As part of their newly-published paper on “Options for Reducing the Deficit“, the Congressional Budget Office has suggested, as Option 12 (at page 130), to “Include All Income That U.S. Citizens Earn Abroad in Taxable Income” — in other words, to eliminate the Foreign Earned Income Exclusion and Foreign Housing Deduction. They estimate that this would bring in US$33.3 billion over the next five years, and US$88.5 billion by 2023 — roughly an order of magnitude more than the US$8.7 billion that FATCA is expected to reap in the course of a decade.
This is the third proposal this year to eliminate the FEIE. Eight months ago, the Congressional Progressive Caucus derided the FEIE as the “Foreign Earned Income Loophole” and claimed that eliminating it would raise US$71 billion over ten years (not clear whether they include the FHD in that number). Days before that, when Dennis Ross (R-FL) presented his own hilariously hypocritical plan to kill the FEIE so that corporations could enjoy territorial taxation, the Joint Committee on Taxation estimated that cutting both the FEIE and the FHD would raise US$36.3 billion over five years. CBO states that they are are using the JCT’s new estimates as updated for 2014.
As previously pointed out, the JCT estimates seem to assume that the “cost” of the FEIE is the foregone tax on all of the excluded income by U.S. Persons who file form 2555 — 415,519 excluding an average of $62,147 each, according to 2010 data — when in reality, if the FEIE were eliminated, many of them would simply switch to using the more-complicated Foreign Tax Credit, incurring higher tax preparation costs, but offering no corresponding benefit to the U.S. Treasury. Bizarrely, CBO acknowledges this prospect in their report, but doesn’t adjust their estimates to account for it:
U.S. citizens who live in other countries must file an individual U.S. tax return each year, but several provisions of the tax code reduce their U.S. tax liability. First, those citizens may exclude from taxation some of the income they earn abroad: up to $97,600 for single filers and up to $195,200 for joint filers in calendar year 2013. (Those amounts are adjusted, or indexed, for inflation.) Second, under certain circumstances, U.S. citizens living abroad can also claim an exclusion or deduction for any allowance their employers provide for housing in a foreign country. Those two tax provisions—combined with the personal exemptions and deductions available to taxpayers living in either the United States or other countries—mean that U.S. citizens who reside abroad and earn over $100,000 (or, in the case of married U.S. citizens living abroad, over $200,000) may not incur any U.S. income tax liability, even if they pay no taxes to the country in which they live. Third, if those citizens pay taxes to the country in which they live, they can receive a credit on their U.S. taxes for foreign taxes paid on any income above the U.S. exclusion amount. As a result, most U.S. tax filers who live abroad do not have any U.S. tax liability.
This option would retain the credit for taxes paid to foreign governments but would require U.S. citizens living overseas to include all of the income they earned abroad, including housing allowances, in their adjusted gross income. (Adjusted gross income includes income from all sources not specifically excluded by the tax code, minus certain deductions.) As a result, U.S. citizens living in countries with lower tax rates than those in the United States would tend to owe more—and, in some cases, potentially much more—in U.S. taxes than under current law, while U.S. citizens residing in countries with higher tax rates would generally continue not to owe U.S. taxes on their earned income. The staff of the Joint Committee on Taxation estimates that implementing such a change would increase revenues by $89 billion over the 2014–2023 period.
(Of course, there are far more than 415,519 Americans residing abroad, but contrary to the assumptions behind FATCA and similar laws, no one actually knows if these non-filers are earning much income at all, nor what portion of them live in low-tax countries and what portion live in high-tax countries. If non-filers are on average more like average residents of their countries, and are living in the more typical destinations for Americans abroad such as Canada, Mexico, and Western Europe — and less like the Middle East corporate assignees with Big 4 assistance who are the most likely to be aware of their U.S. filing requirements — then the U.S. is going to find very slim pickings from the pockets of its newly FEIE-less diaspora, especially in comparison to the cost of hunting down all these non-filers and processing their paperwork.)
The Congressional Budget Office goes on to demonstrate that — like far too many Homelanders — they do not understand the difference between moving overseas and renouncing citizenship:
One rationale for eliminating the partial exclusion for foreign earnings is related to a certain concept of equity—that U.S. citizens with comparable income should incur similar tax liabilities, regardless of where they live. Under the option, people could not move to low-tax foreign countries to escape U.S. tax liability while retaining the benefits of U.S. citizenship. (To discourage U.S. citizens from moving abroad to avoid taxes, the Heroes Earnings Assistance and Relief Tax Act of 2008 instituted a significant “expatriation tax” on the net worth of wealthy taxpayers who renounce their U.S. citizenship for any reason.)
