NCPA - National Center for Policy Analysis

Foreign Income Over $80,000 will be Taxed Twice

May 21, 2003

In order to get President Bush's provision to end taxation on dividends passed, Senate Finance Committee Chairman Charles Grassley (R-Iowa) had to pick some bad revenue raisers to offset the cost, says Bruce Bartlett. The worst is a provision that will make Americans working abroad pay both U.S. taxes and taxes in the country in which they work. At present, the first $80,000 of foreign earned income is exempted from U.S. taxes.

Of course, Sen. Grassley would allow Americans a credit against their U.S. taxes for foreign taxes paid, saying that this will eliminate any additional tax liability for most. But clearly many Americans will be paying substantially more, which is why this provision raises $35 billion. Remember that those earning less than $80,000 will mainly be affected, so we are not talking about millionaires. And the exclusion applies only to wages, not investment income, Bartlett explains.

  • The only effect of raising taxes in this way will be to force U.S. companies to hire foreigners to run their foreign subsidiaries.
  • Studies have shown that this will reduce U.S. exports and increase the trade deficit, because foreign managers will more likely buy from foreign suppliers.

In all likelihood, all of the Senate's revenue raisers will be dropped in conference. Neither the House nor the Bush Administration supports them. But if that offsetting revenue is dropped, then so too will two years of dividend relief -- due to Senate budget rules -- meaning that dividend taxes will be eliminated for just a single year. Obviously, this is too short a time to have any value economically and is really not worth doing, says Bartlett.

Source: Bruce Bartlett, "Try to Get a Tax Cut," National Center for Policy Analysis, May 21, 2003.

 

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