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GAO acknowledges in its May 2014 report on FEIE that no conclusions or recommendations can be made based on its study.

The Government Accountability Office (GA0) published its review of the Foreign Earned Income Exclusion (FEIE), entitled “Tax Policy Economic Benefits of Income Exclusion for US Citizens Living Abroad Are Uncertain.” the first overall review since the famous 1978 and 1981 reports.(1) Contrary to those reports which stated that U.S. tax policy on Americans resident overseas impeded the development of export and created a competitive disadvantage for the United States, the current GAO report basically concludes that the economic benefits for the United States of the FEIE are uncertain. In a footnote, the GAO dismisses its earlier reports by stating “Our prior reports drew on surveys of U.S. companies with foreign operations. Those results were not representative of all employers at that time and given changes in the global economy, are outdated.”(2) It is regrettable that the current GAO report ignores the previous study as historical data on tax treatment does have relevancy and can give context even though dated. Those reports were instigated by the negative impact of changes in U.S. law on Americans abroad which forced many to return to the United States, the loss of significant overseas markets and the shift of the nation’s trade balance from positive to negative. It does appear to ACA that a survey of U.S. companies with foreign operations is a rational approach, if the objective is to understand the impact of laws on U.S. exports.

The FEIE has been classified as a tax expenditure. The GAO review of the FEIE is put within the framework of GAO’s recommendation since 1994 for greater scrutiny of tax expenditures. It states: “Even if a tax expenditure is meeting its intended purpose, broader questions can be asked about its effects beyond that purpose. Specifically, the long-standing criteria of economic efficiency, fairness, transparency, simplicity, and administrability can be used to evaluate whether a tax expenditure is good tax policy.” The GAO argument on economic efficiency is inconclusive; the argument on fairness is treated below; as for transparency, simplicity and administrability, the U.S. international tax laws are mind-bogglingly complex and the IRS itself admits that it does not have the resources and means to effectively administer tax collection from abroad.

The report notes that historically, the tax expenditure has been defended on the grounds that it encourages the employment of U.S. workers abroad who play an important role in promoting U.S. exports. The orientation of the 2014 GAO report is summarized in its concluding observations. “Currently, the federal government is forgoing billions in federal tax revenue for a small but growing population of U.S. citizens working abroad that claim section 911 tax benefits. Yet, there is little evidence that the tax expenditure has a significant effect on export promotion.” ACA can argue just as well that given the current limitations of the FEIE, it is not surprising that direct impact on exports is difficult to discern. If the FEIE had been indexed to inflation from the time if was introduced, the FEIE would exceed $250,000. Unfortunately, the GAO report limits itself to the FEIE, for it can also be argued that the current citizenship-based taxation generally inhibits Americans from taking up international careers, which could promote exports.

However, the GAO report does provide some interesting statistical insights. In 2011 (the most current data available), 445,000 tax returns claimed the FEIE. The GAO report notes that less than one-third of the 445,000 tax returns claiming FEIE reported that their employer was a U.S. company. This suggests that only about 130,000 Americans reporting Form 2555 are engaged abroad for U.S. companies, which is insignificant compared to the relative presence of citizens abroad from foreign countries and reflects the stagnation of the number of Americans employed overseas by U.S. companies.(3) This suggests that American companies favor hiring foreigners who cost less because there is no U.S. tax obligation and that insufficient numbers of American companies are engaged overseas, in particular from small and medium-sized companies who represent the vast majority of U.S. jobs and the large potential for increases in exports. President Obama’s National Export Initiative (4) highlighted the crucial role of small and medium-sized companies in the goal of doubling exports in five years, yet the GAO report specifically states that adopting appropriate taxation of U.S. citizens abroad was never considered as part of the program.

Despite the conclusion of the GAO that Americans abroad contribute little to exports, the U.S. Chamber of Commerce has stated its opinion that Americans abroad are important for U.S. presence abroad. The GAO report also cites a survey of international trends that notes that the greatest increases in Americans abroad for employment are in Asia and Africa, which is not surprising since those are the areas of greatest economic growth and opportunity.