As repeatedly noted by Brockers, this “expatriation tax” applies not just to “wealthy taxpayers” but anyone who cannot certify under penalty of perjury on Form 8854 that they filed every single one of the ridiculous paperwork messes the Homeland imposes on Americans abroad in the name of “horizontal equity”. And it is already the case under current law that people cannot “escape U.S. tax liability while retaining the benefits of U.S. citizenship” — if you live in a foreign country and receive unemployment or disability payments from them (funded out of high taxes you paid in prior years), the U.S. considers that “unearned income” and taxes you on it without any FEIE.
On the bright side, unlike every time they previously brought up the FEIE, at least Congress admits:
However, the United States is the only member of the Organisation for Economic Co-operation and Development that taxes the income of its citizens on a worldwide basis; therefore, eliminating the exemption for income earned abroad would move the United States further out of alignment with the rest of the world in terms of the tax treatment of foreign-earned income. Another argument for not making this change is that U.S. citizens who live in other countries do not receive all of the same services from the U.S. government that are available domestically, and they may receive fewer services from the low-tax countries in which they reside.
The fact that they point this out at all is a certain measure of progress compared to last year, and is doubtless in no small part thanks to Shadow Raider’s ongoing efforts to educate Congressional staffers on the uniqueness of the U.S.’ system of citizenship-based taxation.
Notwithstanding the fact that no other country (save Eritrea) adopts this position, there is a difference between paying “some tax” and the lifetime of form filling, threats, intimidation, loss of privacy and dignity, lost time and the emotional and financial cost associated with the “insurance”. As with other life risks that can be insured, various insurers compete for business to insure that risk. In the case of the US and its citizenship, people seem to be dumping the insurer in droves by renouncing. The price of the insurance is way too high.
No reaction from U.S. press or politicians yet. Only thing so far is a cut-n-paste summary from Accounting Today which scrupulously avoids stating anything that wasn’t in the GAO report, not even to get an outside quote from the usual suspects:
The US benefits from large numbers of young adult immigrants whose upbringing was paid for by another country. By the same reasoning, the US should be recompensing these countries.
Translation: Argue all you want – you have to pay anyway.
Communist Romania charged its emigrants the cost of their education as a form of exit tax. This is a comment to a 2008 Economist article “America’s Berlin Wall, Congress increases the ransom expats must pay to escape the taxman” on the US HEART legislation and exit tax:
“Reminds me of some of the rules passed by the defunct regime in Romania prior to 1990. Those who insisted to emigrate had to pay for the education they got in Romania. But since education (especially higher level education: which for most included, besides basic education, housing and meals) and health care were “free”, the requirement doesn’t seem unjustified. However, the US acts like a slave owner, keeping its citizens at high ransom. And as far as I hear, there is no free higher education or health care in the US.”
CBT is just another form of an exit tax, but payable in installments.
Hmm, here in Germany going to university is free. In the USA I had to pay for my B.S. and my M.S. out of my own pocket. Where can I apply for a reimbursement on that public investment in my education which I never received???
My relatives in the USA received checks from the IRS a couple of times during the past decade, simply because they were US taxpayers. I think they were referred to as ‘economic stimulous’ payments or some such thing. I never received any of those, simply because I was living ‘abroad’. There are NO benefits of having US citizenship when living abroad!!!
The GAO Report puts a stamp on the need for long term expats to renounce or relinquish US slavemanship.
The report completely fails to address the double taxation, inability to save for retirement, tons of complicated forms, and confiscatory penalties faced by Americans living abroad on a permeant basis.
FEIE is a bandaid for temporary expats, nothing more.
Seems to me Eritrea is much more honest! At least they say the taxes collected are taken to finance the homeland. PERIOD.
How is it that time and again America can get by spreading such downright lies? The only thing US citizenship affords is the chance to ” go home” again one day if one so choses. And every country`s passport affords that- no taxes required. They save your ass in a pinch? You get a bill for it. They afford you education? You get the bill for it. They give you services at consulates? You get a bill for it.
Mark Steyn raises some interesting points about whether the US offers any protection. More likely that any association with the US increases a persons jeopardy in many countries – and FATCA is geared to “out” anyone with a US connection:
Shadow Raider’s link to the GAO has the email and phone number of someone you can contact for more information on the report:
GAO made no recommendations in this report. IRS and Treasury provided technical comments that were incorporated as appropriate. Commerce said it had no comments.
For more information, contact James R. McTigue, Jr. at (202) 512-9110 or firstname.lastname@example.org.
