Tax Squeeze Overseas

A costly bill is dulling the U.S. 's competitive edge

Paying income taxes is a headache at best, but not knowing how much you owe calls for a double gulp of Excedrin. For the second year in a row, 150,000 Americans working abroad face that situation as a result of a 1976 tax code amendment that would sharply increase their taxes. The amendment would add much to the costs of firms doing business abroad and hurt the nation's trade balance by making it harder to sell U.S. goods and services in foreign countries. Businessmen have protested so persuasively that Congress delayed enactment of the amendment for one year and has been dallying over the matter ever since.

The U.S. is the only major industrial nation that taxes its citizens who work abroad. They also have to pay taxes to the host countries, and many of these have steeper rates than does the U.S. To alleviate this double burden, the U.S. tax code has long provided two moderate loopholes. First, overseas taxpayers could exempt up to $25,000 annually from U.S. taxes. Second, they could claim a credit for any foreign income taxes paid. The amendment would chop the exemption to no more than $15,000 a year and limit the credits for foreign taxes. It would also tax the excess at the rate that would have applied if the $15,000 were not exempt --in other words, force the taxpayer into a higher tax bracket.

The impact would vary from country to country; but overall the amendment would push the tax bills for Americans overseas at least as high as for Stateside employees, and in many cases far higher. Rich, high-technology firms that need to keep only a few executives overseas can pick up the increased taxes for their employees. Doing so would of course increase an employee's income and raise his taxes still more the following year. But if U.S. firms in labor-intensive operations attempt to compensate their overseas Americans for the extra tax load, their payroll costs could rise so much that they would become uncompetitive.

Those costs are already climbing frighteningly. As the slumping dollar makes it increasingly difficult for even well-paid American workers to support Stateside living standards overseas, companies have had to offer many fringes (housing, cost-of-living and education allowances) to induce top people to take foreign postings. Compared with New York City, costs of living are 21% higher in Paris, 34% more in Bonn, 41% in Geneva and 56% in Tokyo.

The squeeze is particularly severe for American construction and engineering firms in the Middle East, where living costs are exorbitant. Some are replacing American managers and construction workers with recruits from Europe, Canada and Japan. Explains an Aramco official in Saudi Arabia: "Under the new law you can get two Britons for what one American would cost." Businessmen worry that U.S. exports will suffer because non-American supervisors will tend to order equipment from their own countries, where they know what is available, instead of from the U.S.

Since the amendment was passed, Britain's large American community of about 120,000 civilian, government and military employees and their families has declined by 20,000. One London group of U.S. executives, Tax Equity for Americans Abroad (TEAA), has launched a spirited campaign to mail tea bags to Wisconsin Senator William Proxmire, the bill's main backer, after he chastised "jet-setting" Americans abroad and their "mink-swathed" wives. The planners intended this symbolic Washington tea party to be a protest against an unfair tax policy. Complains Robert Worcester, co-chairman of the group: "An awful lot of people have gone back already, and the indecision by Congress is causing a great deal of anguish. People don't know what to do."

The House last autumn voted to extend the suspension of the amendment for another year. Last week the Senate did the same, but called for changes that would raise taxes above 1976 levels. The whole issue now must be taken up by a House-Senate conference committee, and a decision is needed quickly. Overseas taxpayers are automatically granted a two-month extension of the nation's mid-April filing deadline, and with four weeks left they still do not know how much to pay.

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