Posted on 05/16/2003 1:34:29 PM PDT by Action-America
International Provisions of Tax Bill Undermine U.S. Competitiveness
by Daniel J. Mitchell, Ph.D.
Executive Memorandum #878
May 12, 2003
The Senate Finance Committee tax bill contains a number of provisions that would undermine American competitiveness and restrict fundamental rights of labor and capital to cross national borders. If approved, these provisions will undermine the parts of the tax bill--such as the acceleration of marginal tax rate reductions and small-business expensing--that promote economic growth. Three provisions are particularly damaging.
Americans Working Abroad
Under the Senate Finance Committee bill, Americans who work and live in other nations will have to pay tax to the IRS on all their income, even though that income is earned--and subject to tax--overseas.
The United States is one of the few nations to tax its citizens when they live and work in other nations--the misguided practice of "worldwide" taxation. This policy hurts U.S. companies trying to compete in global markets and reduces American exports. It also is a form of double taxation since U.S. citizens employed in other nations are subject to all applicable taxes in those nations (much as foreigners working in the United States pay tax to the IRS). Current law tries to limit the damage of America's worldwide tax regime by taxing workers only on annual income above $80,000--a policy known as the Section 911 exclusion. The Finance Committee proposal eliminates this $80,000 exclusion.
Repealing Section 911 would significantly increase the cost of employing American citizens and make it more likely that foreigners would get these jobs instead. This would result in fewer exports since U.S. workers working abroad--particularly executives--are likely to purchase U.S. products. According to PricewaterhouseCoopers and Johns Hopkins University economists, eliminating Section 911 would reduce U.S. exports by $8.7 billion and result in a loss of nearly 150,000 U.S.-based jobs.
The United States is the only developed nation to tax its citizens working in other nations. Indeed, only a tiny handful of nations--places like Jamaica and the Philippines--make the same mistake.
Corporate Expatriation
If the Senate Finance Committee bill is enacted, companies that re-charter in low-tax jurisdictions will be treated as if they were still chartered in the United States. This means they will be taxed on income earned in other nations, undermining their competitiveness and harming U.S. workers and shareholders.
The proposal is designed to punish corporate "inversions," which occur when U.S.-chartered companies decide to re-charter in jurisdictions like Bermuda and the Cayman Islands. However, this is akin to blaming the victim. Companies invert
because the Internal Revenue Code taxes companies on income earned in other nations, and this "worldwide" tax system undermines competitiveness. American companies trying to compete in global markets can (a) passively allow their market share to decline, (b) become takeover targets for foreign-based competitors, or (c) have their charter in a filing cabinet in a low-tax jurisdiction instead of in a filing cabinet in Delaware.
Option (c) is the only choice that helps America. An "inverted" company still keeps its headquarters and factories in the United States. All that changes is that the company no longer has to pay tax to the IRS on income earned in other nations, but this is exactly what should happen. Every tax reform plan--including the flat tax--is based on "territorial" taxation, the commonsense notion of taxing only income earned inside national borders.
The Senate tax bill would preclude option (c) since an "inverted" company would continue to be taxed as if it were chartered in the United States. In effect, the bill would empower the IRS to chase down companies seeking to protect the interests of their workers and shareholders. Hence, this provision is known as the "Dred Scott Tax Act"--a reference to the infamous Supreme Court decision that said slaves were still property even if they escaped to a free state.
Individual Expatriation
The Senate Finance Committee bill imposes heavy exit taxes on American residents who emigrate. Émigrés would be forced to surrender a significant share of their assets as a penalty for exercising their rights.
Like every other free nation, the United States allows people to emigrate. Unlike most other civilized nations, however, the United States sometimes imposes a tax penalty on people for choosing another nation--and the Finance Committee proposal would make the law even worse. Émigrés currently must pay tax to the IRS on their U.S.-source income, but because of discriminatory rules, they pay significantly more tax than do other foreigners with U.S.-source income. The Senate proposal would compound this bias by forcing émigrés to pay tax on unrealized capital gains--a form of double taxation on imaginary income.
