employed by foreign affiliates of U.S. multinational corporations dropped in half from 1977 to 1999. By 1999 (the latest year available for the statistics), only 20'000 Americans were working for U.S. multinational corporations abroad.
WHY IT MATTERS IF AN AMERICAN FILLS A JOB ABROAD
There are many situations in which it can make a very big difference to the American economy and to the creation or loss of jobs in the United States, if it is an American who plays a key role in the decision making processes of a company. Here are just a few examples:
1. FACTORY LOCATIONS AND CORPORATE PARTNERSHIPS
One example is the process by which a corporation decides whether to close a factory in the United States or abroad. If the U.S factory is a subsidiary of a foreign corporation, the final decision can depend not only on the rational factors in the decision-making process, but also on the inevitable chauvinism and loyalty factors of the participating decision-makers. Having an American present during such deliberations to defend a factory in the United States can help protect jobs back home. The same set of factors operates in corporate decisions for longer-term development partnerships, acquisitions, divestitures, etc.
2. CORPORATE PROCUREMENT DECISIONS
A similar sensitivity occurs when an American in a key procurement job is replaced by someone of another nationality. While some key raw materials and components are controlled by standard worldwide factors, many others are within the purview of the local procurement department. An American in a key job can help steer such decisions toward the American suppliers he/she knows and trusts. His/her replacement by someone of another nationality can just as easily, and will in fact is most likely, steer such purchases to a non-U.S. source better known and trusted.
3. CORPORATE CAREER DECISIONS
Finally, Americans in senior executive positions can have a very important influence on who gets chosen for continuing education, promotion, assignments in emerging markets, and top management positions. Those with significant foreign market experience will often be chosen over those without such experience. By making it highly unattractive for American and foreign companies to hire an American to work abroad, the U.S. puts an additional block on new jobs for Americans in important posts both at home and abroad.
THE PRESIDENT'S EXPORT COUNCIL WARNED OF THE DANGER AND DAMAGE ALREADY IN 1979
In 1962, when Congress introduced the worldwide taxation of the income of U.S. citizens who were bona fide residents of a foreign country, foreign trade (imports and exports combined) represented only 9% of U.S. Gross Domestic Product (GDP). The United States even enjoyed a small positive trade balance of $3 billion which was the equivalent of 0.6% of GDP.
The toxic effect of this disincentive to working abroad was a slow but steadily accumulating poison in the American economic system. By 1979, the symptoms were becoming much more apparent: the United States had just experienced its seventh trade deficit in nine years and trade had doubled in importance to represent more than 18% of American GDP
[IN 1979] The President's Export Council, whose members included Senators Jacob Javits and Adlai Stevenson, Congressman Bill Alexander, the Governor George D. Busbee of Georgia, and the Chairmen of Sperry Rand, Gould Paper, Jefferson Mills, and Armco, decided it was time to take a closer look at how the taxing of overseas Americans might be contributing to this trade deficit problem. [You can see this report further below]
[In December 1979, the President's Export Council issued a report to the President in which it stated that "Americans are being taxed out of competition in overseas markets. The re sult is a sharp loss in the U.S. share of overseas business volume in vital economic sectors. The current situation contributes to our negative balance of payments, a loss of U.S. jobs to competitors and the decline in the U.S. presence and prestige abroad."
The President's Export Council recommended "...enactment of a new tax law to put Americans working overseas on the same tax footing as citizens of competing industrial nations."]
... subsequent history has shown that Mr. Jones and his Export Council were correct and the implementation of their recommendations could have made a difference. Consider the following:
The United States has never since had a trade surplus. Imports and exports continue to grow in importance and now represent nearly 25% of GDP. Between 1980 and 2003, trade deficits aggregated to more than $ 3.2 trillion. By 2003, the trade deficit alone was equal to more than 4% of US GDP. In 2004, it jumped to nearly 6 % of GDP.
WHAT SHOULD BE DONE?
This is but a very brief overview of a complicated and challenging issue. And, of course, it merits a lot more study and cogitation. Yet, in essence, it can be reduced to a couple of basic principles. It is not purely by chance that no other major country of the world has chosen to follow in our footsteps. Seen from their point of view, U.S. taxation of its overseas citizens is one of the most self-destructive trade and employment strategies any major country has ever adopted. But at the same time, it is also an extraordinarily generous gift, offered benevolently by the United States to everyone else, allowing their citizens to enjoy a very big competitive advantage over U.S. citizens in all of the markets of the world. Since none of their citizens even have to pay taxes to their home country on their foreign source income while living and working in the United States, they can compete on a level playing field everywhere. What, then, should be done? Well, we could go back to the wisdom of the founding fathers. We could give U.S. citizens a chance to once again compete on a level playing field everywhere on this little planet of ours.
