With the 113th Congress in full swing, Dennis Ross (R-FL) has introduced H.R. 243, the so-called “Bowles-Simpson Plan of Lowering America’s Debt Act”. This is basically the same as the bill he introduced last year, and features the same ridiculous proposal to raise taxes on U.S. persons abroad to pay for tax cuts for Homeland corporations. For more details, see this previous post of ours.
What’s mildly interesting here is that just days after Ross introduced his bill, the Joint Committee on Taxation published its “Estimate of Federal Tax Expenditures for Fiscal Years 2012–2017” (hat tip: TaxProf Blog). Their estimate of the “cost” of the Foreign Earned Income Exclusion has fallen significantly compared to last year: US$5.9 billion for 2012, down by more than 20% against their US$7.4 billion estimate for 2011. So where does that leave Ross’ bill and the revenue projections he used to justify all his tax goodies for Homelanders and their corporations?
The JCT seems to assume that the “cost” of the Foreign Earned Income Exclusion is equal to the hypothetical U.S. tax on the full amount of the excluded income of the four hundred thousand-odd people who took the FEIE in the most recent year for which data is available. The JCT’s estimates of the “cost” of the FEIE thus have a tendency to jump around wildly in line with the number of Form 2555 filers, without any evidence of a proportionate change in the actual number of U.S. persons abroad from whom the IRS demands tax paperwork. Apparently no one at the JCT realises the farcical incorrectness of their methodology.
What’s more, even if the FEIE were to be eliminated, most U.S. persons abroad would simply switch to using the more complex foreign tax credit to protect their wage income from U.S. extraterritorial taxation — resulting in an increase in tax preparation costs but little or no benefit to the U.S. Treasury. Some of these people might even be overpaying their taxes on non-wage income by taking the FEIE — thanks to the “stacking” provision that Chuck Grassley snuck into the “Tax Increase Prevention and Reconciliation Act” of 2005 — and would be better off taking the FTC, but have never bothered to do the necessary math because of the complexity of Form 1116. If they were forced to hire an accountant, the accountant would figure this out for them, again taking a bite out of the IRS’ cut.
And finally, out of the sizable minority who would see increase in double taxation because the taxes imposed by the countries they actually live in are not creditable for US purposes (such as VAT, wealth taxes, and social insurance payments), many will either repatriate to the U.S. in frustration or renounce citizenship to free themselves from the whole mess, again resulting in increased costs or decreased revenue for Washington.
horrendous.
For all of those stupid laws, there ought to indeed be a chance for a person or organization, who has some money, could sue in the land of their residence or USA. In many lands, a treaty becomes a law as high or higher than any all laws in that country.
In USA, a treaty is the highest law of the land. When these stupid laws come, the treaty is the highest law. The tax treaty, which states no double taxation, reigns over any other stupid law passed. The only issue is finding an organization with financing to take these laws to Supreme Court.
This became obvious to me, as I indeed found a guy in the Swedish political system who knows about FATCA and talked a little about it. He knew about USA and its stupid extra territorial taxes, but he had no idea of these ineffective exclusions and FATCA penalties.
Same in Canada. Treaties are above the law. Which is why it is so scary that an IGA is the so called “solution” to the treaty override of FATCA. There’s simply no way to make them accountable nor to protect oneself. So much for democracy, eh?
@Tim Nondeductibility of VAT, wealth tax, and social insurance are already big issues despite the FEIE in countries like Switzerland where a middle class salary can easily exceed 97k and a few thousand in extra US taxes can easily make it difficult to take a vacation or save for other projects like opening a business. Don’t forget the swicheroo they did in (was it 2004) limiting the housing exclusion and deduction and taxing earned income above 97k starting at the 97k rate instead of restarting in the lowest bracket.
Furthermore, the FEIE does not cover welfare, unemployment, disability, or pension benefits. Where these benefits are taxed very low (often because they represent only basic subsistence) or not at all (which is the case with welfare in Switzerland as best I know) the additional US tax can result in someone having to chose to refuse to be compliant, renounce, or not pay all of their basic bills in their home country.