The GAO report works with global figures. It makes no attempt to look at the export growth by country or region. It criticizes the FEIE for allowing Americans to owe no or little U.S. tax and pay no foreign tax when they reside in countries with no personal income tax. Yet in recent years, the Middle East registered exports increasing at the rate of 17%, much higher than the overall average, and certainly one reason for this growth is the active export promotion activities of Americans resident in the Middle East working through their U.S. employers and through Chamber of Commerce organizations such as AmCham Abu Dhabi, AmCham MENA, and the U.S.-U.A.E. Business Council and the Middle East Council of Chambers of Commerce (MECCAC).(5) If the FEIE were eliminated, ACA predicts that there would be a significant drop in the export growth in that region as few Americans could survive the cost of living differential in the Middle East when paying full U.S. taxes. Americans working in the Middle East are there for business reasons, not for pleasure or for low taxes.

It is also not without interest that the GAO could not provide a figure for the total number of Americans abroad filing because the IRS data does not provide such information. The IRS statistics on Form 1116, the form on which foreign tax credits are reported, do not separate out those reporting with foreign addresses from U.S. residents. A report that focuses on just one element of the tax code and not the global picture risks to be misguided or incomplete. The report does not look into the real impact of the current tax laws on Americans abroad. If the country practiced residence-based taxation, as does the rest of the world, there would be no need for the FEIE. The FEIE was introduced to attenuate the competitive disadvantage of Americans working abroad under citizenship-based taxation.(6)

The GAO looks at the issue from the framework established for review of all tax expenditures to determine if the FEIE generates net economic benefits for society; is fair and equitable; is simple, transparent, and administrable; and is achieving its purpose. The fair and equitable issues are treated under the theoretical approaches of horizontal equity, vertical equity and services provided by the government, always comparing Americans abroad to U.S. residents, but this is like comparing apples and oranges. In fact, Americans abroad are in a totally different situation from U.S. residents because the majority live in countries with a cost of living significantly higher than in the United States. The devaluation of the U.S. dollar against other currencies has artificially pushed up the dollar value of foreign earned income when translated for U.S. tax purposes.

ACA questions the GAO’s methodology in viewing the two communities, state-side Americans and overseas Americans as equals. Unlike Americans state-side who move from one state to another finding similar public services state to state, those choosing to work overseas relinquish access to many services such as U.S. public schooling, federal grants for education, health services and homeland security. The current tax code applied to overseas State Department employees recognizes this inequality by granting State Department employees access to educational and cost of living allowances tax-free whereas these are taxable for individuals who chose to relocate overseas in the private sector.

Contrary to U.S. residents, all Americans resident abroad file taxes with the foreign country where they reside. If they happen to live in low or no income tax countries found in the Middle East, they pay hidden taxes in the form of excessively high rent in protected zones for foreigners and other indirect taxes, not recognized by the United States. The GAO report misses key elements of fairness in their argument as their assertions would mean that Americans who are paid in salaries commensurate to a foreign jurisdiction’s cost of living standards would be forced to accept a lower standard of living in order to pay taxes based on a U.S. standard. Americans abroad also have to assume a foreign exchange risk to pay U.S. taxes and must often pay tax on fictive capital gains due to the depreciation of the dollar.

The GAO report states: “To prevent double taxation on foreign source income, U.S. citizens and resident aliens are allowed a credit or deduction against U.S. tax for foreign income taxes paid to other countries – the foreign tax credit (FTC).” Yet, FTC does not always prevent double taxation. Incompatibilities between U.S. and foreign tax systems inevitably lead to double taxation, always to the detriment of overseas taxpayers.

