Sound and Fury, Signifying What? The U.S. Foreign Earned Income Exclusion Debate

Tax Notes International

This article was originally prepared as part of a tax policy seminar at Georgetown University Law Center under the supervision of Prof. Ronald Pearlman. The author would also like to acknowledge the inspiration and support of Prof. Tom O’Shea of Queen Mary College, University of London; Prof. David Cameron of Northwestern University School of Law; and his colleagues at Caplin & Drysdale in Washington. The article represents the views of the author only, and the responsibility for any errors rests solely with the author.

Why has such a comparatively underutilized and fiscally minor provision of the tax code attracted so much controversy, while remaining so resilient?This article seeks to answer that question by arguing that the importance of the foreign earned income exclusion lies not in its utilization rate by individual taxpayers or its fiscal impact, but in the fundamental questions it raises about the policy and equity implications for businesses and individuals regarding the exercise of Congress’s taxing authority beyond the borders of the United States.

Part I of this article establishes the comparatively small role of section 911 in the overall U.S. tax picture, and discusses the types of taxpayers who benefit either directly or indirectly from the exclusion of foreign earned income and foreign housing costs. Part I also argues that the debate over section 911 must be understood by first identifying the subsets of overseas U.S. taxpayers most affected by any attempts to extend, restrict, or eliminate the section’s provisions. Part II summarizes the historic and current debate over section 911. This summary follows up on some earlier analyses of section 911 by emphasizing the basic conceptual categories to which the various arguments on both sides of the controversy can be assigned: comparative domestic equity, comparative international equity, and promotion of American trade and interests abroad. Part II then identifies the larger unresolved debates that underlie these specific policy considerations. Finally, Part III offers some suggestions for reform and concludes by conceding that the lack of resolution of the larger debates effectively precludes any reforms of section 911 that could satisfy all the interested parties. Click on pdf to read more.


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