The Congressional Progressive Caucus, one of the larger Democratic Party caucuses, has proposed to end the Foreign Earned Income Exclusion in their 2013 “Budget For All”, details of which were revealed yesterday following a vague press release last week. As U.S. persons abroad have already learned, when American homelanders use words like “all” and “us”, we are decidedly not included, except when they want money from us. Indeed, with this latest budget proposal, even members of the Americans Abroad Caucus have come out in support of eliminating the FEIE.
This one appears to be the brainchild of Raúl Grijalva (D-AZ), the CPC’s co-chair Correction: the “Budget For All” is the brainchild of Mike Honda (D-CA), chairman of the CPC’s Budget Taskforce and a member of the Americans Abroad Caucus. John Tierney (D-MA), whose so-called Tax Equity And Middle Class Fairness Act proposed the same thing in July 2011, is also a CPC member. Both Grijalva and the other CPC co-chair Keith Ellison (D-MN) were supporters of Tierney’s earlier bill. Details are very sketchy at this point, but in the CPC’s “executive summary” they give a one-line mention of eliminating the Foreign Earned Income Exclusion at page 3 under the heading “Individual Income Tax Policies”. Then at page 17 they repeat the tired old projection that eliminating the FEIE would raise $71 billion over 10 years, starting from $4 billion in 2013 and growing to $9 billion.
This projection ignores the obvious fact that people respond to new taxes by changing their behaviour. We U.S. persons outside of the U.S. have many options, none of which contribute to Grijalva’s goals. We may increase our use of the Foreign Tax Credit, thus incurring far greater tax preparation costs due to the higher complexity of Form 1116, leading to new Ferraris and island vacations for accountants, but little additional revenue for the Treasury. We may return home and add to the ranks of the U.S. job-seekers just like our predecessors did a generation ago, the last time Congress eliminated the Foreign Earned Income Exclusion in the 1970s before hastily restoring it three years later — though not before U.S. exports had collapsed as American businesspeople abroad abandoned emerging markets to German and Japanese competitors. Or we may renounce U.S. citizenship and get away from a government and a public which shows no understanding that we are already taxed where we live, which keeps making it more difficult for us to live normal lives abroad, and which sees us as nothing more than easy pickings for further plunder.
The CPC claims that their budget “asks those who have benefited most from our economy to pay a sensible share”. This principle makes perfect sense to me. All I ask in return is a sensible share of federal highway and educational funding given the location where I reside. The definition of “sensible” that two hundred other countries and territories in the world use would suggest both those “shares” should be zero. The CPC definition of “sensible”, on the other hand, would suggest that they’d better get busy on building me an interstate highway. I’ve always wanted to take a road trip to Hawaii.
Honda’s contact details can be found here if you would like to tell him what you think of his plan. He is also on Twitter: @RepMikeHonda
Update: One other thing worth noting. The membership of the Congressional Progressive Caucus includes the head of the Americans Abroad Caucus along with eight other AAC members. That’s fully a third of the AAC’s membership. The list:
- Carolyn Maloney (D-NY)
- Michael Capuano (D-MA)
- Andre Carson (D-IN)
- Donna Christensen (D-VI; non-voting)
- Steven Cohen (D-TN)
- Mike Honda (D-CA) — chairman of the CPC’s Budget Taskforce which produced the “Budget For All”
- Jim McGovern (D-MA)
- Jim Moran (D-VA)
- Janice Schakowsky (D-IL) — spoke out in support of the “Budget For All” in a YouTube video
John Tierney is a real sweetheart. His sister’s family was embroiled in an illegal internet gambling operation see – http://cnhinews.com/node/2042
However John claims no knowledge – so he never questioned where is brother-in-law’s income came from? This goes back to the old story of Massachusetts politicians and corruption. Let’s remember the ex-speaker of the Mass House, Sal DiMasi, is serving time in the federal pen as we speak.
John….collecting ex-pat money is expensive and doesn’t create the revenues needed by the federal government – start voting for taxes that are collectible within the borders of the US!