IT IS A VERY LOW-RISK, HIGH REWARD PROPOSAL
Let's assume that the President's Export Council in 1979 knew what it was talking about. If so, it is at least worth experimenting with some of their recommendation to let overseas Americans compete once again on a level playing field. Indeed, this might really make a difference in creating jobs at home and abroad, and in reducing America's chronic trade deficit. What kind of risk would really be involved? Abandoning the taxation of overseas Americans would be a very minor affair from the point of view of lost revenues received by the U.S. Government each year. The $ 3.5 billion that overseas Americans pay today in annual U.S. federal income tax is less than 0.1% of total tax revenues of the United States. It was less than 0.5% of the trade deficit in 2003.
But if the Export Council is right, it would unleash a hoard of new Americans onto the world marketplace who would feel free once again to live and work abroad without financial inferiority to anyone of another passport. Companies would no longer have a financial incentive to fire Americans, or replace them with those of other nationalities. American entrepreneurs would be really free for the first time in a very long time to set up new companies to pull American products into foreign markets. And these entrepreneurs would also be able to serve as catalysts in helping developing countries move much faster toward their own economic prosperity than any aid programs could ever hope to achieve.
In essence then, an experiment to see how turning overseas Americans loose, and letting them compete for the first time in more than 40 years on a truly level playing field, is a very low risk and potentially very high reward opportunity. Why not give it a try? [because us politicians are IDIOTS] A worldwide level playing field for American ideas, culture, national security and prosperity, as well as trade, is where American policy belongs.
THE 1979 REPORT OF THE PRESIDENT'S EXPORT COUNCIL
THE PRESIDENT'S EXPORT COUNCIL SUBCOMMITTEE ON EXPORT EXPANSION
"Task Force to Study the Tax Treatment of Americans Working Overseas".
I. THE SITUATION
Despite the enactment of the Foreign Earned Income Act of 1978, Americans are still being taxed out of competition in overseas markets. The result is a sharp loss in the United States' share of overseas business volume in vital economic sectors. The current situation contributed to our negative balance of payments, a loss of U.S. jobs to our competitors, and the decline in U.S. presence and prestige abroad.
II. TASK FORCE RECOMMENDATIONS
Americans working overseas are essential to a viable export program. An increase in the number of Americans assigned abroad can increase our exports, reduce the negative balance of payments, enhance our country's image, and raise employment in the U.S.
Recognizing that it is in the best interest of our nation to encourage Americans to work overseas, the Task Force recommends the adoption of tax policies that are comparable to those of major competing industrial nations, none of which now tax citizens who meet overseas residency tests. We urge the development and enactment of new legislation to put Americans who work in the private sector overseas on the same tax footing as citizens of competing industrial nations.
Foreign Trade Encouraged
Beginning in the 1920's, after the U.S. emerged from World War I as a major exporting nation, the income of Americans at work in foreign countries was virtually exempt or excluded for U.S. taxes, as a matter of public policy and by specific acts of Congress. The purpose was to encourage foreign trade. It was recognized that the export of U.S. goods and services depended, in large measure, on the presence of Americans in overseas markets.
The U.S. tax policy was not unique. All of our trading partners, and certainly all of the world's major producing nations, had long excluded the income of citizens overseas from their domestic taxation.
In the early 1950's, some revisions were made in the tax treatment of U.S. citizens working overseas. The principal aim was to halt abuses by highly paid movie stars. These revisions altered foreign residency tests and placed a ceiling on the amount of foreign-earned income that could be excluded. The income and allowances of most Americans working overseas was below the $20,000 limit, so they were not affected. They were not meant to be.
Additional technical adjustments were made during the 1960's in foreign residency tests and in the sums that could be excluded. By the mid-1970's, the effects of inflation - rising living costs and rising salaries and benefits for overseas American workers - had overtaken the amount of foreign-earned income that could be excluded from U.S. taxes.
