The United States began increasing the taxes on Americans working overseas in 1976. These tax changes are unquestionably knocking us out of competition in foreign markets.
It is difficult to discern any justification for this new policy, particularly since the US is now the only industrial nation that taxes income earned by its citizens working in foreign countries. Americans are taxed not only on their actual or base incomes but also on a host of cost differential allowances provided by their employers to compensate for the higher cost of living abroad. The devastating impact of our country's competitive position in the world's export markets results in a loss of jobs here at home.
The cost of living in the US is relatively low in comparison to the exhorbitant expenses that Americans working abroad must meet. For example, a house renting for $7,000 a year in the US can rent for between $50,000 and $70, 000 in the Saudi Arabian desert.It can cost an employer more than $100,000 to maintain a $30,000-a-year American worker at something approximating the standard of living the employee would enjoy automaticallym at home.
Yet, when an employer picks up the cost differentials, the American may be taxed on the total sum and the following year, taxed again on any tax equalization payments the employer may make to offset the inequity.
Thus, one unmarried American working in Saudi Arabia at a base salary of $30, 000 was faced with a US tax bill of $35,444. In another case, a married American with two children and an actual or realm salary of $40,000 in Hong Kong faced a US tax bite of $31,238. In case after case, because of the tax premium on Americans, it has cost employers twice as much to employ an American overseas than to employ someone of any other nationality. If an employer wanted to hire 100 American workers on an individual salary of $30,000 for a project in Saudi Arabia, the added costs of doing business, owing solely to the cost of providing tax equalization for those Americans, would be more than $3.5 million.
The extravagant US tax policy not only has discouraged multinational and foreign companies from hiring Americans but has led many employers to send home Americans already on overseas payrolls. With them, they take their preferences for American materials and methods, resulting directly in reduced sales of American goods and services in those markets.
A recent study by McGraw-Hill found that the share of US engineering and construction firms in the Middle East markets has dropped from 10 percent in 1976, to less than 1.5 percent today. Just released findings indicate that the US share of total overseas construction volume has declined from first place in 1975 to eighth worldwide, as of the last quarter in 1980 -- and is sinking fast.
The domestic effects of this tax policy are no less alarming. A study by Chase Econometrics for the US and Overseas Tax Fairness Committee found that US overseas tax penalties had resulted in a five percent reduction in US worldwide exports, causing a $14.9 billion loss in US corporate profits and a $6.5 billion loss in tax revenue to the federal Treasury.
In addition, at least 80,000 stateside jobs have been lost as an immediate result of the five percent downturn in exports. The ultimate job loss is estimated at one million, as the full effect ripples through the US economy. The added costs in unemployment compensation are staggering, adding another $200 million in the first year.
In February, I introduced a bill in Congress which would reduce the tax burden on Americans living abroad. It would permit Americans working abroad to exclude from their incomes the first $50,000 earned, plus half of the next $50, 000 of salary and overseas living cost allowances, before paying US taxes. (Currently, most of them have to pay income taxes to both their host country and the US government.)
Housing costs which exceed $5,800 a year would also be excluded. The cost of housing is generally the largest expense to Americans working abroad, and it is ridiculous to force someone to pay extra taxes simply because he or she is forced to pay exhorbitant amounts for housing that meets US living standards.
In addition to these provisions contained in S. 408, I will be working with the Senate Finance Committee and the Internal Revenue Service to devise a simplified tax return filing procedure for individuals whose incomes fall below the exclusion level in the bill.
Sen. Paul Tsongas, a Democrat from Massachusetts and a cosponsor of my bill, has stated his full support for the elimination of undue taxation of US citizens abroad. This truly is not a partisan issue.
"The answer to our present economic ills is not protectionism. Rather, it is to provide equal footing for US companies in the world trade market," Senator Tsongas has suggested.
Although my bill would not exempt overseas Americans from all taxes, I believe it would go a long way toward putting Americans back on equal footing with their foreign competitors -- and that is all we n eed for starters.