The report dismisses the fact that if the FEIE were eliminated, tax filing requiring foreign tax credits (form 1116) would be more complex for Americans abroad. It concludes: “However, this effect (of increasing complexity) is uncertain for several reasons, including that we did not find evaluative studies that compare the compliance burden of the tax expenditure with the FTC.” Manifestly, none of the authors has ever personally filed taxes when residing abroad. Form 2555 can easily be prepared by the individual; form 1116 requires a professional tax preparer with international expertise, which easily can cost $1,000 to $2,000 a year for a relatively simple return.

The report uses the JCT revenue projections of $6 billion in 2015 if the FEIE were eliminated. ACA formally contests the JCT projections, which appear to be calculations of an average tax rate on the amount of foreign earned income. In fact, eliminating the FEIE would produce insignificant additional tax revenue because the vast majority of Americans abroad reside in high tax countries and would simply shift to applying FTC. Those now residing in low tax countries may be forced to return to the United States or to another foreign country in order to survive. ACA wrote a specific paper on this topic and called it “The Section 911 Mirage”.

The GAO report dismisses completely the fact that Americans abroad receive little direct benefits from the U.S. government. It enumerates in detail the opinions of other experts who believe that U.S. citizens living and working abroad benefit from federal services that produce social or humanitarian benefits that are not directly apportioned to specific individuals. Later on, the report states: “The tax expenditure itself is not designed specifically to address the benefits received principle, and the federal income tax in general is not based on the benefits received principle.” From the viewpoint of Americans abroad who are paying taxes to the governments of the countries where they live and receive benefits in the form of schools, roads, medical care, security, the statement that federal income tax in general is not based on the benefits received principle is shocking.

The report cautions against tax policy that encourages individuals to find employment in lower cost tax jurisdictions. The implication here is that those choosing to relocate overseas base the decision solely on taxes. ACA can attest to the fact that the vast majority of individuals relocating overseas are average in demographic composition and the decision to relocate overseas is based on a larger set of factors. A decision to relocate abroad for an individual, and more so for a family, is life-altering and involves considerations such as leaving family, accepting new and sometimes not better, living conditions, giving up career opportunities for a trailing partner or spouse. It is regrettable that the GAO study did not factor this dynamic into their study, as it is important and key to understanding the importance of the FEIE.

The GAO report rests on the fundamental assertion that “The United States taxes its citizens on their worldwide income, regardless of where they reside.” While the report does recognize that most countries do not tax their citizens resident abroad, it never seriously considers the full impact of the U.S. unique citizenship-based taxation on the individuals resident abroad, the fact that the current taxation leads to double taxation, double onerous filing and a whole series of discriminatory measures against U.S. citizens resident abroad. If Congress wants to eliminate the FEIE, it must adopt residence-based taxation to enable the community of Americans abroad to survive in the 21st century.

The full GAO report can be found here:

American Citizens Abroad, Inc. (ACA, Inc.), Washington, D.C. – May 28, 2014


(1) See footnote 51 on page 30 of the GAO May 2014 report, Tax Policy: Economic Benefits of Income Exclusion for U.S. Citizens Working Abroad are Uncertain, (GAO 14-387), which refers to “GAO, American Employment Abroad Discouraged by U.S. Income Tax Laws, ID-81-27, (Washington D.C., : February 27, 1981), and Tax Policy and Administration: Impact on Trade of Changes of Taxation of U.S. Citizens Employed Overseas, ID-78.-13 (Washington, D.C.: February 21, 1978). View the 1981 GAO report and the 1978 GAO report.

(2) Ibid.

(3) The GAO 1978 report that approximately 150,000 Americans worked abroad for U.S. companies in 1978, yet current IRS statistics suggest a similar number in 2014. See 1978 GAO Report, page ii.

(4) See the GAO review of the President’s National Export Initiative, which includes links to the original documents.

(5) See,

(6) As the 1978 GAO report stated: “Major U.S. competitors do not tax their non-resident citizens. The United States does. This reduces U.S. competitiveness in overseas markets. For more than 50 years, the United States provided a substantial tax incentive to citizens employed abroad to promote U.S. exports and commercial competitiveness.” 1978 GAO Report, page i.