U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON WAYS AND MEANS
HEARINGS ON
"THE IMPACT OF U.S. TAX RULES
ON INTERNATIONAL COMPETITIVENESS"
WASHINGTON, D.C.
30 JUNE 1999
REMARKS OF HON. BILL ALEXANDER
FORMER MEMBER OF CONGRESS
REPRESENTING AMERICAN CITIZENS ABROAD (ACA)
Mr. Chairman, Members of the Committee,
Let me thank you for the great pleasure of having this opportunity to submit a written statement. The subject that you are addressing is a worthy one and also a challenging and perplexing one. It is a subject that has been of particular interest to me for many years, including the twenty-four years while I served in this body representing my constituents in the First Congressional District of Arkansas.
My District is one of the major rice growing areas of the United States. Having open and fair access to world markets is of great concern to my former constituents. To better understand their challenges, and to better serve their interests, I helped organize the House Export Caucus. Later, because of active involvement in issues of trade and competitiveness, I had the privilege of serving on the President's Export Council during the Carter Administration. Through contacts with American business and labor leaders, I began to understand even more clearly how the laws we enact, with what we believe to be a very justifiable and noble purpose in mind, can have very important unintended consequences in other areas that are also vital to the health and welfare of all Americans. It is in this conflict between noble and justifiable aims, and their related unintended consequences, that leads to the necessity to continually revisit questions such as the one we are addressing here again today.
While serving on the Export Caucus and the President's Export Council, I had the opportunity to meet with leaders of a number of organizations which have been created by Americans living abroad, whose daily lives are touched by the laws and regulations of the United States and, in particular, those laws and regulations that alter the nature of their competitive standing in the marketplaces of the world.
One of these organizations, American Citizens Abroad (ACA), has been forceful and eloquent in articulating the concerns of this expatriate community. For more than twenty years they have been writing reports, drafting legislation, and proposing other forms of appropriate redress for the grievances that they feel are causing harm not only to themselves but also to all Americans. It is my privilege today to be speaking on behalf of ACA, one of the strongest and clearest voices of the more than 3 million U.S. citizens who live and work abroad.
Addressing the specific topic of this hearing, we ask: "Are the tax laws of the United States having an impact on the competitiveness of American goods and services in world markets?"
There is another equally important and often overlooked question. Are U.S. tax laws making it difficult for U.S. citizens to live and work abroad in competition for jobs and as entrepreneurs with citizens of other countries?
The quick answer to both of these questions is quite simple. Yes, the tax laws are having an impact and it is highly negative.
It is negative principally because the United States is the only country that has seen fit to extend its domestic tax laws to embrace the income of its citizens living and working away from home. This extra-territorial reach of domestic legislation into foreign markets fundamentally distorts the economic rules of the game and tilts the playing field. Competitors in the marketplaces of the world compete by two sets of rules and two cost structures. One applies to Americans, the other applies to everyone else.
What the United States did in unilaterally distorting the competitive environment to the detriment of its expatriate citizens did not pass unnoticed. Shortly after the United States started to impose domestic taxation on its overseas citizens in 1962, the major developed countries of the world, meeting under the auspices of the Organization for Economic Cooperation and Development (OECD), took up this very question of how citizens living away from home should be treated from a taxation point of view. The OECD members decided that a common set of standard rules applying to all participants in the same market should be the norm. The OECD drafted, therefore, a model bi-lateral tax treaty that defines the tax status of citizens living away from their home countries. This bi-lateral tax treaty takes as its fundamental premise that workers should have a unique tax liability to be defined by the country in which the individual is residing after a certain minimum period of time. Double taxation is considered not only unfair but also detrimental to efficient trading. The OECD model proposes taxation of individuals that is predictable, consistent and applies equally to everyone in the same geographical market.
