Measure would eliminate tax exclusion for Americans abroad

International Herald Tribune ^ | Saturday, May 17, 2003 | Elizabeth Olson/IHT

[KKing]

Measure would eliminate tax exclusion for Americans abroad
By Elizabeth Olson/IHT (IHT)
Saturday, May 17, 2003

WASHINGTON: A provision to eliminate the income-tax exclusion for American wage earners overseas was in the Senate version of the tax package approved late Thursday, and its future could be decided within days when congressional negotiators are to begin hammering out the final bill.

Repealing the income tax break, which allows each American worker to exclude $80,000 in income in calculating U.S. taxes, is not in the House of Representatives' $550 billion package, passed this month. Reconciling the two very different versions will be done in what will probably be a contentious conference between the two houses.

As the Senate debated the legislation late Thursday, Senator John Breaux, Democrat of Louisiana, introduced an amendment to remove the repeal provision, arguing that it amounted to “a $35 billion tax increase on schoolteachers who work overseas, ministers who work overseas and Catholic relief work and charitable work, on technicians that work overseas and earn income overseas and pay taxes overseas."

Such people do not “get the benefits of living in this country, therefore, we give them a tax exemption,” he said.

“This is not a tax increase," Charles Grassley, Republican of Iowa and chairman of the Senate Finance Committee, retorted.

“This is a loophole closer for people who live overseas," he said. "Taxpayers' dollars should in fact not be subsidizing an employer's cost of sending an employee overseas." He said Americans abroad would not be double-taxed because “the foreign tax credit can be used against American taxes owed.”

Grassley said that 34 million people would benefit from dropping taxes on stock dividends “against only 358,000 people who benefit.”

Breaux's amendment failed, 51 to 49.

“We're flabbergasted,” said Lee Gribble, vice-chairman of the American Business Council of Gulf Countries. “This was packaged as a jobs-and-growth bill, but this provision flies in the face of the logic of the whole package. It jeopardizes jobs overseas by making it more expensive for workers.”

Section 911 of the U.S. tax code allows U.S. citizens who live outside the country for at least 330 days each year to exclude the first $80,000 in income. Overseas workers pay taxes to their host country, as well as paying taxes on their benefits, allowances and overseas adjustments - and their income above $80,000 - to the U.S. government.

The United States is the only major, industrialized country to tax the income citizens earn working abroad, said the U.S. Chamber of Commerce, which supports the tax exclusion.

“Robbing Peter to pay Paul is a poor tax strategy,” said Thomas Donohue, the chamber's president.

The committee added almost 40 tax increases and other measures to replace lost revenue. The foreign-earned income repeal would raise the most.

International Herald Tribune

[KKing]

This would affect me and a few more Freepers overseas - I thought this would be a good read and wanted to see where Freepers are on this issue.

Apologies if it has been posted already.

[Hillarys Gate Cult]

Europeans would sure benefit from it.

[clamboat]

Let me get this straight - a democrat (John Breaux, D Louisiana) tried to prevent the repeal of this tax exclusion, and a republican (Charles Grassley, R Iowa) tried to block that effort claiming "This is not a tax increase."

OK, now I got it. Hard to keep the players straight if they keep changing sides.

[DPB101]

I have a better idea. Eliminate the Social Security tax exclusion for government employees. Nearly 7 million of them don't pay SS tax. Have them put their pension in the SS "lockbox" (general fund) as the rest of America does. In fact, take all the money they have invested in the markets in lieu of paying Social Security tax and use the money to cut taxes for people in the private sector.

Or fire every tenth government worker. That would work too.

[KKing]

I've seen the bill come up at least twice in my 12 years overseas. I will once again contact my Congressman to let them know this is wrong.

The British folks here only have to be out of the UK for 9 months, its bad enough Americans have to do 330 days outside of the USA.

[Hillarys Gate Cult]

I was overseas when it came up a few years ago. We sat around calculating the impact if it happened. The company did it's own numbers and ours came close. It would cost more money to the government than it brought in, as all liberal tax plans do.

