Taxation of Americans Working Overseas (June 2006)

The Issue

Current U.S. taxation of U.S. citizens overseas is completely out of step with the international norm. No developed country other than the U.S. imposes any tax on the foreign earned income of its citizens living and working abroad. (Only Eritrea, North Korea, the Philippines, Vietnam and the United States do).

The U.S. foreign earned income exclusion, contained in Section 911 of the Internal Revenue Code, partially ameliorates the effects of the U.S. approach. Under Section 911 a U.S. citizen working and residing overseas is entitled under certain conditions to exclude from U.S. income tax up to US$ 80,000 of foreign earned income.

Taxing U.S. citizens abroad reduces the number of Americans working overseas and thereby reduces U.S. exports. A 2005 PriceWaterhouseCoopers study shows that eliminating the Section 911 exclusion altogether would reduce U.S. manufactured exports by an estimated 1.14 percent, or about US$ 8.1 billion in 2004, affecting 77,115 domestic jobs in the U.S. Further limiting the housing exclusion is estimated to reduce U.S. manufactured exports by US$ 2.5 billion, affecting 23,676 domestic jobs in the U.S.

American business representatives abroad increase U.S. exports and U.S. employment. Exports of U.S. goods and services are critical to the U.S. economy and create hundreds of thousands of jobs in the U.S. The PriceWaterhouseCoopers study estimated that each billion dollars of manufactured exports supported 9,531 domestic jobs in 2004. This study estimated that removing the cap on the foreign earned income exclusion would increase U.S. manufactured exports by US$ 14.4 billion supporting 137,319 domestic jobs in the U.S.

What Needs To Be Done

The United States should revise its tax laws so the tax costs of basing us citizens overseas are not substantially higher than those tax costs borne by our competitors from every other developed country in the world.

• Congress should resist calls to abolish the Section 911 exclusion.

• Ideally, the U.S. should revise its tax laws to join the international norm of not taxing the foreign earned income of citizens who are working and living overseas. This would eliminate this competitive disadvantage, increase U.S. exports of good and services, and increase the U.S. jobs those exports create.

• At a minimum, the foreign earned income exclusion should be increased to US$150,000 and then immediately be indexed for inflation. This would reduce the extent to which the U.S. taxation of Americans living and working overseas undermines their competitiveness and the competitiveness of American companies that employ them.