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

For more than 50 years, the United States provided a substantial tax incentive to citizens employed abroad to promote U.S. exports and commercial competitiveness. In 1976, two things reduced this incentive: (1) the Tax Reform Act of 1976 substantially increased the tax liability of citizens employed abroad; and (2) the U.S. Tax Court reaffirmed the taxable status of some overseas allowances. In an attempt to determine the probable effects of the 1976 tax increases on Americans abroad, data were gathered from 145 companies, 367 individuals, and 6 nonprofit foundations operating abroad. Preliminary analysis suggests that protential tax increases will vary greatly according to income levels, employer compensation policies, and geographic locations. Seventy seven percent of the companies surveyed reimbuse their American employees for all or part of the additional taxes incurred as a result of living abroad; companies that do not reimburse their American employees may lose them because of higher tax burdens. An econometric model used to estimate the economic impact of the reduced incentives showed that, assuming that the tax increase will be passed along, the "ripple effect" might: cost as much as 4,000 jobs in 1978 and 21,000 jobs in 1981; adversely affect the gross national product, in real terms, by up to $200 million in 1978 and $600 million in 1981; and adversely affect real exports by $110 million in 1978 and $260 million in 1981.