Policy Shifts in 1976
Responding to misguided arguments that Americans overseas were being granted preferential tax treatment, Congress in 1976 reduced the exclusion to $15,000 and changed the manner in which it was computed so its maximum practical effect became about $3,000. The philosophy behind these provisions was directly contrary to the principles which had guided the United States' tax treatment of overseas Americans for more than 50 years. Instead of encouraging Americans to work overseas, the 1976 amendments actually discouraged such employment. In fact, even before the 1976 amendments, it was becoming less attractive to work overseas. Inflation was running at between 50 percent and 300 percent higher than domestic inflation, a fact that should have been recognized by increasing the $20,000 exclusion rather than decreasing it.
Further, the Tax Court ruled in 1976 that employer furnished housing was taxable to employees at full local rental value, rather than the value of similar housing in the United States. These rulings were interpreted as a strong indication that employer contributions to offset extraordinary overseas living expenses - or so-called "keep whole" contributions - were taxable to overseas employees, whereas such amounts often may have gone unreported up to that time.
These rulings, when combined with the 1976 tax code revisions, produced effects that Congress and the Tax Court did not foresee. For example, in the oil-rich Middle East, the costs to an employer of maintaining an American worker at something approximating the standard of living he or she would have enjoyed at home could exceed the actual salary paid to that worker by three or four times. As a result, some Americans overseas became liable for more taxes than they received in real income.
The 1976 tax policy shifts on foreign-earned income actually amounted to a substantial tariff on our own goods and services by our own government.
[A picture is worth a thousand words, so here is graph of what happened to the US's trade balance since 1976.
Foreign Earned Income Act of 1978
After belatedly postponing the effective date of the tax code revisions, Congress moved in 1978 to remedy the devastating mistakes of 1976 with the Foreign Earned Income Act. Unfortunately, the 1978 Act is inadequate. The House of Representatives had passed a realistic bill, but the law that was eventually enacted represents a compromise with a more restrictive Senate version. Section 911 of the Act provides a $20,000 exclusion for overseas Americans living in qualified camps in remote hardship areas. Section 913 provides deductions for certain allowances for extraordinary overseas living expenses under fairly strict qualifications. Both Sections 911 and 913 are very complex. Moreover, regulations drafted by the Internal Revenue Service under the new law effectively reverse the intent of Congress by compounding the complexities beyond reason.
Even if the Foreign Earned Income Act of 1978 is interpreted in the least restrictive way possible, it is clear that overseas Americans are not currently competitive with citizens of other nations in terms of taxes.
IV. RATIONALE FOR RECOMMENDATIONS
Americans at work overseas direct business to our domestic economy. If we are to increase exports in order to bring our trade accounts into balance, we must encourage more U.S. citizens to accept assignments with American business overseas. Concurrently, we must continue to be sensitive to the geopolitical ramifications of having more Americans working abroad. Overseas employees of American business are seen as representatives of our country. Through their participation and visibility in international business affairs, they can function as goodwill ambassadors whose work exemplifies America's ideals and values.
To achieve these benefits will require, among other things, that current tax laws bearing on foreign-earned income be changed. At present, our nation's tax policies discourage the employment of Americans overseas. Many American companies dong business overseas, especially in man-power-intensive industries, are sending American employees home in order to keep some vestige of market share. For example:
· Recruiting firms in France, Germany, Italy and the United Kingdom report they are swamped with requests for qualified citizens of their respective countr ies to replace Americans who are being forced home by U.S. tax policies.
· Several leading U.S. contractors in the Middle East have reduced their American staffs by more than half, and adopted hiring policies overseas that specifically exclude Americans on future work.
· The University of Petroleum and Minerals in Saudi Arabia says Americans now make up less that 30 percent of its teaching staff, compared to more than 80 percent several years ago. Replacing American employees with citizens of other countries is the only way American companies can remain competitive. This means that as U.S. companies operating overseas "de- Americanize," sales of goods and services move away from this country and toward the competing industrial nations.
· A report by the Government Accounting Office suggested that the impact of current U.S. tax policies for overseas Americans might be very significant - with a reduction of 5% or more of total exports or a loss in overseas sales of at least $6 to $7 billion, based on available data. And the GAO report cautioned that its projections might well prove conservative.
