Roger Conklin provides insight that few today have about the United States trade deficit. Today, in a comment, he displays the remarkable depth of his knowledge and the compelling force of his narrative:
@Joe Expat, I totally agree with you that the US ought to repeal citizenship-based taxation and adopt the same residence based taxation, which is the policy of every other civilized nation on the face of the earth. The current US tax policy creates problems for US citizens residing abroad which citizens of other countries living abroad never confront.
In my feeble way I have been espousing this point of view for the past 36 years since it was this policy that forced me to make a decision I never anticipated I would have to make: chose between becoming a naturalized citizen of Brazil and in so doing renounce my US citizenship, or resign from position in Brazil and return to the United States to look for a new job.
In those days hardly anybody was proposing the total elimination of US taxation of its non-resident citizens. George P Shultz, ex Labor Secretary and Ex Treasury Secretary in the Nixon Administrations made this statement at a hearing conducted by the House Ways and Means Committee on subject of “proposals relating to sections 911 and 912 of the Internal Revenue Tax Code dealing with earned income from sources outside of the United States” on February 23, 24 1978. We both sat at the same Witnesses table where we both presented our testimonies.
He was president of Bechtel Corporation at the time of that hearing. He included in his testimony the specific case of one of their married engineers working on a design and construction project in Saudi Arabia whose tax obligation on his $40,000 salary was $51,000. He did not go into the details, but did mention that the value of company-provided housing in the remote area where he was assigned plus tuition reimbursements for private school education for his children, all of which is considered as taxable income, placed him in a situation where, after paying his tax obligation, he had less then zero left to live on.
But in spite of this, Mr. Schultz made this statement, which I still remember and which is recorded in the printed testimony: He did not propose the elimination of citizenship based taxation but recommended that it be structured so there be allowances for working in overseas areas and “a substantial income exclusion.”
I did not have an opportunity to discuss this with him, but I did not see then nor do I see today how it is in any way possible for US citizen personnel to be competitive with non-US personnel who are never taxed based on their citizenship. It just does not work. It is like trying to have your cake and eat it too.
US companies back then had been #1 in these labor intensive design and construction contracts in the Middle East. They dropped to #7 two years after the enactment of the Tax Reform Act of 1976 and essentially ceased to even bother to bid on these contracts after that, because there was no way they could profitably price competitively given the necessity to compensate their US professional employees additionally to cover their additional tax costs plus the tax on those tax reimbursements.
Looking through the list of companies whose representatives testified at this hearing, other than Bechtel, I checked on the Internet and none of the others even exist today. And when the US lost this market it also lost the export market for products employed to implement them. As Mr. Schultz stated, when a German company won the contract, they sourced their equipment from Germany, the French from France,the Japanese from Japan, the Koreans from Korea, the Italians from Italy, etc. There was nothing required to implement these products that was available only from US sources.
And that is why the cumulative US trade deficit, which began in 1976, now exceeds $8.6 trillion. For the last 12 months it is $746 billion and is increasing by $2 billion with every passing day.
Addendum: Roger Conklin responds to another reader:
@Jefferson [who asked about the US worker whose tax exceed his salary], what happened in this particular case was not known, but in the testimony presented at that hearing by Robert Gants of US and Overseas Employees Tax Fairness Committee, which represented several engineering and construction trade organizations at this hearing, indicated that some 75% of the companies he represented had employees whose tax obligations exceeded their salaries. That was not 75% of their total American employees, but the organizations.
In all probability these people were sent back home or returned on their own. There was a really mad scramble on the part of these American companies to replace US citizen personnel with qualified personnel from other countries, but it largely failed. These contracts just fell apart. There was no way the companies could pass on these additional tax costs to their customers, because they were generally fixed price contracts. Some of them were cost-plus contracts, but universally the end customers footing the bill rejected reimbursement of their American citizen employees for the massive tax increase that resulted from the Tax Reform Act of 1976 as being “legitimate” costs, so they just refused to pay American companies more to cover these new additional costs.
I recall from subsequent news back in those days that many of them were subjected to massive failure-to-perform penalties that led to their bankruptcies. That’s why US companies just disappeared from the International market for these kinds of contracts.
Referring to the printed record of this hearing, here is the response Ex-Secretary George Shultz, testifying as the president of Bechtel Corporation, to questions and comments of Congressman Frenzel of Minnesota in explaining the predicament of their employees who suddenly found themselves in this tax trap where suddenly their tax obligation exceeds their salaries:
Beyond that if we say to the individual “well, you stay there, we are going to work on this problem, there are hearings before the Ways and Means Committee and those are reasonable people and we are going to present your case and we are going to stand behind you and as a company until this gets resolved.”
Then he went on to explain the objections of their clients in covering this additional tax cost, in addition to their having to pay for the employees housing and the education for their children, but also the effect of US tax and then the tax on the tax, and then the tax on that tax, and the whole roll up, which becomes gigantic.’ ” And then the customers respond with “well when we talk with nationals of other countries, we don’t have this problem.”
Well we all know that the optimism of Secretary Shultz that Congress would solve the problem was over optimistic. There were certain members of Congress who simply did not want Americans to live and work overseas, and it was their views that prevail to this day.
Senator Proxmire from Wisconsin also testified at this hearing. His position was that we don’t offer tax breaks for persons living in high cost areas in the US so we should not do it for those that go overseas either. He was obsessed with Americans overseas spending their tax evasion dollars, swathed in mink, at the gambling tables of Monte Carlo. His position was that the Market would work this out. In that he was right. American companies employing US citizens with this extra tax obligation could not compete and the market was lost.