[KKing]

That's what gets me though...Is this even a Liberal push?

Why would any Pubbie vote in favor of this? I'm hoping a few of VP Cheney's buddies from Halliburton grill him over this.

It's bad enough we have to compete against Third Country Nationals that are willing to work for a fraction of what Americans make.

[John Valentine]

I am angry and amazed that such a retrogressive move would come from --- the Republicans!

I was almost reduced to tears by the uninformed, class baiting comments from Charles Grassley... a Republican!

I feel like I have been sold out for nothing.

“This is a loophole closer for people who live overseas," Grassley said. "Taxpayers' dollars should in fact not be subsidizing an employer's cost of sending an employee overseas." He said Americans abroad would not be double-taxed because “the foreign tax credit can be used against American taxes owed.”

This is a crock. Is it possible that Grassley is really this ignorant?

First of all, the present law is not a "loophole" for people who "live" overseas, it is a tax provision to protect people who WORK overseas from predatory taxation.

People who "live" overseas should and do pay taxes on their income where it is earned. The question is whether it ought to be taxed again on the basis of citizenship.

Our competitors (Britian, France, Germany, Japan) don't tax that way.

And, American companies won't have to pay US taxes on Aussies or Brits or Japanese or Koreans or French they hire to replace American workers, either.

Grassley says "Taxpayers' dollars should in fact not be subsidizing an employer's cost of sending an employee overseas." Well, the flesh and blood overseas American worker shouldn't have to subsidize his American employer's deployment costs either.

But, that is exactly what will happen when the exclusion goes away.

I will have to use my "real" earnings to pay US taxes on home leave transportation, dependent primary and secondary education, cost of living equalization payments, housing allowances, and not the least, Foreign Tax subsidy, all sorts of "pass-through" payments made by my empoyer in support of my deployment. These items are all taxable income and they are more than double my actual pay- and the taxes on them will consume three quarters of my earnings.

I know this because once, due to a paperwork screw up, my US tax deductions were taken out of my paycheck without considering the exclusion's effect on the US taxes I would owe. The result: about $1200 left for me out of $6,000- that was a month's pay with uplifts. Thankfully, the company LOANED me $1500 as an employee recievable to get me through the next month until the problem could be fixed.

But what if that problem COULDN'T be fixed. What if that were the LAW?

We'd be left with maybe a quarter or less of what we would earn in the US, where our kids actually get to go to the schools our taxes support, where we don't need a home leave because we are already home, and our kids can see their granparents without flying 16 hours to do so.

How much money will this raise? ZIP.

Because, in a very short time there won't be any Americans left working overseas. Only the insane would buy into the deal, or independently wealthy could afford it.

[tomakaze]

to hell with the details, all this nibbling around at the margins, tweaking this and that.
Eliminate the income tax period. It is evil.

[KKing]

Excellent points.

I use to work with Parsons back in the mid 90's here in Kuwait and we didn't even have to pay FICA because Parsons had set up an offshore account for payroll. Most of us liked it that way because at our ages, most felt we wouldn't see any SS when it came time to collect.

I can assure you - there will be a mass exodus of employees from this region if we lose the tax break - it will not be worth all the extra hardships to be away from America anymore.

[gr8eman]

This is unbelievable. Not only will workers leave their overseas jobs because of this, it will cause companies, mainly defense contractors, to increase the dollar amount of their bids on contracts that include civilian employees overseas. That means the costs of the government to have civilians doing the jobs that the military (namely the Army) doesn't want to train its people to do will increase dramatically. So the government will get their income tax and then have to pay the same amount or more to these companies to keep these people overseas. Definitely it will be more because of the paperwork filter! Grassley and his likeminded ilk are idiots and need to be stopped!!!!!

[Free the USA]

http://www.freerepublic.com/perl/bump-list

[ragnarocker]

“This is a loophole closer for people who live overseas," Grassley said. "Taxpayers' dollars should in fact not be subsidizing an employer's cost of sending an employee overseas."

On Wednesday May 14 the American Chamber of Commerce Japan sent out notice of this news to its members with a copy of the letter the president sent to every senator. A few years ago the chamber and the republicans abroad fought to get the exclusion raised.