· The Commercial Counselor of the Embassy of Saudi Arabia recently observed:
"U.S. tax treatment of American companies doing business in foreign countries makes them less competitive vis a vis European and Japanese (and other) companies, which receive better tax treatment from their governments. In the case of Saudi Arabia, it is noticed that American companies, in order to overcome the higher costs resulting from the unfavorable tax treatment, have tended to hire non-American engineers and other skilled personnel. Naturally, these prefer equipment and specifications originating in their countries (European or Japanese, etc.), which represent a loss in American exports to Saudi Arabia. Thus, the end result of U.S. tax treatment of American personnel working abroad has been a net loss of American sales abroad." [See this? This is incontroversial evidence that US politicians are IDIOTS]
That means a loss of jobs in our economy. Estimates vary. Using the low end of the Department of Commerce estimate that for every $1 billion in new economic activity between 40,000 and 70,000 jobs are created, a loss of 5% of our current overseas export volume - or about $7 billion in economic activity - would produce a job loss of 280,000. Using the same Department of Commerce figures, if the U.S. decided on policies to increase exports by at least $30 billion annually as a means of bringing the trade account into balance, at least 1.2 million new jobs would result.
If we increase our nation's exports we will increase job opportunities for Americans at home and abroad. In order to achieve such improvement, we must re-assess our tax policies. We also must write new tax laws directed at placing Americans on a competitive footing with other nationals in overseas markets.
But wait, it gets worse. American Citizens Abroad reports about current status of the double taxation of overseas Americans.
Current Status [of the double taxation of overseas Americans]
In May 2006, Congress inserted and passed a last-minute provision, with neither discussion nor hearing, that was a significant tax hike on overseas Americans in the "Tax Increase Prevention and Reconciliation Act of 2005" (TIRPA). [You have got to love the sick humor of US politicians: putting a huge retroactive tax hike in legistlation titled "Tax Increase Prevention and Reconciliation Act of 2005"]
With the passage of TIRPA, the unfavorable tax situation for overseas Americans has become significantly worse. Section 515 of TIRPA "Modification of exclusion for citizens living abroad" under "Title V Revenue Offset Provisions" specifically aims to increase taxes on overseas Americans.
— Section 515 raised the maximum foreign earned income exclusion from $80,000 to $82,400.
— It simultaneously introduced a low annual cap of $11,536 on the exclusion for foreign housing costs. This cap is determined by subtracting a housing cost floor (rent which would be considered a normal base rent not excludable) from the actual rent cost which can be a maximum of 30% of the $82,4000 foreign earned income exclusion allowed, or $24,720. The housing cost floor is set at 16% of the foreign earned income exclusion allowed, i.e. $13,184. Hence, the maximum net housing exclusion allowed is the difference between the maximum actual rent cost and the housing cost floor, or $11,536. Prior to this, "reasonable housing costs" without a cap, less a housing cost floor, were excludable. [I have prepared close a hundred tax returns, for individuals and businesses. I have done schedule k flow throughs. Yet I don't have a clue what this last paragraph was talking about (with a little research on the web I could find a better explanation and figure it out). In any case, the points I am trying to make are:
1) If I find this complicated, the millions of Americans living abroad will be completely lost.
2) ONLY AMERICAN EXPATS have to go through the hell of trying to calculating their exclusion for foreign housing costs.
— Nevertheless, the law states that the Secretary of the Treasury may issue regulations or other guidance providing for the adjustment of the percentage of the actual rent cost limit. In fact, this allows the Treasury department to establish a list of cities of exception considered to have rents exceeding $24,720.
— Section 515 also pushed overseas Americans into higher tax brackets by a stacking measure which requires that the tax rate applicable to taxable non-excluded income be determined by adding back the excluded income under Section 911 to the taxable income. Previously, the tax rate applicable to non-excluded income was determined only by the amount of the taxable income.
— Furthermore Section 515 was enacted i n May 2006 with retroactive effect to January 1, 2006. The cumulative affect of these measures is that many Americans working and living overseas will see their 2006 U.S. tax bill double or triple, or increase in by even more, as compared to 2005. It is forcing more Americans overseas to return home, particularly middle income families living in high rent, low tax countries. Its clear consequence is for U.S. corporations to cut back even more on American overseas staff.