When the United States negotiates tax treaties, it also uses the OECD model as a base. Then, however, it unilaterally adds additional language that states boldly that the protections in these treaties against double taxation will not apply to U.S. citizens! In other words, bi-lateral tax treaties negotiated by the United States that ensure competitive equality to foreign citizens living and working in the United States, at the same time guarantee competitive inequality and extra competitive handicaps to Americans living and working abroad. That, surely, is an incomprehensible trade policy.
Does this really make a difference? Does imposing an additional tax burden on overseas Americans really have any impact on the ability of the United States to export American goods and services?
When I was serving on President Carter's Export Council in 1979, we set up a special task force to look into these and related questions on the impact of American taxation on trade. Our analysis was convincing and our conclusions were unambiguous. The taxation of overseas Americans was costing the United States billions of dollars in lost trade, and tens of thousands of export-related jobs each year. We recommended twenty years ago that the United States stop taxing Americans living and working abroad so that they might once again enjoy a level playing field throughout the world.
How has the situation changed since then? We have a lot of anecdotal evidence to suggest that it hasn't improved very much. I regret very much that more concrete official statistical and analytical data is still lacking on this subject. I would have welcomed the chance to comment on any studies of the cost-benefit analysis of the taxation of overseas Americans carried out recently by at least one responsible agency of the U.S. Government. Unfortunately, no such studies seem to be available.
How do we explain that the U.S. Commerce Department prepares an annual assessment of barriers to trade imposed by other countries, but has never shown any similar curiosity concerning the barriers we impose on ourselves?
How do we explain the anomaly of the aggressive efforts of the Office of the Special Trade Representative, ardently negotiating at the WTO and with foreign governments to open up foreign markets for U.S. origin goods and services, but never negotiating internally within the U.S. Government to eliminate the impediments that we ourselves have erected to the exploitation of these new market opportunities by our own citizens?
In the absence of any such official information on this subject, I asked ACA to prepare the table that is attached to my statement. This shows the evolution of the Gross Domestic Product (GDP) of the United States since 1960, before the taxation of overseas Americans began, right up through the end of 1998. It also shows the evolution of imports, exports and the balance of trade since then.
This table shows that when the law introducing expatriate taxation was first enacted, trade was still a very modest percentage of GDP, and the United States was enjoying a small trade surplus. Not long thereafter, when the tax bite was starting to be felt abroad, trade grew to play a more important role in our domestic economy and a trade deficit began to appear. Trade as a percentage of GDP increased from less than 10% in 1962 to almost 25% in 1998. At the same time, the United States began to generate and accumulate the world's largest and most chronic trade deficit, which grew to 2% of GDP in 1998 alone.
Taking an international comparative perspective, are the practices of the United States really that different from those of other countries? One of the founders of ACA looked specifically at this question. He carried out a study a few years ago comparing the way the major trading nations of the world treat their citizens living and working in foreign countries, and discovered that taxation was only one of the areas where the practices of the United States differed fundamentally from the practices of our competitors. Citizenship of children born abroad, access to social security programs, health care, educational benefits, and myriad other issues are all areas where other countries are usually much more generous than the United States. These are additional dimensions of the competitive advantage enjoyed by non-Americans. Sadly, the United States comes last in two categories. It imposes heavier burdens and grants fewer benefits than almost every other major trading nation.
Does it make a difference when it is more expensive and bureaucratically burdensome for an American expatriate than an expatriate of another country? Let's put the question a different way. Would we ever consciously send our armed forces abroad to fight in foreign conflicts with severe competitive military handicaps compared with our adversaries? If not, why do we feel so complacent and have such a different attitude toward our overseas Americans who have to compete in the equally ferocious trade battles?
How specifically does the U.S. taxation of overseas Americans create a handicap? Let me give a few brief examples.
