Globalization is sending tax rates tumbling
across the world, as jobs and capital migrate across borders in
search of lower and more equitable taxation regimes. That makes it
all the more imperative not only to roll back the recent tax
increases on U.S. expatriates, but to eliminate double-taxation of
overseas Americans altogether. Thankfully, there's a new bill in
front of the U.S. Congress to do just that.
The U.S. is one of only a handful of countries that insists on
applying an onerous system of "world-wide taxation." Since U.S.
citizens living overseas are already, in most cases, paying local
taxes in the countries where they work, that means they end up
being taxed twice -- thus violating one of the most important
principles of good tax policy. Most other countries, by contrast,
have the good sense only to apply "territorial taxation," confining
their taxation systems to income earned inside their national
borders.
America's policy makers have tried to mitigate the adverse impact
of world-wide taxation by exempting Americans living overseas from
paying U.S. taxation on up to $82,400 annually. This is the
"foreign-earned income exclusion" in Section 911 of the U.S. tax
code. Thanks to a last-minute amendment inserted into a recent
comprehensive tax bill, the foreign income exclusion will be
slightly raised, but other benefits, such as housing exclusions,
will be cut -- resulting in a huge spike in tax payments for many
American expatriates.
While the foreign-income exclusion is better than nothing, it still
leaves any overseas Americans earning more than this at a
substantial competitive disadvantage, along with the U.S.-based
multinationals that employ them. Such companies commonly foot the
bill for ensuring that their American expatriate employees pay no
more taxation than they would at home. In low-tax jurisdictions,
for instance, American firms might have to pay 30% more to employ
an American citizen than a national from another country with a
less onerous taxation system.
Now relief is sight under the "Working American Competitiveness
Act" recently introduced into the U.S. Senate by Jim DeMint
(R-S.C.). This bill would end the double taxation of Americans who
live and work abroad, and has a decent chance of getting enacted in
the next two years thanks to the Center for Freedom and
Prosperity's Coalition for Tax Competition. The likely outcome if
it is approved? Increased job opportunities for American workers --
particularly in the executive-level jobs and marketing, management
and financial-services posts most affected by the current system.
With the operating costs of U.S. companies lowered, American
exports would become more competitive. And the U.S. taxation system
would be simplified too -- since Section 911 is so complex that
those using it almost always have to seek expensive professional
assistance.
The revenue implications would be surprisingly modest. According to
the IRS, only 306,000 Americans filed tax returns in 2003 showing
foreign-earned income, and fewer than 126,000 of those returns
resulted in a tax payment to the IRS. In other words, the IRS
collects a paltry amount of money -- perhaps $2 billion annually --
from a policy that creates a very large competitiveness
challenge.
Even that revenue estimate is exaggerated, though, since it ignores
the economic stimulus that ending double taxation would be sure to
bring.
As has been again demonstrated by the success of the Bush tax cuts,
lowering marginal tax rates on productive activity is a recipe for
faster growth, which yields substantial revenue feedback. Liberated
from the shackles of world-wide taxation, American companies would
create more jobs and boost their exports -- and most likely end up
paying more in taxes as a result of their improved economic
performance. So ending a pernicious tax practice, which deserves to
be abolished simply because it's wrong, could well end up being a
money spinner as well.
Daniel J.
Mitchell is the McKenna senior fellow in Political
Economy at The Heritage Foundation.
First appeared in the Washington Post