Still very little reaction from the Homeland media on the GAO report, still just “book reports” with no outside opinion or analysis, accepting the government’s framing of FEIE as a “tax break” (rather than the reality of a tiny bandaid of “human capital export neutrality” subsidy against CBT’s giant compliance-costs penalty for working outside of the U.S.):
“….other experts said that U.S. citizens living and working abroad benefit from federal services—such as national defense, foreign affairs, income maintenance, and basic research—that produce social or humanitarian benefits that are not directly apportioned to specific individuals. For example, citizens abroad benefit from years of public investment in their education, the cost of which is typically recaptured over their lifetimes….”
And those born abroad, and living their entire lives outside the US who are deemed “taxable persons” by parentage alone?
They have never benefited from any of those examples listed. And those who left as infants and children? Who paid for my education, defense and foreign affairs costs? My parents, via their Canadian taxes, and later, myself as an adult. What horse*&%$#.
And CBT justified due to the imaginary benefit from “research”? Give me a @#$% break. The author of that example must have been really desperate – first time they tried to use ‘research’ as a benefit of being sentenced to the status of lifetime US taxable serf abroad.
Apparently, if you want to produce ‘research’ on this issue, you don’t have to meet even the minimum standards required of an ordinary first year undergraduate. You can just pick and choose your few ‘experts’, and apparently, those ‘experts’ can SAY anything they want to – they don’t have to actually meet any burden of proof. And then you can quote them – whether they’re reliable or informed or biased or objective or not.
And who has paid for the security and wellbeing of those millions living abroad? They do – as taxpayers in the non-US countries where they live, and also their fellow non-US taxpayers. Who pays for our healthcare outside the US? And our education? AND for seniors and those with disabilities? Ourselves and our fellow non-US taxpayers outside the US, that’s who.
What a distortion and a convenient self-justification of the Homelander bias.
Basically, the conclusion was; “they have to pay because we said so”.
Finland, Sweden, Denmark, the Netherlands, Germany, Austria, Australia, Canada, France, Norway, and Switzerland all have higher public R&D spending as a percentage of GDP than does the United States.
Can’t seem to find any statistics on how much basic research Eritrea conducts. But I’m sure they’re a world leader with all that $$$ they’re getting from their 2% diaspora tax.
JCT still going with the FEIE/FHD “tax expenditure” BS. Their numbers keep inflating; now they claim it “costs” US$47.6 billion over 5 years.
Prediction: as FATCA results in more & more U.S. Persons abroad filing tax returns which show zero actual tax owed, the JCT’s naive estimate of the “cost” of the FEIE is going to keep going further and further up until finally it proves to be politically irresistable to try repealing it again. And then the JCT will be utterly mystified when everyone switches to the Section 901 foreign tax credit instead.
Yet another pair of lazy, ignorant academics regurgitating figures for the “cost” of the FEIE without taking unused foreign tax credits into account
As always, they call it a “tax subsidy” for taking jobs abroad and claim that it “adds complexity”, without even acknowledging the fact that the baseline CBT system for which they advocate does not even remotely approach their mythical ideal of “human capital export neutrality”, but penalises it massively with compliance costs and fines for living an ordinary financial life outside of the U.S.
That’s because they live in Bizarro world, and paid the same no matter how lousy a job they do.
And, it’s “Options for Reducing the Deficit” time again! Same old proposal to eliminate the FEIE. On the bright side, at least CBO continues to acknowledge that citizenship-based taxation is “out of alignment with the rest of the world”:
Amusingly, this is basically the only significant mention of the word “citizen” in the entire 316-page mess. There’s only two other times the word is even used. One is a bare mention in the definition of “US taxpayer” (p. 172, in discussing a financial transactions tax), and the other is:
I met those two lazy, ignorant academics last month and it was a not too pleasant experience.
Well, at least the CBO recognised that we don’t get all the services of government. It is a sad day when the government bureaucrats come out with better thought-out material than legal scholars. Is this a backwater in legal scholarship? The overall quality seems really low.
I suspect that the real problem is that the U.S. wants us to pay taxes to it, but it has to pretend that this is about tax evasion. If all U.S. citizens moved to Denmark and started paying taxes through the nose, I don’t think the U.S. would be happy because we would never owe it taxes, and that is what it really wants. The U.S. is quite pathetic sometimes.
The education point is odd for the U.S. Yes, it contributed to my education by providing loans, but the UK government paid for the entire education, including university, of lots of people who emigrated to the U.S. The U.S. largely benefits from the exchange. It wants to have all the benefits of globalization but not the costs. Fortunately, the WTO tends to see right through it.