Good. It’s time for FEIE to go.
It is akin to “don’t ask, don’t tell” in that it masks the problem by sheltering 81% of Americans abroad from the egregious double-tax-system of Foreign Tax Credit.
When I speak to my compatriots, they are either completely unaware (which covers more than 50% of them) or they are lulled into complacency because FEIE hides the vicious truths.
At a Democrats Abroad meeting with Tim Kaine, just before FATCA was signed, members pleaded with him to stop the craziness. The leadership and many of the members asked people to stop talking taxes so that we could hear more about Reconciliation strategy for health care and what the Democrats will do to combat Fox News.
One of the officials said “these issues don’t affect me and I would appreciate it if we can talk more about party issues”. That person is a UN employee and pays no local tax and because of FEIE, pays no US tax.
Until we are in this together, we will be fighting alone. Killing FEIE is the best thing the Democrats can do for us – even if their intentions were driven by greed.
One more thing – it gives on-shore Americans an excuse to look the other way… and they use that excuse all the time to justify their complacency.
“Grijalva claims that his budget “asks those who have benefited most from our economy to pay a sensible share”.
How any one can argue that “those who have benefited most from the economy includes US persons who live and work overseas, some of whom may never have set foot in the US, is beyond me.
What do you mean when you say that she doesn’t pay any local tax? Do people working for the UN pay their taxes back to the UN budget or nothing at all? What rate are they taxed at?
As to the article, what always bothers me the most about these changes in US law is not what they actually want to do, but rather how they always portray the situation:
“Grijalva claims that his budget “asks those who have benefited most from our economy to pay a sensible share””
I don’t know about others here, but when I lived briefly in the US my schooling was paid for entirely by my parents (they sent me to a European school because they were rightly worried about how US qualifications would transfer back home) and the last time I checked the US government did not cover any of my medical care whilst I was here. I have benfitted and continue to benefit from the EU and Belgium, who have both supported my education, training, health and so on. This is where I pay my taxes Mr. Grijalva and where I receive my benefits. Whatever benefits I received from the US whilst a resident I paid when I was resident. I do not live in the US anymore and do not use any US services or receive any benefits whatsoever from the US or from holding US citizenship. Take note.
One of the reasons some type of protest in Windsor is so appealing to me is that if some of your don’t already know Carl Levin’s brother is a left wind congressman from Michigan too and his sister is a Federal judge in Detroit. So there is a bit of Levin family dynasty in Michigan.
@all- how does living abroad equate with having gotten some disproportionate benefit from America? Even if we had why is it okay to wage “class warfare” against one segment of American society?
Living abroad is a right and not a privilige. Paying taxes where we live is obedience to the laws of the governments under which we live and derieve our livelihood.
We cost them nothing so we owe them nothing. All that they want to do is to spread America’s dysfuntional legislative system beyond their borders.
Correct me if I am wrong, but it is my impression that there are international agreements that exempt all employees of certain international organizations from being subject to income tax either by their home country or their country of residence.
Also, US govenment employes (diplomats and others) by virtue of their diplomatic passports, are never subject to taxation by their foreign country of residence and the same is true of foreign diplomats in th US. US govenment diplomats and other Federal Government employees abroad do not benefit from the Foreign Earned Income Exclusion but are subject to US tax on their full Federal salaries. Unlike priviate US citizens employed abroad, they are not subject to US tax on reimbursements for such things as private school tuition, cost of living allowances, government provided automobiles and private security, employer (the government) provided housing or housing allowances, home leave transportation for themselves and their families and the savings they enjoy as a result of being able to purchase their daily necessities from government provided PX facilities which are not subject to tax by local governments.
I don’t know about this latest bill to abolish the FEIE, but some prior bills would also ablolish the tax free status of these reimbursements and ‘in kind’ income for Government employees abroad.. I suspect this would result in some cases of diplomats ending up with tax obligations that exceed their salaries so you can bet your bottom dollar such a measure would be fought tooth and nail by US dimplmats and others abroad on the Federal payroll.