This proposal will discourage investors and entrepreneurs from other nations from becoming U.S. residents. Moreover, U.S. taxpayers thinking about emigrating would have an incentive to place their investments in other nations. The correct approach is to fix the problems with U.S. tax law--punitive tax rates and pervasive double taxation of savings and investment--that motivate taxpayers to emigrate.
The Senate bill is to the left of even the United Nations. The 1948 Universal Declaration of Human Rights states that "Everyone has the right to leave any country, including his own" and that "No one shall be...denied the right to change his nationality." Yet the Senate bill makes the right to emigrate contingent on paying a ransom on the way out the door. The taxation of emigrants is almost unprecedented, at least among democratic governments.
Conclusion
The three provisions of the Senate Finance Committee tax bill outlined above undermine good tax policy and harm U.S. competitiveness. Why, then, are politicians taking these steps? In two cases, the actions are motivated by spite, not revenue. The anti-inversion provision raises only $2.6 billion over 10 years, and the anti-expatriation provision raises only $700 million. The tax on Americans working abroad, by contrast, is driven by greed. According to static revenue estimates, this provision will increase tax collections by more than $32 billion over the 2004-2013 period.
If enacted, these provisions will substantially offset the pro-growth impact of other provisions of the tax bill. Combined with the decision to emasculate the President's dividend proposal, the Senate Finance Committee has produced a tax bill that will provide only modest benefits for the U.S. economy.
Daniel J. Mitchell, Ph.D., is McKenna Senior Fellow in Political Economy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
"American companies trying to compete in global markets can (a) passively allow their market share to decline, (b) become takeover targets for foreign-based competitors, or (c) have their charter in a filing cabinet in a low-tax jurisdiction instead of in a filing cabinet in Delaware." ...or (d) if option "c" is denied them by the US government, they can move not only their incorporation offshore, but all of their factories and jobs, as well. With our elected officials, on both sides of the aisle, in full greed mode, option "d" is looking more and more favorable every day.
These laws, aimed at punishing Americans who have the audacity to invest or earn money offshore or even to permanently move offshore are actually responsible for forcing more and more wealthy Americans to do just that. Increasingly, the option that they are choosing is to move themselves and their assets offshore.
It's nice to see a major organization, like The Heritage Foundation, finally taking note of the problems that Action America has been reporting on since 1995. Every year, when we update our permanent article, TIck-Tick-Tick - The Economy Bomb, the new statistics for the year reinforce the fact that the situation is getting worse by the year. In fact, according to an April 2, 2003, Financial Times article, approximately 250,000 Americans expatriate every year. How many of those people do you think are poor? It's a safe bet that well over 90% of them probably make at least $128,000 per year, putting them in the top 5% of income earners (those who pay over 55% of the taxes and just exactly the people who we should be encouraging to stay).
FYI, the tax collection data for the year 2000, that I cited above, can be found in the article, 1986-2000 IRS Collections Data by Income Group.
I think that it's about time to replace, not only all of the Democrats in Washington, but most of the Republicans, as well.
The did this when Jimmah KA TA was president and brought home THOUSANDS (I was one of them)of Americans who had been working overseas and, in the process, generating thousands of times more business for the American economy than could EVER be realized by taxing their incomes!
SHEESH what a bunch of LOONS!
Give me your tired, your poor, and we'll give you in exchange our rich and most productive citizens, yearning to breathe free.It's a good thing Gore wasn't elected president or you know he'd veto a tax cut if it ever cleared congress.
Aren't we glad Bush will sign this monster?
Too bad the courts let the government slide on retroactive income-tax increases; if the court had held that line monstrosities like this wouldn't have stood a chance.
