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.