End of the FEIE would end all semblance of supposed income tax relief for USP’s abroad, and would strengthen our argument against the abomination of US tax policy (although make the life of some currently compliant individuals impossible in certain foreign countries). The FTC is often not enough to eliminate double taxation. The result is that people may be taxed at a higher rate than their corresponding purchasing power. Persons should be taxed at the same rate as their neighbors who have the same income, same deductions, and same purchasing power.
Imagine a USP who has several children whose spouse does not or cannot work or whose spouse has a very low income. Imagine that such a family lives in a country with a high cost of living but a lower local effective tax rate for their income, when adjusted for the current exchange rate of the US Dollar. If they fall into a higher US tax bracket, despite the lower foreign tax, they would be required to pay additional tax to the US. This not only discriminates economically against such a hypothetical family, but also robs funds out of the local economy where the family lives. Such a situation might result in the inability of the family to pay it’s bills.
One could also imagine a family as above, but where the foreign spouse works, but cannot pay the family expenses alone without the USP’s contribution. The foreign spouse’s share of local tax would not be deductible under current US tax regulations, possibly resulting in a US tax burden rendering life impossible for the family.
All of this having been said, despite the current FEIE, some families are already in an impossible situation, and some individual “compliant” USP’s are already economically disadvantaged compared to their neighbors who pay only local tax.
Double taxation of foreign earned income by citizens abroad has been denounced by the US through UN Resolution (in the case of Eritrea).
Here is the link to the US Government website which describes the taxation and non-taxation of diplomats and employees of international organizaions and how these apply to US citizens deployed abroad.
Lots of loops to jump through, but some indeed to escape taxation by any country.
link.
@Roger US government employees can’t take the Foreign Earned Income Exclusion against wages they earned from the government. So US consular staff sent abroad are tax-exempt where they are stationed, but pay normal US taxes instead as if they lived in DC. In contrast, UN employees are also exempt from tax in the countries where they are stationed (part of the treaty on rights and privileges of UN employees which all UN members have signed), but unlike US diplomats they are not US government employees and so do get the foreign earned income exclusion. Hence they can live entirely tax free.
One odd consequence of the tax exemption for UN employees is that one cannot be a US green-card holder and a UN employee at the same time. I wrote a post about the history of that policy on my personal blog a few weeks ago for those who are interested.
lexicon for above FEIE= Foreign Earned Income Exclusion FTC=Foreign Tax Credit USP=US Person
One thing the FEIE does is make US companies more competitive when bidding on foreign contracts. Canada has something similar, the Overseas Employment Tax Credit (although it is only applicable primarily in resource and construction projects).
Repeal of the FEIE is shooting oneself in the foot. Surprise!!!
It was the massive cutback of the FEIE and the court decision that classified company reimburesements as taxable income back in 1976 that destroyed US domination of the turnkey engineering and project construciton business in the middle east. It is not that the FEIE gives US copanies an advantage over foreign competitors in labor intensive projects abroad, but it reduces their non-competiveness, since no other country in the world subjects its citizens who are bona-filde residents of a foreign country to any home country income tax at all on their foreign income. Other countries have in effect what is an unlimited foreign earned income excluson. US companies with these projects quickly disappeared from the International competition for these contracts, and along with the loss of this foreign revenue, US exports nosedived because the foreign companies that took over this market sourced the goods to implement these projects from their own national suppliers rather than from the US.
Total elimination of the FEIE exclusion will nearly totally destroy the ability of US citizens to live in work in those countries of the world which do not raise their rvenues through an income tax, or where their tax rates are signficantly below those of the US.
Those in Congress who are bound determined to eliminate this FEIE “revenue expenditure” will find that the results fall far short of expectations if this legislation is enacted, but they wlll not bother to ask why or do anything to rectify this mistake.
Any percentage tax rate on zero income is still zero.
