New bill seeks to ease expat income taxes
By Brian Knowlton International Herald Tribune
Published: June 15, 2006
WASHINGTON A Republican senator has introduced legislation to eliminate
the cap on income that Americans working abroad can earn without having to
pay both local and U.S. taxes on it, a change meant to make American
businesses more competitive and bring the U.S. system in line with those
of other industrialized countries.
The tax proposal, by Senator Jim DeMint, came days before several groups
representing Americans overseas, united in their outrage at a recent tax-
law change that they say will mean crippling tax bills for some, were to
meet here to plan strategy and confer with sympathetic lawmakers.
"Every other developed nation allows their workers to protect all of their
foreign income," DeMint, who represents South Carolina, said in a
statement. "This is a small change, but it will help put U.S.-based
companies and their workers on a level playing field with the rest of the
world."
Andy Sundberg, a director of American Citizens Abroad, called the DeMint
proposal "a great initiative." In a phone interview from Geneva, he said
that it would partly offset the recent tax-law change that was engineered
by Senator Charles Grassley, an Iowa Republican, and which Sundberg
described as "this abomination."
Sundberg and others with knowledge of the situation said the DeMint
language appeared to have good prospects, if framed as a way to improve
U.S. competitiveness.
They portrayed the recent vote changing the tax law as a fluke - a last-
minute effort to offset tax cuts in a much larger bill - that does not
represent broader congressional feeling.
"I fully expect DeMint will very easily get 30 Republican co-sponsors,
which automatically will make this a serious proposal," said Daniel
Mitchell, a senior economist at the Heritage Foundation, a policy center
in Washington. "The fact that our tax system is much more onerous in this
regard than France or Sweden - that should tell us something."
Given Congress's charged schedule, and a relatively low awareness among
lawmakers about this issue, congressional aides predicted no final action
before the end of the current term or the start of the next.
The change that has mobilized the expatriates was a last-minute addition
to tax-cut legislation that retroactively increased taxes on Americans
living abroad, a group that in 2001 paid nearly $3.5 billion in U.S.
income taxes. That was the last year for which data were available.
The new law raises the foreign- earned income protected from U.S. taxation
to $82,400 from $80,000. But because it raises taxes on additional
compensation and caps housing allowances, it could quadruple the tax
burden on some overseas Americans, while leaving others untouched. The
highest impact will be in low-tax jurisdictions with high housing costs.
"If you work in a low-tax jurisdiction - Switzerland, Hong Kong or the
Mideast countries, the oil-producing countries - being an American means
you have a 20-to-30 percent competitive disadvantage in terms of your pay
scale," Mitchell said. "American expats are completely priced out of the
market now."
Sundberg said that if companies, seeking to keep their workers "whole,"
subsidize the higher tax payments, those subsidies will have to be
declared as income the following year, "until the company says, 'We can't
afford to have you here anymore, we're going to replace you with a Brit or
a Canadian.'"
He predicted "relatively massive layoffs of Americans working in countries
that have particularly high housing costs. It's going to do devastation in
Japan, for example."
The New York Times earlier described an Iowa couple living in Singapore
who expect to owe $20,000 to $25,000 more in U.S. taxes, up from $5,000
last year, while paying $20,000 in Singapore taxes to boot.
Many in Congress have been less than sympathetic to the cause of overseas
Americans, whom they see as enjoying tax breaks unavailable to their
countrymen at home. But past efforts to trim those breaks have been beaten
back. The Grassley language, however, was inserted and passed before
expatriate groups, businesses and commercial groups could mobilize against
it. Those groups, joined by several conservative think tanks in
Washington, are belatedly seeking to make themselves heard.
"We get probably a call a day from international companies that hire
American workers," said one congressional aide, who was not permitted to
speak for attribution.
An editorial in the business-friendly Wall Street Journal was sharply
critical of the Grassley legislation, citing one study that said it could
not only affect an estimated 4.1 million abroad, but even cost the jobs of
24,000 Americans working inside the United States. Grassley insisted, in a
reply, that the figures were inflated.
