Politics & Policy

Unfair, If You’Re Over There

France doesn't tax expatriate incomes. Why do we?

It’s not often one can say France’s tax policy make more sense than ours.

After all, in 2000, the average Frenchman paid 54 percent of his income in state and federal taxes, while the average American paid 42 percent. That, of course, is one reason why our economy is so much more robust than France’s.

But there’s one advantage to France’s system: If a highly skilled, well-paid employee makes the sensible decision to leave France to work in the United States, he leaves his high income-tax rate behind. France taxes only those who work inside its borders.

Not so with the United States. Americans abroad still must pay U.S. income taxes, in addition to the income taxes of the country they’re working in.

For now, these Americans enjoy at least some relief from the IRS. Under a tax-code provision known as Section 911, they’re not subject to income tax on the first $80,000 they earn in another country. While that may seem like a large exemption, consider that every penny earned over that amount is taxed twice. Talk about unfair.

Since the United States is the only developed nation that taxes its expatriates at all, you’d expect Congress would act to change the law. “The tax exclusion for overseas income should be expanded,” Thomas Donohue, president of the U.S. Chamber of Commerce, said recently. He correctly observed that Americans overseas “play a vital role in promoting our national interests, and their presence helps support U.S. exports and creates U.S.-based jobs.”

Unfortunately, the Senate recently passed a tax bill that would repeal Section 911, meaning any income earned by Americans abroad would be subject to U.S. taxes, just as if it had been earned in this country.

Lawmakers took this step because they claim it would “reduce the cost” of the tax cut they’re trying to hammer out. Some senators estimate that repealing Section 911 will increase tax revenue by $32 billion over the next 10 years.

But such shortsighted measures ignore the real reasons to cut taxes: to encourage job creation and economic growth. According to PricewaterhouseCoopers and Johns Hopkins University economists, eliminating Section 911 would reduce U.S. exports by $8.7 billion and cost nearly 150,000 U.S.-based jobs.

Plus, as my Heritage Foundation colleague Daniel Mitchell wrote recently, “Repealing Section 911 would significantly increase the cost of employing American citizens and make it more likely that foreigners would get these jobs instead.” So the overall cost of scrapping Section 911 — in American jobs and tax revenues — would probably be far greater than any expected savings.

There are things Congress can, and should, do. Recent Heritage research shows that even a relatively modest $550 billion tax cut can stimulate the economy and create hundreds of thousands of jobs — if the right taxes are cut.

Congress should eliminate the individual income tax on dividends, accelerate the reduction in marginal tax rates, wipe out the “marriage penalty,” and increase the child tax credit from $600 to $1,000. Computer models show these steps would create explosive growth. In fact, simply eliminating the dividend tax would create 488,000 jobs over the next five years.

Tax measures should be designed to encourage people to work, save, and invest. An intelligent tax cut would do just that. However, repealing Section 911 would only harm American workers and, ultimately, make us less competitive overseas.

Let’s take the right steps, and make sure that overtaxed France remains just a speck in our economy’s rearview mirror.

— Ed Feulner is the president of The Heritage Foundation.

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