No matter what, a repeal of FEIE would still be an enourmous slap in the face to USPs abroad and would demonstrate ongoing callous disregard for the rights of USPs abroad on the part of congresscritters. However, such a repeal might actually awaken a larger portion of the “51-st state” (6 million of us living abroad).
@All
Also, I just came accross another blog I hadn’t seen before:
1389 Blog – Counterjihad! (http://1389blog.com/2013/02/02/fatca-intergovernmental-agreement-exposed-as-bad-deal-for-partner-countries/)
Article: FATCA Intergovernmental Agreement Exposed as Bad Deal for ‘Partner’ Countries
A blogger called 1389 AD (who appears to be the owner of the above blog) visited my site http://stopunconstitutionaldoubletaxation.wordpress.com/2013/02/01/statement-of-roger-conklin-retired-international-sales-and-marketing-executive-the-negative-consequences-of-citizenship-based-personal-taxation-on-the-competiveness-of-american-companies-and-the-r/
Was 1389 AD during one of the later crusades? I don’t remember, but:
Feb 24th – Battle at Falköping: Danes defeat King Albert of Sweden
Jun 15th – Battle of Kossovo; Turks defeat Serbs
Jun 28th – Ottomans defeat Serbian army in the bloody Battle of Kosovo, opening the way for the Ottoman conquest of Southeastern Europe (see Vidovdan).
Oct 30th – French king Charles VI visits pope Clemens VII
Source: http://www.historyorb.com/events/date/1389
@Mark Twain: In USA, a treaty is the highest law of the land.
If only. From this paper by Anthony Infanti:
*The phrase “not worth the paper they’re written on” comes to mind.
Every couple of years the foreign earned income exclusion is placed on the chopping block and in recent years it has been finding itself on the block more often. Its only a matter of time before it gets whacked.
This is the result of US citizens living abroad having no representation in congress. The only vote US citizens abroad have left is with their feet.
US Expats — born to be punished!
@Eric as to “Some of these people might even be overpaying their taxes on non-wage income by taking the FEIE — thanks to the “stacking” provision that Chuck Grassley snuck into the “Tax Increase Prevention and Reconciliation Act” of 2005″
Was this “stacking” business the point at which they started taxing income over the (now 97k) FEIE mark starting at the bracket of 97k and not zero as before?
Also, the FEIE has only been increased annunally for a few years, not since it’s inception in the (70s?), so the current dollar value of the FEIE does not respect the legislative intent of the time.
Imagine Mr. or Mrs. FATBARDT at your door in Borat-thong or miniskirt:
http://www.forbes.com/sites/anthonynitti/2013/02/04/has-the-irs-gotten-a-whole-lot-sexier/
Well. I just got a “B” in my international contracts class, during fall 2012. In that class, 20 people were taught that, although questionable, the treaty trumps the statutes. This was written in to make sure that treaties were taken seriously. Following statutes can be made to help treaty enforcement, but the treaty stands. Granted, in class, the scenario of “last first” was not discussed, however the principal of treaty first meant that the law professor’s statement held (he was one of the deans)
This is why cap&trade and other treaties are resisted by knowledgeable people, because if enacted they would over ride other laws.
For example, we were taught, when writing a contract with a foreign counterpart, if one writes: “This contract is governed by the laws of the state of Utah”, Utah law is governed by the laws of USA, and the contract law (for applicable portions) is governed by the CSIG, United Nations Conventions on Contracts for the Sale of Goods, which is enacted by treaty of participating partners and USA. A court in Utah would rule according to the what is specified in the treaty–the laws in the CSIG.
Not being a lawyer, I could guess that a local court might mistakenly (or rightly) follow its state laws, and the over-riding judgement might need to go upwards to federal court to strike down the applicability of state law.
@Mark Twain, have you read the paper by Infanti? In it are clear examples of congress specifically overriding tax treaties, and being backed by federal courts when doing so. This wouldn’t be the first time that reality and theory taught in classes find themselves at odds.
lots to read. No worries. I am not the one to argue further. But a representative lawyer such as from the Institute of Justice could lay it in front of the court, if they could be persuaded to be involved
IGA isn’t a treaty and isn’t a statute, so other countries might believe its contents and act upon it, as might USA, but it doesn’t hold up to legal standard
@Mark Twain, right, the IGA on the US side may not even be an executive agreement but just a “competent authority agreement” according to Alison Christians in her FATCA Forum speech (or was it comments she made later when she sat back down?). What happens when the execution of the treaty flies in the face of constitutional rights?