Double Taxation Discriminates Against Americans Working Overseas
Intentionally or otherwise, current US tax policy concerning Americans residing overseas penalizes Americans who work overseas. Furthermore, it forces American companies to employ non-U.S. citizens for key overseas assignments. U.S. double taxation of Americans working overseas, in addition to the taxes paid in the country of residence, simply makes American citizens too costly. This double taxation denies U.S. citizens an equal opportunity to compete for jobs abroad. In today's highly competitive world market, long gone is the time when American companies could afford to employ American citizens overseas irrespective of costs. Over the last twenty years, the number of Americans working overseas for Americans corporations has been cut by more than half, according to published Commerce Department data. This is a very dangerous trend clearly foreseen in the President's Export Council Report in December 1979 and in the GAO 1981 Report to Congress ID-81-29. It is particularly dangerous when globalization of the world economy is accelerating and American presence in international markets is ever more important to combat the serious shortfall of American exports that is causing unsustainable trade deficits. The tax hike on overseas Americans passed in May 2006 within the framework of TIRPA seriously accentuates the penalty on Americans overseas.
For Americans to be competitive when working overseas, they must cost no more to their employers than either qualified local nationals or expatriates from other countries. At the same time, they must be able to have a standard of living comparable to that of their foreign colleagues with equal rank, skills, experience and responsibility. With U.S. tax rules in place, Americans in countries with low income tax or no income tax, such as the Gulf countries or Hong Kong, find themselves in the dilemma of either having to accept a lower standard of living compared to other foreign nationals because they are the only persons with dual fiscal obligations to their country of citizenship or of being paid wages over the general market because of their U.S. citizenship to maintain the same standard as their foreign competitors, which is a patently illegal alternative in countries prohibiting salary discrimination based on nationality or national origin. It is not surprising that Lissa Redmiles, an economist with the Special Studies Returns Analysis Section of the IRS writes the following in the Statistics of Income Studies of International Income and Taxes. "One noticeable shift however is the steady decline of foreign income earned in Saudi Arabia. In 1987 some 13,407 U.S. individuals living in Saudi Arabia reported almost 10% of the total foreign-earned income. In 2001, 7,449 such individuals earned 3% of the total foreign-earned income."
Repeal Immediately the Retroactive Tax Hike Enacted in May 2006
The Senate Finance Committee estimated that $200 million of revenue per year would be raised through Section 515 of TIRPA. While this amount is very significant for the overseas Americans concerned, it is an insignificant rounding error in the U.S. government budget and can easily be compensated by the elimination of one or more of the thousands of pork barrel expenditure bills passed in 2006. In 2006, Congress allocated a record $71.77 billion to 15,832 special projects, more than double the $29.11 billion spent on 4,155 pork-barrel projects in 1994.
The new cap on the housing exclusion/deduction is most seriously impacting middle-income families and affects, in particular, American companies and their overseas employees. While the Treasury Department has established a list of "exception cities" where rents are evidently significantly higher than the cap provided in the law, the need for such exceptions only reinforces the arbitrariness of the law. In fact, the Treasury list is based on locations known to the State Department and has missed some important economic centers with high rents where Americans work. For example, The Treasury Department set the maximum actual rent cost for Geneva, Switzerland at $70,300 and for Bern at $50,900, but made no specific mention of Zurich which was included in "all other cities" of Switzerland with a maximum rent cost of $32,900. Yet rent costs are very similar in Geneva and Zurich. Similarly, if one lives in a suburb of Geneva, which has rents comparable to the city of Geneva, the maximum rent cost of $32,900 is applicable. This law also creates a disproportionate administrative burden on the IRS and the Treasury Department; it is not the business of the Treasury or the IRS to survey rents worldwide. Putting a cap on the foreign housing exclusion/deduction is fundamentally bad tax law.
It is also essential that the stacking measure introduced in Section 515 be eliminated, as its sole purpose is to push Americans resident abroad into higher tax brackets in the U.S.; this seriously accentuates the double taxation. For example, an American taxpayer overseas with a salary of $85,000 and a rent allowance of $48,000 will have a total income of $133,000. His taxable income after exclusions will jump from around $17,000 in 2005 to $39,000 2006 due to the new cap on the housing exclusion; in addition, he will find himself in the 28% tax bracket in 2006, based on $133,000 total income, compared to the 10% bracket in 2005, based on $17,000. This leads to a six-fold increase in U.S. taxes due. It must not be forgotten that Americans residing overseas pay first and foremost taxes in the country of residence. It is necessary to return to the status in Section 911 whereby tax rates on Americans resident overseas are determined only by the level of income exceeding the foreign earned income and housing exclusions, not total income including those exemptions. This will eliminate a severe tax penalty on the middle income managers and professionals.