@Hazy
The Overseas Employment Tax Credit is for people who are tax residents of Canada. The vast majority of Canadian citizens working overseas are not tax residents of Canada. Now there can be issues with determining tax residency in Canada that are bit tricky but my sense is the Canadian system works far better than the American one.
@hazy2- and there is the rub. Canada’s FEIE is used by those who are working abroad without giving up their Canadian residence or financial interests. If you are a Canadian citizen who has move abroad to live- an emigrant- then you are not taxed by Canada at all because Canada has territorial based taxation.
In contrast to this the U.S. puts all of its citizens under the same taxation regime without regard to whether or not a citizen has actually emigrated. The U.S. assumes that we are all temporarily absent and that we may want to return.
In this regard I liken U.S. citizenship to being a barnacle. It attaches itself to a moving object and then easily feeds off of the food that its unwilling host stirs up as it moves through the seas. The only difference between the barnacle and U.S. citizenship being is that at least the barnacle does no harm in exchange for its free ride. Whereas U.S. citizenship actually is parasitical and functions more like a tick or flea.
@recalcitrantexpat: The US citizenship based tax policy is even worse than you describe. You are taxed not because of where you live, but because you have US citizenship. Even if you were born abroad to just one US citizen parent, don’t speak a word of English, have never held a US passport nor ever even once set foot on US territory, you are a US citizen and are taxed in the same way as the person born in the US who has never been out of the city where he was born. Not only that the American abroad must maintain much more detailed records, use accurate exchange rates in converting foreign currency values into dollars, file additional forms that are so complex that they can’t possibly do it without competent and therefore expensive professional assistance, or fall into the trap of non-compliance penalties that will totally destroy him. And he must pay his US tax in US dollars even though his income is in a foreign currency in a country which may both prohibit the conversion of that currency into dollars and their removal from that country to pay taxes to a foreign government which, in accordance with the laws of that country, has no authority to either levy or collect taxes from residents of that country.
Your description of the parasitical characteric of the citizenship barnacle hits the bullseye.
@recalcitrantexpat, re; “The only difference between the barnacle and U.S. citizenship being is that at least the barnacle does no harm in exchange for its free ride. Whereas U.S. citizenship actually is parasitical and functions more like a tick or flea.” – I had to laugh when the full image hit me.
Characterizing U.S. citizenship as a tick or flea is a bit too benign for my tastes. It’s more like a full-on facehugger from the Alien films:
http://www.oocities.org/tom_crazyone/Info/facehugger1.jpg
I actually hope they get ridf the FEIE because finally, then, will the majority of U.S. persons abroad be forced to get their heads out of the sand. Many of the USPAs I know think that filing U.S. taxes is no problem, but that is only because they lump all of their income under the FEIE (even unearned income). If everyone is forced to use the 1016 then maybe there will be more of an uproar.
@Hazy2 – you need to think out of the US domestic box:
“One thing the FEIE does is make US companies more competitive when bidding on foreign contracts.”
should read:
“One thing the FEIE does is make US companies less uncompetitive when bidding on foreign contracts.”
@redgrad, Even today lumping all foreign income, both earned and unearned and classifying it as Earned is fraudulent tax evasion.
I just found out something absolutely ridiculous. This “Budget for All” was not written by Raul Grijalvas (I mistakenly assumed that because it was on his website). Actually it was written by Mike Honda (D-CA). Mike Honda is a member of the Americans Abroad Caucus. The fact that an Americans Abroad Caucus member would propose eliminating the FEIE demonstrates very clearly how seriously he takes his membership in the caucus, and how “devoted” this caucus is to promoting our interests.
http://www.mercurynews.com/bay-area-news/ci_20253586/rep-mike-honda-presents-his-budget-all-counter?source=rss
I updated the post to reflect this information.
@Roger: I know that, but many USPAs have no clue about how to properly report foreign income. Hell, many of them still have no idea that they’re supposed to file!
@Eric
The Am Abroad Caucus reminds me of the “photography club” in high school. 90% of its members are there because it looks good on a college application.