Great post, Eric. Gotta keep an eye on these folks – who knows what they will cook up next. I think Abused Expat is right and it’s only a matter of time before FEIE gets axed.
Don’t crucify me for this but sometimes I wish they would just go ahead and do it. I’m getting very tired of saying to people “double taxation” and having them say back “tax treaty” and “FEIE.” When I say that these things do not prevent double taxation (they just mitigate it and not very well) I’m told that I must be a complete idiot. It would clarify the situation a great deal if the FEIE were taken out of the equation. Would also mobilize more people around this issue. I don’t want to cause anyone unnecessary pain but I’m a bit tired of people telling me, “But it is so simple, Madame, just take the FEIE like me and, voila, your problems are over.” I DID and I still owed 9,000 USD! Talk about a dialogue of the deaf…
I’ve also seen 1389 around the Flophouse.
@victoria I seem to remember that you got hammered with tax outside of the FEIE on unemployment compensation benefits. Were these taxed by France at all or just at a rate lower than the US rate?
constitutional rights requires someone to bankroll a challenge in court. Someone needs to find someone to do that in either home country and/or USA.
Other than that, it seems that no one else cares—not USA, not media in USA, not your home government, not your home media. Most of all, the sheep that are affected by it either comply and wait, blog to like-minded readers, or cower at home—all with the same effect.
“go back out of frustration” pshhtt.. never! Everything I have (house, car, job, etc..) is where I live. I DO NOT suffer from Stockholm Syndrome and I am planning on renouncing as soon as my citizenship process here moves forward. This is a problem that is never going away. Enforcement of the FBAR only made it worse because they realised they could extort money from innocent people by lumping them into the same categories as real tax evaders. If anything, I only expect things to get worse.
When you talk to media or US politicians, don’t mention that normal workers are screwed by the elimination of the income exclusion. Tell them that the security workers that are phased in after the war machine is removed are affected by the income exclusion. Those private contractor guys (ex military) that are guarding over US-supplied war material in Iraq and surrounding countries are counting on you. Those are the real heroes.
@Mark Twain: constitutional rights requires someone to bankroll a challenge in court.
The federal courts side with the government on almost every point when it comes to tax treaties, so that would be at best an uphill struggle. And nobody is really motivated to challenge this stuff in courts anyway. Much simpler and cheaper just to renounce, fade into the woodwork, and let the US stew in juices of its own making. Once you’ve renounced and no longer have a dog in the fight, why spend your own time and money trying to save the US from itself?
@Watcher, I think you are 100% right. Especially for those of us who are long-term residents outside the U.S. OK it’s interesting to have the possibility of going back but it’s a “nice to have” and not a necessity.
I’ve heard people talk about how it’s not so simple and you must file 5 years back returns and so on and so forth. From what I hear (not a representative sample mind you) I don’t think folks are taking this terribly seriously. Just file something à la louche and say those famous words, “good enough for government work.” It’s not terribly clean and I wouldn’t recommend doing it but it takes away another barrier in people’s minds by lowering the perceived cost.
@Jefferson – Definitely paid French taxes on it. Still haven’t figured out if they really did tax the unemployment or not on the US side. I mean I see it there on the return but a reader told me to look for a form that would exclude it. I haven’t found it. Clearly the bulk of the tax owed was the capital gains on the property sale. But if anyone is game I’d be more than happy to discuss via email and perhaps we could have a look together and try to figure it out.
*It is absolutely correct that the Foreign Earned Income exclusion has not kept up with inflation. In fact indexiing it at all is as a resolt of a fairly recent legislative change.
It was first introduced in 1962 when the US seriously began the taxation of its citizens resident abroad. It was $35,000 for persons who had lived abroad for 3 years or longer. Adcusted by the Consumer Price Index Calculator that amount in 1962 would be equivalent in 2012 dollars to $266,085.76. The current FEIE is well under half that amount.
