Impact on Trade of Changes in Taxation of U.S. Citizens Employed Abroad

Until 1976, the United States provided substantial tax incentives to citizens employed abroad to promote U.S. exports and commercial competitiveness. This tax incentive, under 1975 tax practices, would have amounted to an estimated $563 million in 1977 or 75 percent of the total U.S. tax liability of overseas employees. However, in 1976 the Tax Reform Act increased the tax liability of citizens employed abroad by about $319 million, and the U.S. Tax Court reaffirmed the taxable status of some overseas allowances. The probable impacts on trade which could be attributed to the 1976 tax increases were examined, and alternative methods of granting tax relief to these taxpayers were appraised. Of the companies surveyed, 77 percent reimburse their American employees for all or part of the additional taxes incurred as a result of living abroad. These companies will have to absorb the potential tax increase, pass the increased costs on to customers, or replace American employees with local or third-country nationals. Companies that do not reimburse their American employees may lose them because of the higher tax burdens. Potential tax increases will vary greatly according to income levels, employer compensation policies, and geographic locations. The companies advised that either the increased costs or loss of U.S. citizen employees associated with the tax changes may be the cause of lost contracts and adverse effects on U.S. exports. Basic options with regard to the question of the tax incentive involve fully taxing, partially taxing, or making tax free all allowances and foreign-earned income.