The most fundamental tax reform for Americans residing overseas would require the United States to adopt, like all other industrial countries, residency-based taxation for its nationals rather than citizenship based taxation. However, since it is feared that U.S. billionaires might change residency just to escape US taxes [You kidding me? ARE YOU KIDDING ME? Then why don't US politicians pass legislation to tax ONLY US billionaires living overseas?], there is
understandably great resistance in Washington to this most fundamental reform.
U.S. exports must grow more rapidly. U.S. exports have systematically remained in the range of 10% of GDP for the past 25 years, but currently cover only about two-thirds of imports; in order to close the gap with imports, exports need to increase by more than 50%. If American industry is encouraged to work towards this objective and is freed up from constraining U.S. fiscal laws for its overseas subsidiaries and its American employees abroad, a significant increase in exports is possible, particularly in China and the other rapidly growing markets in Asia and Latin America where U.S. exports are seriously underrepresented today.
The purpose of the foreign earned income exclusion is to avoid double taxation on earnings for Americans working and residing overseas. The problem with a cap is that it does not keep up with reality. The current cap of $82,400 for the foreign earned income exclusion is ridiculously low. The foreign earned income exclusion established in the mid sixties for bona fide overseas residents was $25,000. Today, that $25,000 would be worth $150,416 if indexed with the CPI of the USA. And this does not take into consideration the substantial change in exchange rates and relative overseas purchasing power. For example, the U.S. dollar has declined over 40 years from CHF 4.30 (Swiss Francs) in 1966 to CHF 1.20 in December 2006. Hence, the 1966 foreign earned income exclusion of $25,000 compensated for a salary of CHF 107,500 whereas the 2006 exclusion of $82,400 at the exchange rate of 1.20 compensated for a salary of only CHF 98,880, which is 8% less in absolute terms than in 1966. If the CHF 107,500 allowed in 1966 were adjusted for inflation by the Swiss CPI, the exempted Swiss Franc salary in 2006 would need to be CHF 352,000, 3.27 times the 1966 salary level. In other words, a foreign earned income exclusion of $300,000 today, not $82,400, would be comparable to the foreign earned income exclusion of $25,000 in 1966.
A more recent example of foreign exchange movements illustrates only too well the tax lottery faced by Americans working overseas due to the cap on foreign earned income exclusion.. The euro and dollar were exactly at parity on November 6, 2002; by November 6, 2006 - just 4 years later, the dollar was worth only € 0.78670. An overseas American resident in Europe who was paid €100,000 in Nov 2002 and was still earning that €100,000 in 2006, is considered by the U.S. government to have had a salary increase from $100,000 to $127,114 - a 27% increase. With the U.S. dollar continuing to decline against other currencies, this distortion will become more perverse with each passing day.
My reaction: US politicians are IDIOTS!
1) Deciding to tax of overseas Americans is one of the single dumbest thing US politicians have ever done (and they have done a LOT of stupid things).
2) America's lack of a functioning manufacturing sector is one of the main causes of the today's financial/dollar crisis, and the damage caused by the 1976 tax policy shift is one of the main reasons the US lacks of a functioning manufacturing
3) To end the double taxation of overseas Americans, the US would have to make politically unpopular spending cuts to offset the decrease in revenue. Since US politicians are pathologically incapable/unwilling to do ANYTHING unpopular in the short run (even if it is to ensure America's long run prosperity), this is unlikely to happen.
4) The dollar's collapse is going to significantly worsen the double taxation of overseas Americans (each time the dollar falls, their income goes up in dollar terms)
5) The outlook for Americans right now is rather dim. With the US domestic economy on the verge of implosion, domestic job prospect are bleak, and, thanks to US tax policies, overseas job prospect are bleak as well.
6) For all my non-US readers, consider how lucky you are in this regard. Unlike Americans, you can leave your country of origin without being hounded across the world for taxes by a cash starved government. The US government's tax policies have made US citizenship more a curse than a blessing.
Conclusion: I don't have much to add. American Citizens Abroad does a pretty good job of covering everything, with the perverseness and stupidity of US tax policies especially well captured in this passage from the article above.
..in essence, it can be reduced to a couple of basic principles. It is not purely by chance that no other major country of the world has chosen to follow in our footsteps. Seen from their point of view, U.S. taxation of its overseas citizens is one of the most self-destructive trade and employment strategies any major country has ever adopted. But at the same time, it is also an extraordinarily generous gift, offered benevolently by the United States to everyone else, allowing their citizens to enjoy a very big competitive advantage over U.S. citizens in all of the markets of the world.