If Americans have to pay taxes to two countries on the same income, and if both countries define income, and taxes, differently, there will inevitably be income that is taxed more than once. Many taxes paid abroad are not recognized as tax eligible for credit under U.S. tax rules because the tax is novel and not used the same way in the USA. Even in the case of credit given for some foreign income taxes paid abroad, the United States has moved recently to reduce the value of this credit by applying the Alternative Minimum Tax to the foreign earned income exclusion. In other words, today there is a mandatory minimum amount of double tax that has to be paid on certain incomes, even if that income has already been fully taxed at the same rate by another country!
The extra tax paid abroad obviously has to come from somewhere. Either the American expatriate taxpayer then has to live with a lower take-home pay than colleagues of other nationalities earning the same gross income, or the employer will have to make up the difference. In many multinational companies, the practice in recent years has been for equal take-home pay for equal work for all expatriate employees of any nationality. Thus, the employer has to endure an extra expense for every U.S. citizen on the payroll. Ask, as I have done, whether corporations overseas are less inclined to hire Americans than people of other nationalities and the answers are usually clear and unambiguous. Americans are less likely to be hired because they are more expensive. The net difference in cost is a payment that has to be made to the U.S. government for the privilege of having an American on the payroll. And, because of the way the repayment of the extra tax is made, the burden grows larger every year. So even if an American is hired to work abroad, the extra cost for an expatriate American keeps getting larger and larger. This is another incentive to reduce the American expatriate staff.
Even more perplexing and competitively debilitating is the exquisite complexity of the U.S. tax laws as they apply to Americans living and working abroad. Because they are so hard to understand, many Americans are forced to have recourse to expensive tax and legal consultants and can end up paying even more in service charges to correctly fill out their tax returns than they end up paying in tax. The competitive handicap then becomes double. Not only is the tax a burden, but the cost of complying with the complexity of the tax compounds the burden.
Finally, Mr. Chairman, we should be paying much more attention to the competitive handicap that our tax laws create for American entrepreneurs overseas, especially those who are willing to set up a small business in remote parts of the world. The costs associated with the filling out of forms and filing returns for small entrepreneurial controlled foreign corporations are a very heavy disincentive. The only way many such businesses could survive is by simply ignoring the current law and risking the consequences. Yet who better than an American entrepreneur should be encouraged to go abroad, set up an innovative new business, and manifest the virtues and benefits of the liberal democratic political and economic system we have found to be so propitious to our welfare and way of life at home.
In other words, does it really make sense for the United States to spend billions of dollars each year of taxpayer money on aid projects in developing countries when, without any cost to the United States, we could simply turn loose our American entrepreneurs and wish them well? If we would get rid of the expense and complexity of our current tax laws as a disincentive to our entrepreneurs, I believe we could much more effectively help developing countries become much more prosperous, and at a much lower cost to the American taxpayer.
My concern about the importance of overseas Americans to the long term economic health and vitality of our country motivated me to introduce legislation to end the taxation of Americans overseas. The last bill, which I introduced in 1992 (102nd Congress HR 4562), was co-sponsored by my good friend Congressman Ben Gilman, now the Chairman of the House Committee on International Relations.
In summary, my conviction is that changing the tax laws of the United States would have a dramatic and material impact on the ability of Americans to compete in foreign markets. I believe that this would encourage many more Americans to live and work abroad, to set up small businesses abroad, and be a powerful contribution toward a more safe and prosperous world.
It is noteworthy that overseas Americans have never asked the U.S. Government for special competitive favors abroad. Are they really asking for too much when they request the right to be able to compete on a more level playing field? I think not.
My hope, therefore, Mr. Chairman, is that you and your colleagues will agree that giving overseas Americans a fair and equal chance to compete abroad is not only good for them, but good for us all. Amending the tax laws of the United States would have a positive impact on the international competitiveness of our country and its citizens at home and abroad.
Thank you.
* * * * *
Hon. Bill Alexander
20599 Broadnax Place
Ashburn, Virginia 20147
Tel: 703-723 1456
American Citizens Abroad
Website: http://www.aca.ch