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.
Let me add that while nobody was talking about eliminating citizenship-based taxation back in 1978, it is at least being mentioned today. Not by many and not often, but it is now comes up and ACA has formally presented a Working Paper with a plan that, conservatively speaking, is revenue neutral.
That does not mean that it is about to happen, but slowly and surely hammering away at this theme, it is at least being mentioned. To me that is an encouraging change. It is still not imminent, but I do hope that the some of the sleeping “powers that be” may be beginning to open their eyelids just a crack. That is what keeps me going!
When you go around Europe all the big projects are done by German or British construction companies. Please remember due to trade agreements, US companies can reply to big infrastructure projects via the European Journel the same as EU companies.
I’ve never seen an American one. British TV had a documentary about Africa construction, it’s the same story no Americans, but in this case the Chinese companies are doing all the building.
Tutor Perini used to do big infrastructure overseas in the 70s, I know because I knew someone that worked for them and told me about his projects. Today you look on their website it’s all US projects except for in Northern Canada, and Palau (in the pacific). Both places have close US connections. I can only come to the conclusion they don’t do a lot of business overseas because of the tax situation in the US. It’s left to the Europeans and Chinese to fill the gap at America’s expense.
America has outsourced it’s oversea sales and marketing to “foreigners” who have don’t care either way as long as they keep their jobs or makes them money. US-made products often do not feature in the plans. I’ve listened to oversea businessmen talking about the US, “it’s yesterday’s news,” “a mature slow growing market that requires a lot of investment for low returns,” “we only engage the US to retain world market share” that’s how America is seen abroad. It’s certainly not the go-go BRICs with a chance at much higher returns today and in future.
It’s all about boots on the ground and the US doesn’t have any because the US government is worried about losing a few bucks in tax revenue.
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The cultural factor also needs to be considered here. As Roger Conklin pointed out some time ago, the United States ranks very low in proportion of citizens with extraterritorial experience, and much more so if immigrants are excluded. Those who have substantial direct lived acquaintance with the “foreign” — excluding military and others who shelter in bubbles and compounds — are likely to still be outside the United States. These are the adventuresome, the missionaries, the real entrepreneurs, the risk-takers, the questers for knowledge, the linguists. What Americans used to be more, until they built a big fort and became self-satisfied inside of it. This may be an irreversible state of affairs. No lardass is going to get off the couch until the junk food runs out and/or the boob tube blows. Only a massive disaster, an epic push event, will bring the diaspora that resident United States persons require to head back toward a greater spiritual health. Different government tax policy will not do this.
@USX, sometimes I wish there was a “like” button on comments. This is one of those times.
I think discrimination against the Diaspora will continue until enough ex-pats refuse to sit in the “back of the bus” and renounce / relinquish their citizenships.
The higher the body count, the more attention brought to the injustices of citizenship-based taxation.
@usxcanada — I agree with Petros in your description of the cultural change of America. This may also be the breeding place of the discontent and distrust for those of us who have ventured out to other countries, seeking new experiences and embracing multiculturalism.
@FromTheWilderness: unfortunately I do not think more and more renunciations, by themselves, will convince Americans that the tax system is to blame. They won’t see the connection unless prominent renouncers tell the truth, and the stories of people like Roger Conklin are widely broadcast. They have to see a clear connection between the taxation of offshore citizens (leading to loss of talent and of offshore trade) and the mediocrity of the US economy.
But first they have to have an appreciation of just how offshore entrepreneurial activity by Americans leads to wealth, jobs and economic growth at home. I did not have much appreciation for this concept, beyond a vague general understanding of the value of trade, until I read Roger’s story. I just never saw the connection before. I thought that America can’t compete overseas because of cheaper labor in other countries.
America is so big and so self-absorbed that most Americans don’t see how dependent they are on relationships with other countries. Personal stories like the ones Roger has been telling us would go a long way to helping people see what’s wrong.
Roger, your personal story resonates with me because I lived and worked many years in Switzerland and loved it here but I had a sense that things were getting worse for US expats so I felt compelled to leave and go back to the USA.
After I landed in the US, I missed Europe and began to regret my decision. So I moved back to Europe and renounced. No regrets.
After that experience I will never let a government tell me how I should live my life or where to live.
@Petros, it is not really the Greed of Government that had propelled the US government to tax it citizens who live abroad, because the imposition of this tax destroys probably 30 times more tax revenue than it generates. Because US citizens are priced out of the overseas job market by this citizenship-based subjection simultaneously to the the usually very different tax laws of two countries, they stay home. At 18% of GDP the tax revenue of $134 billon that fails to be generated by the 7.9 Americans who are without jobs because of the $747 billion US trade deficit makes the $6 billion that the IRS rakes in from Americans living abroad certainly pales by comparison.
What really is the purpose of this tax? The insescapable conclusion is that is to punish Americans who have the traitorous audacity to live in any country other than the US. So they stay home to escape this punishment and American products go unsold in the world market. The evidence is as plain as the nose on your face, yet most of those who make the rules are totally disinterested in what this does to weaken the US economy and destroy jobs. They consider themselves heros for keeping Americans home “where they belong.”
