By Kurt Couchman
Americans who live and work around the world face crushing burdens from U.S. tax laws. Liberating them in the next round of tax reform can increase prosperity at home and expand American influence abroad.
The December 2017 Tax Cuts and Jobs Act replaced an anti-competitive global system with pro-growth territorial taxation for businesses. Companies now pay income taxes where they produce, not where the company is based. This smart move levels the playing field between U.S.-headquartered firms and their foreign competitors.
Individual Americans should also pay taxes based on residence, not citizenship.
Under current law, the first $102,100 earned by an overseas American is taxed under the foreign country’s tax laws and is exempt from U.S. income taxes under the foreign earned income exclusion, as are certain housing costs. Additional income faces taxation in both countries—and more, if the person has earnings in several countries. Only the United States and tiny, impoverished Eritrea do this.
Income tax is hardly the worst aspect of America’s extraterritorial tax system.
Under the Foreign Account Tax Compliance Act, an incredibly cumbersome offset to Obama’s 2010 stimulus bill, both Americans abroad and any foreign financial institutions they use must report detailed information to the Internal Revenue Service. Many foreign banks refuse to serve Americans to avoid the compliance costs, and thousands of Americans each year are driven to renounce U.S. citizenship so they can have a normal life.
This misguided tax system doesn’t just reduce the income of American citizens abroad or create headaches for those already out and about. The compliance burden—actual and perceived—discourages many from going out into the world. As a result, fewer Americans live and work abroad.
And who are these people? They are a broad cross-section of our fellow citizens. Some are teachers or medical researchers. Some are missionaries or humanitarian workers. Others conduct diverse business activities, from software development to manufacturing to resource production to selling solar ovens to shipping and logistics, and much more.
In some ways, they are better ambassadors than official diplomats. They are more likely to interact—and deeply—with regular people in those countries. Sometimes they marry or adopt locals. They live in the same communities for years or even decades. Their objective is almost always peaceful cooperation, and they have diverse backgrounds. They cost taxpayers nothing.
Foreign service officers, on the other hand, are taxpayer-funded and focus on foreign policymakers. Consular officers interact more with locals, but as government officials in specific contexts like visa interviews. They stay in one place for a few years as government officials. They don’t necessarily reflect regular Americans. They are crucial to U.S. diplomacy and security, but they cannot replace person-to-person bonds in civil society.
Americans bring new ideas. Our traditions of ordered liberty based on constitutionally limited government, equality under the law, free markets, inclusive institutions, and individual dignity remain aspirations for many around the world. As Americans share our heritage and contribute to societies abroad, more opportunities for political and economic progress as well as cultural enrichment may be created.
Economic development is also crucial. Beyond fostering institutional reform, direct commercial ties can help generate prosperity at home and abroad. Foreign inputs can strengthen production in America. Foreign goods and services can provide better and cheaper consumption options. Foreigners with greater incomes and friendlier attitudes to America are potential export markets for American workers’ products.
U.S. expatriates aren’t just good for bringing American values and commercial relationships, however. Many also have friends and family back here in the U.S. Their stories and experiences enrich us too. They share new ideas, perspectives, and ways of living that improve our lives as well.
All in all, these relationships promote mutual understanding, economic development, and peaceful relations. Many government programs actively promote international exchanges. Yet the tax code discourages them.
This is easy to fix. About nine million Americans live abroad. Many have earnings below the threshold. FATCA does far more harm than good, and legislation has been offered to repeal it. Even if more Americans were to seek their livelihoods abroad, the increased economic activity would more than offset any lost revenue. In fact, American Citizens Abroad’s “residency-based tax” concept can be revenue neutral even without these additional considerations. Of course, the main idea is to remove foolish barriers to flourishing, not to fixate on filling government coffers.
Americans abroad help advance peace and prosperity. They also reduce armed conflict and humanitarian crises. Some seek these outcomes explicitly. Others, by making a living as they provide what other people want, will be (per Adam Smith) “led by an invisible hand to promote an end which was no part of his intention” like more robust, resilient, and self-sustaining societies.
Adopting territorial taxation for individual Americans is good policy. It would bring U.S. tax laws in line with global standards. It would simplify legal compliance for overseas Americans and reduce obstacles to their aspirations to serve others. Most importantly, it would enhance U.S. influence and prosperity while enriching Americans wherever they live.
Kurt Couchman is an economist and the vice president of public policy at Defense Priorities.
This piece was originally published by National Review Online on August 15, 2018. Read more HERE.