FEIE: Foreign Earned Income Exclusion
To those who live and work abroad, the foreign earned income exclusion (FEIE) makes sense. The FEIE (Section 911 of the Internal Revenue Code) excludes from US taxes an annually-adjusted amount of income earned abroad for individuals who meet the necessary residence requirements. For 2012 the exclusion will be $95,100 (note that the rate which you are taxed is determined by your total global income, however). After all, Americans abroad already pay taxes of various sorts on that income in their country of residence.
The US Government, however, views this as “tax expenditure” – i.e. money it could tax, but doesn’t. When looking for additional sources of funding, abolishing the FEIE regularly crops up as a possibility. The congressional Joint Committee on Taxation, in a report on tax expenditures earlier this year, listed the FEIE for housing and salary as $5.7 billion of foregone income for 2011. The bi-partisan nonprofit Committee for a Responsible Federal Budget recently issued a report, “Let’s Get Specific: Tax Expenditures”, claiming that eliminating the exclusion would bring in $6 billion.
It Just Doesn't Add Up...
ACA is attempting to counter this wealth of literature that encourages abolishing the FEIE. In strongly worded letters to both the Joint Committee on Taxation and an author of the Bipartisan Policy Center’s paper, ACA argues that the projected multi-billion dollar income gain for the Treasury is “a mirage.” ACA’s calculations put the maximum potential additional revenue at $777 million – less than one seventh of the committee estimate.
As the Joint Tax Committee clearly states in its January 2010 report on Tax Expenditures, “tax expenditure calculations do not incorporate the effects of the behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure provision.” ACA predicts: “In fact, there would be a major behavioral change if Section 911 of the Tax code were eliminated, which would significantly reduce future tax revenues.” ACA goes on to recall, “The United States already experienced a massive retreat from foreign markets in the late 1970s when the FEIE was temporarily eliminated and tens of thousands of overseas jobs for Americans were destroyed in the construction and engineering industries abroad and markets for American companies were lost.”
What can you do about this? Educate your members of congress; send them the ACA documents, such as ACA's letter to the Joint Committee. Support ACA. Support Overseas Americans Week. Seek companies’ estimates of how they would react to elimination of FEIE.