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

ID-78-13: Published: Feb 21, 1978. Publicly Released: Feb 21, 1978.

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For 50 years, tax exemptions or tax breaks have been given on income earned by U.S. citizens employed abroad. The Tax Reform Act of 1976 reduced the amount of the tax break, and by the spring of 1977, U.S. individuals and businesses operating overseas were expressing concern that this reduction might force many citizens to return to the United States and seriously reduce the competitiveness of U.S. industry abroad.

Companies surveyed overseas indicated increases of up to $22 million a year in employee compensation costs resulting from the tax change. These increased costs could result in lost contracts or in the replacement of Americans with foreign nationals, with possible adverse effects on U.S. exports. Indirect costs could result from: tax reimbursements becoming taxable to both host governments and the U.S. Government, increased complexity and cost of preparing returns, and confusion and apprehension over how U.S. employees abroad will be treated from the tax standpoint. On the assumption that the tax increase would be passed along to customers, an econometric model estimated the economic impact of reduced incentives on the gross national product, exports, and employment. The results showed a generally smaller effect than was forecast by company officials, but the full impact of the tax increase on the U.S. economy cannot be objectively measured.

Matter for Congressional Consideration

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Matter: To enhance its oversight of the tax incentives provided for Americans employed overseas, Congress should spell out specifically what it expects the incentives to achieve. The Department of the Treasury, in consultation with the Department of Commerce should: periodically evaluate the effectiveness of tax incentives in achieving their objectives, compare the tax incentives with other policy instruments designed to achieve similar objectives, and report the results of its evaluation regularly to Congress.


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