I'll second that motion. The Free Republic should develop a list of important questions to be asked of any candidiate seeking Conservative nomination. This country has been run by the left at the local level for far too long. I don't care what Repocrat label you put on the monster is has run amok. And now the socialists are trying to push both parties even further left. Why do I say this? This is reason #1 and this is reason #2 from a WSWS editorial:
Barry Grey, a member of the WSWS editorial board, introduced the resolution on the political independence of the working class. He emphasized the need for a definitive break with the Democratic Party, citing the long history of the political subordination of American workers to this bourgeois party, extending back to the nineteenth century in the period prior to the Civil War, when the Democratic Party defended the interests of the southern slaveocracy. Grey stressed that the political independence of the working class could not be achieved through the construction of a reformist “third party.” Rather, as the resolution stated, it could be achieved “only through the building of a party that attacks the economic foundations of the capitalist system.” The resolution concluded: “We undertake the task of building the Socialist Equality Party as the mass political party of the working class which, on the basis of an internationalist and socialist program, will fight for power.”
They have a renewed push believe me. Conservatives need a renewed vigor also or .......? Stand for your convictions. Don't flinch from their hate driven name calling. Anything they may call us they have been perfecting for decades. Remember these if you need any smelling salts. Love.
Are these provisions mentioned in the article in regards to foreign income set to sunset in three years, like the dividend tax amnesty, or are they permanent?
Here is the link to the actual text of the bill as it came out of the Finance Committee:
http://thomas.loc.gov/cgi-bin/query/z?c108:S.2.RS:
Following are snipetts from the text, that you can reach from the above link (my remarks are in bold blue and I also highlighted a few key words of the legislation in red bold):
SEC. 340. REVISION OF TAX RULES ON EXPATRIATION.
(a) IN GENERAL- Subpart A of part II of subchapter N of chapter 1 is amended by inserting after section 877 the following new section:
`SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.
`(a) GENERAL RULES- For purposes of this subtitle--
`(1) MARK TO MARKET- Except as provided in subsections (d) and (f), all property of a covered expatriate to whom this section applies shall be treated as sold on the day before the expatriation date for its fair market value.
Such abusive laws just encourage wealthy expats to move ALL of their assets (property) offshore, before they renounce and leave only their debt in the US. Without such laws, most expats would leave a sizable chunk of their investments in the US, where it would help fund our current tax system, but such punitive laws mean that they will likely take ALL of their assets out of the US before renouncing.`(2) RECOGNITION OF GAIN OR LOSS- In the case of any sale under paragraph (1)--
`(A) notwithstanding any other provision of this title, any gain arising from such sale shall be taken into account for the taxable year of the sale, and
`(B) any loss arising from such sale shall be taken into account for the taxable year of the sale to the extent otherwise provided by this title, except that section 1091 shall not apply to any such loss.
SEC. 350. REPEAL OF EARNED INCOME EXCLUSION OF CITIZENS OR RESIDENTS LIVING ABROAD.
(a) REPEAL- Section 911 (relating to citizens or residents living abroad) is amended by adding at the end the following new subsection:
`(g) TERMINATION- This section shall not apply to any taxable year beginning after December 31, 2003.'.
This line effectively repeals Sec 911 after 12/31/03.(b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 2003.
SEC. 601. SUNSET.
(a) IN GENERAL- Except as otherwise provided, the provisions of, and amendments made, by this Act shall not apply to taxable years beginning after December 31, 2012, and the Internal Revenue Code of 1986 shall be applied and administered to such years as if such amendments had never been enacted.
"Except as otherwise provided" I'm no lawyer, but I think that the 911 repeal qualifies as an exception.(b) EXCEPTIONS- Subsection (a) shall not apply to the following provisions of, and amendments made, by this Act:
(1) Title I (other than section 107).
(2) Title III (other than section 362).
These dumbass politicians will, if we stand idly by, continue to run more trains into the wreck they themselves are creating.
Wake up, America!
The solution, is, of course, the National Retail Sales Tax!
“I have sworn upon the altar of God eternal hostility against every form of tyranny over the mind of man.” [Thomas Jefferson, letter to Benjamin Rush, 1800.]
Click here to help us scrap the Code, scrap the IRS and abolish the VLWC!
You can also click here to sign a petition in support of Fundamental Tax Replacement.
We will never be a truly FRee people so long as we have the income tax and the IRS.
Give me your tired, your poor, and we'll give you in exchange our rich and most productive citizens, yearning to breathe free.
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