THE EXTRAORDINARY EXPERIMENT THAT FAILED:
The United States has been conducting one of the most expensive, and futile economic experiments ever undertaken by a western nation since 1962. This experiment is
whether you can effectively protect jobs in the United States by using the US Tax Code to discourage US citizens from living, working and investing abroad. All of the evidence to date, and it is considerable, suggests
that not only does this not protect jobs at home, it leads to massive LOSS of jobs at home, and to now what has become the worlds largest and most persistent trade deficit.
WHERE THE PROBLEM BEGAN:
The roots of
this extraordinary saga go back to the period when the United States first introduced a federal income tax. This tax was initially to be imposed on all "legitimate" income. Since this implied that illegally
obtained income would thereby be exempt from tax, the wording was quickly changed to embrace "income from whatever source derived". Inevitably, the question then arose of whether this also included income that
was earned abroad. The issue eventually reached the Supreme Court, which ruled that the taxation of foreign source income was indeed constitutional if congress wanted to do so. Constitutionally okay, but wise? [Were the
issues of jurisdiction, place of residence and dual taxation agreements properly considered? When was this ruling?]
BACK IN THE 1920s THE CONGRESS HAD A BETTER APPRECIATION OF THE IMPORTANCE OF OVERSEAS AMERICANS TO
Shortly thereafter, in 1926, the Congress addressed the wisdom of such taxation. After much debate and careful deliberation, the Congress decided that it would not be in the interest of the United
States to tax the foreign source of overseas Americans. The prevailing argument was that such a tax would probably have a major negative impact on US trade. The Congress simultaneously decided that the income of US
Foreign Service officers on duty abroad should also be exempt from US Federal taxation.
THE FIRST RETREAT:
The first breach in this policy of equal treatment of all Americans living abroad occurred in 1932, when
Congress rescinded the exemption from US taxation of Foreign Service Officers on duty away from home. This was the beginning of a very unfortunate differentiation in treatment of overseas Americans which has opened a
major fissure in the solidarity of the overseas American community, and which has generated misunderstandings as well as hard feelings between Americans in the public and the private sector abroad that persist to this
day. [i.e.: perks of military overseas]
THEN IT GOT WORSE:
After World War II, press reports about a few movie actors, who were temporarily abroad making movies and thereby avoiding taxation of their income, goaded
the Congress to introduce more stringent rules establishing minimum periods of absence from the US to trigger immunity from US taxation of income earned abroad.
THE KNOCKOUT BLOW:
The truly devastating blow to
overseas Americans, and the real origin of our perennial trade deficits, occurred in 1962. Under pressure from labor unions, and under the influence of former Harvard Law School professor Stanley Surrey, President
Kennedy asked Congress to enact new legislation that would tax foreign source income of all Americans living and working abroad. Henceforth, overseas Americans would become "least favored competitors" all over
OTHER COUNTRIES REFUSE TO FOLLOW OUR LEAD:
In the 1960s, shortly after the United States started using the Tax Code to harass and de-motivate its expatriates, other nations also started taking a closer
look at how to handle the problems confronting their expatriates working in a foreign country. They came to the exactly opposite conclusion. They saw their overseas citizens as assets in their trade strategies and
wanted to help them to succeed. Thus, all of these other nations rejected the US approach and unanimously agreed that they would pursue policies to guarantee a "most favored competitor" position for their
expatriates. The United States stood alone in the war it had declared upon itself.
OVERSEAS AMERICANS ARE IN PLAY AGAIN:
Professor Surrey promoted another novel notion that any income that the US Government exempts
from taxation should be considered an expenditure of comparable amount. Thus, a "revenue expenditure" is lost tax revenues from income that is exempt from taxation. The recent GATT negotiations, leading to
reduced tariffs, will also lead to some loss of government revenues. The "revenue expenditure" from not fully taxing the income of overseas Americans looms, for some, as an attractive alternate source of new
revenue. Section 911 is once again in play, because for the uninitiated or naive, this looks like all benefit at no cost.
OUR CHRONIC TRADE DEFICIT DEMONSTRATES THE STUNNING FAILURE:
The persistence of the chronic
trade deficits, which have now accumulated to more than a trillion dollars, is a monument to the victory of stupidity over common sense in a war we have been waging upon ourselves. The experiment has failed, but cannot
be stopped. The losses keep accumulating because there is no leadership to bring about the needed change.
RECENT DEVELOPMENTS in the '90s
The foreign earned income (f.e.i.) exclusion was increased from 70.000 $ to
80.000 $ with further increases of 2.000 $ for 5 years. The end result will be an exemption of 90.000 $. That sounds like a lot, but double taxes still hit normal corporate expatriots who live in Japan and must include
the "fair" local market value of employer paid housing. Thus the increase of the f.e.i. exclusion does not solve the problem and is not as good as Residence Based Taxation.
THE SECTION 911 COALITION
deflecting a legislative attack on the f.e.i. exclusion and getting the exemption increased to 80.000 $, the 911 coalition went back into hibernation. It did not continue on toward:
THE PROPER SOLUTION - globally accepted, OECD recommended RESIDENCE BASED TAXATION
President Bush should ask Congress to pass a "SUPER 911" amendment to the Tax Code. "SUPER 911" would exclude all
foreign source income from US taxation, for individuals who meet simple residence requirements, putting Americans on par with overseas citizens of every other nationality, and on a level playing field with for the first
time since 1962. This would unleash the full competitive genius of Americans and finally overcome our chronic trade problems.