@foxlady, this is not to say that product costs are not important in this competitive world, but price is but one factor in the selling process. There are certainly many very high labor content products where neither the US or any other industrialized nation can compete with producers in low-wage countries. But value-added products have to be sold and that takes feet on the ground, knocking on doors to be succcesful.
Do you suppose that it is purely by coincidednce that the No. 1 market for Mercedes Benz vehicles today is China?
I guess nobody ever told Chancellor Merkel that Germany cannot export its products because its average wage levels are 26% higher than in the United States. Not knowing this Germany continues to continue to encourage it citizens to relocate abroad to sell its high priced products to countries like low-wage China.
And the crazy Swiss, whose wage levels are even higher than those of Germany, are currently negotiating a free trade agreement with China. With a 3 % unemploment rate, the lowest in recent history for that country, its leaders must be totally insane. They obvousy don’t understand economics, in spite of the fact that their per-captita exports to China are 9.3 times greater than those of the US must be a mistake, because it just can’t happen.
Roger, you have often referred to the Tax Reform Act of 1976 as the point at which the US trade deficit began to rise, and also the point at which you lost your tax deductions when you filled in your US tax return from Brazil.
Wikipedia gives very little detail on what was in that Act. Would you be able to tell me what was in it that resulted in all this? It wasn’t that Act that established citizen-based taxation rather than residence-based, was it? I really want to understand this, so I can explain it to my family, who are sympathetic to our plight. Thanks for any enlightenment.
@foxlady, The Tax Reform Act of 1976 included many things besides increasing the taxation of Americans abroad. That is why Wikipedia is so sketchy about this speficic parf of that Act.
Extraterritorial taxation by the US began in 1962 under President Kenney. He was upset that certain never-named movie actors were supossedly filming in Mexico, where taxes were lower then, rather than in Hollywood. That is was triggered the Tax Act of 1962. It provided for a $35,000 foreign income exclusion, which in those days the salary level of a CEO, so it affected very few. Subsequently the FEIE was cut back to $25,000 for those out of the country for 3 or more years, or $20,000 for less. You could claim a US tax credit for all foreign taxes paid on foreign source incomek but not . That was the law when I went abroad in 1966.
The Tax Reform Act of 1976 reduced the FEIE to $15,000 “off thae bottom,” that is on the first $15,000 at the lowest marginal tax rate for that amount, introducted “stacking” which taxed everything above $15,000 at the marginal rate that would have applied had there been no FEIE, restricted the use of foreign tax credits to only foreign taxes paid onincome that was not excluded from US tax. Almost silulaneously the Tax Court ruled that employer reimbursement and “in kind” non monetary befefits were to be treated as taxable income. This included various items expats sometimes received such as payment of tutition for children to attend a private school abroad where they were excluded from local public schools for religious or linguistic reasons, the value of employer provided housing in remote areas where no housing was available, rent reimbursements in areas of very high housing costs or where expats had to live in segregated-from-locals housing, transportation for obligatory home leave where persons were in very remot areas, reimbursements for tax reimbursements, security for you and your family in dangerous areas where foreigners must have bodyguards for themselves and their familiies, etc. All of these “bernefits” are tax free for US diplomats and Federal employees abroad under separate legislation, but they were identified as taxable for private citizens. You were also taxed on obligatory employer contributions to foreign social security and pension plans – money which you never saw or could never access until after you retired.
With the FEIE of $25,000 when I went abroad in 1966, plus foreign tax credits, the only US tax I had to pay was on US-source passive income such as interest,. dividends and capital gains. These were double taxed by the foreign governments both in Peru and Brazil in those days. Neither allowed a foreign tax credit against taxes paid on income from outside of those countries, but they just doule taxed it.
Subsequently the US law changed so that foreign tax credits could only be utilized to offset fhe US tax if the foreign tax had been paid on that same kind of income abroad. In other words if you had a surplus of earned income tax credits you could not apply them against the US tax on US source capital gains, interest or dividends. Foreign taxes paid on these non-passive income items could be used to offse the US tax.
This is just a thmbnail sketch of the 1976 legislation. It was this legislation that really knocked US expats for a loop.
Thanks Roger. There has to be a reason, there has to be some sort of pay-off for someone, if this madness is still going on. I found paper by Dan Mirtchell of CATO that repeats much of what you told me, and has some other examples too. It’s here:
Despite all the instances over several decades when knowledgeable people have talked to Congress about this problem, they still haven’t done anything about it, at least not since Reagan in the ’80s. Sometimes they still talk about eliminating the FEIE and blatantly double-taxing expats. I despair of the US government.
@foxladyhawk, you are more than welcome. I know Dan Mitchell and have interfaced with him in Washington on several occasions. He used to be with the Heritage Foundation but moved to Cato several years ago. I occassionaly see him being interviewed on Fox News about tax issues. He is indeed a great supporter of our cause.