Does anyone know who is on the reconciliation committee?

[angkor]

For some reason I'm not surprised that Grassley would take the demagogue's position on the tax credit. He is a stupid man.

In truth it's difficult to assess the actual macro "revenue" impact because the distribution of workers overseas varies across high-tax and low-tax countries. I suspect Saudi workers would lose the most because Saudi taxes on expats might be lower than in other countries.

I know about Indonesia, where ALL comp is taxed at 30 to 40 percent, meaning salary, housing, school, home leave, etc. (plus you pay the Indo equivalent of SS, which of course you'll never collect).

But under all scenarios - including the loss of the exclusion - Indo taxes would still exceed U.S. taxes, and the whole thing would be a wash: the foreign tax credit (for taxes paid to Indo) would still wipe out any taxes due to the U.S. government.

But you could easily end up in a situation where you're paying MORE taxes overseas than in the USA (that is, to the foreign government). Then you get foreign tax credits against your future USA taxes. Problem is, those credits are good for only 5 years, and only against future foreign income. So when you come back to the USA, they're useless. And, no, you can't get a rebate from the US government.

Most/many US companies are going to incent you to work overseas with a tax equivalence program that basically keeps you "whole." You are going to have a foreign take-home salary which is equivalent to your US take-home salary. So in truth the company picks up any excess taxes. It's important to note that your company cannot "save" any excess foreign tax credits for use against other expat employee taxes, so the company basically eats it (unless there's another accounting trick I don't know of).

The bottom line is that the removal of the $80K exclusion will hurt American business, and they'll find their expenses for expat employees higher. That makes American expat workers more expensive and less desireable.

Grassley's brilliant plan actually is a reverse H1-B program, which will force American expats back to America, and make (lower paid) foreign workers more desirable in many overseas operations.

And that $35 billion "revenue increase"? That looks to me like a complete fiction.

[expatguy]

This does not even take into consideration the expats overseas who have in the last few years opted to take a "local pay" package, of which there are many.

This is not a loophole, all expats are responsible for paying taxes in their respective countries of residence.

Another thing not taken into consideration is the cost of living overseas, food, clothing, travel, and education.

There are no free public schools for expat children, try explaining to someone back home how much money it costs to send children to school or how much money is costs to travel back home with the wife and children on family emergencies.

Finally, ask yourself what representation that expats have when they live overseas. Do we have any representative in Congress to address our concerns? The answer is "No".

[American in Israel]

OK, now I got it. Hard to keep the players straight if they keep changing sides.

They are so much alike now, even they forget which side they are on.

[Susannah]

I'm probably considered "middle income" and work in the USA. However, it's time to send email to Grassley and remind him what increasing taxes does in this case.


There is a strong possibility that companies will switch to hiring foreigners to remain competitive....final outcome will just add to the USA unemployment figures.

[tdadams]

“This is a loophole closer for people who live overseas," Grassley said. "Taxpayers' dollars should in fact not be subsidizing an employer's cost of sending an employee overseas." He said Americans abroad would not be double-taxed because “the foreign tax credit can be used against American taxes owed.”

This is a crock. Is it possible that Grassley is really this ignorant?

It's not about what's right or factual, it's about what rhetorical sophistry sounds plausible on the Sunday political talk shows. There's not a legislator in Washington that doesn't know how ignorant voters react to the word "loophole" and how heroic they look if they're fighting to close that loophole.

Lost in the rhetoric is the question, "Is that really a loophole, or just sensible tax policy?"

[mugsaway]

This would hit me too. If it does pass there is going to be a flood of overseas workers quitting their jobs and going back to the states. In fact I think the militarys eastern and pacific test ranges would be shut down over night. The ONLY reason I remain where I am is because I don't like giving my money to the government.

[tdadams]

What we are witnessing in America is an exploding appetite for more tax revenue to the point where any notion of fiscal justice is disregarded as inexpedient and a mentality of wanton confiscation has taken over simply because it's within the government's power take as it wishes.