But has been pointed out by serveral the forecasts of additional tax revenue that would be generated by its elimination are terribly inaccurate because they are based on the assumption that such changes have no influence on the behavior of the persons affected. Why is this not taken into consideration? According to the Joint Tax Commission it is because there is no way to forecast what that would be. So they just ignore it.
The cold, hard fact is that the only way the elimination of the FEIE is ever going to substantially increase tax revenues is if Congress were to simultaneously limit the use of foreign tax credits to offset the US tax obligations. They have already done this once back in 1976. Before that those overseas could use all income taxes paid to foreign governments for foreign tax credtis, but with that legislation the allowable tax crredit was limited to foreign taxes on non-escluded income. And also, somewhere along the line, another change was made to require that the use of foreign tax credits would only be allowed if the foreign tax was on the same kind of income as the US tax. For example, if you had a surplus of foreign tax credtis on earned income they could not be applied to the US tax on capital gains. Since many countries do not tax capital gains at all, but some instead have an annual wealth tax on your assets, you would have no foreign tax credt to claim against the US capital gains tax, and you could not use wealth taxes you had paid over the years you owned the asset you sold as a foreign tax credit to offset the US tax on that capital gain. So you may have a surplus of foreign tax credits on earned income, but you cannot use them to offset the US tax on passive income. You must have paid foreign taxes on that passive income in order to be able to credit them against the US tax on that same income.
So don’t be surprised if Congress does not attempt to further limit the application of foreign income taxes, or even to eliminate the foreign tax credit altogether. We must maintain vigilance to any such legislation. But this is not to say that Congress could not tack something like this as a silent rider on some unrelated legislation with it being introduced 10 minutes before the vote is taken, so there would be no discussion or hearing at at all and overseas Americans would wake up some morning and discover that it had already happened. That, in essence, is how FATCA was tacked on to the HIRE Act in 2010 as a last-minute way to finance the expenditures in the HIRE Act in order to get it passed.
renouncing is a great solution—for the majority of folks on this site. Those who have no need or intention to work and live in US. That option simply isn’t there for some of us. Also, for many who use this site for info but don’t comment–they neither have that option.
Personally, if I followed emotion I would renounce my citizenship. Due to reality, I can only denounce it.
Therefore I can bury my head in the sand or find some way to not be thrown into debtor’s prison.
Too bad they don’t banish tax debtors to AUstralia anymore.
@Mark Twain,
re ‘denouncing’ vs. ‘renouncing’:
For some, denouncing can be a stage on the road to renouncing. We can’t be sure how many reading here can actually get to renouncing as long as the US process and policies amount to an effective denial of the right to expatriate in many cases http://www.justice.gov/olc/expatriation.htm , and requires a “trial by fire” http://en.wikipedia.org/wiki/Trial_by_ordeal and running the gauntlet http://en.wikipedia.org/wiki/Running_the_gauntlet of the IRS witch-hunt http://en.wiktionary.org/wiki/witch-hunt and inquisition http://en.wikipedia.org/wiki/Inquisition
For a very illuminating discussion of the ‘chilling’ effect of conditioning and coupling expatriation from US citizenship with satisfying the IRS, and the concomitant barriers the US has designed to deny all access to the fundamental right to expatriate, as well as a dissection of US government behaviour and arguments on this issue, see:
‘The Constitutionality of the Taxation Consequences For Renouncing US Citizenship’
byWilliam Thomas Worster
1020 Florida Tax Review [Vol.9:11
“……….This method of taxation goes to heart of what it means to be a citizen. Is a citizen simply an individual receiving benefits from the legitimate monopolizer of violence or is the citizen a member of a common endeavor to create and sustain a government among equals? If the people are the former, existing in a separated and adversarial relationship with the government, then perhaps the government should be empowered to tax all who it can reach for its own enrichment. If, on the other hand, the citizens are engaged in a collective relationship, with the government merely acting as their representative and agent, then when a citizen elects to leave the community and no longer
receive the rights of the community, then the individual should not have lingering obligations upon leaving the state” http://www.academia.edu/1228417/The_Constitutionality_of_the_Taxation_Consequences_for_Renouncing_US_Citizenship
In it, he established discrimination in USA upon persons with US national origin. THis could be used with FATCA also.