Johnny Comes Marching Home

American taxes force U.S. businessmen back from abroad

The Cummins diesel engine distributor in Hong Kong, J.W. Streeter, commutes 5,636 miles every month to work from his home in Honolulu. He does so gladly. Before he moved from Hong Kong back to the U.S. in 1979, Streeter had been spending $65,000 a year on rent and education for his four children. Although these costs resulted directly from his work in Hong Kong, the Internal Revenue Service did not give him full tax credit on them. Says he: "I'm saving at least $1,500 a month by living in Honolulu, and that is more than enough to pay for the plane ride every few weeks."

From Tokyo to London, anguished U.S. businessmen are complaining about the unbearable financial burdens of what were once considered cushy overseas assignments. Long battered by the declining value of the dollar, many of the 1.5 million Americans working abroad now claim that the IRS has made life even harder by penalizing them unfairly. Companies doing business overseas also argue that U.S. tax laws have made it too expensive to keep American employees abroad and are replacing them with foreigners.

The cause of the complaints is changes in the U.S. tax code. Beginning in 1976, the Government began pushing up the tax brackets of Americans working outside the U.S. It also tightened the rules on exemptions for the benefits many receive while employed overseas. The equivalent of an apartment renting for $700 a month in Chicago, for example, might run $2,000 or more in Saudi Arabia. Private English-language schools there can cost as much as $5,000 a year for each child. The tax changes that finally went into effect in 1978 made it almost prohibitively expensive for independent American business men to work abroad and hiked the tab for companies that pick up their employees' expenses. Firms usually pay the extra tax, but the proceeds then become taxable income for the employees. ITT estimates that a $40,000-a-year executive can wind up paying taxes on $95,000 of gross income. The extra tax bill: about $33,000.

These additional expenses have forced more and more U.S. companies to pull their executives out of overseas posts. Within the past four years, RCA, Boeing, AT&T and General Electric have substantially reduced the number of Yankees that they employ abroad. After Dow Chemical's Pacific subsidiary discovered that U.S. tax laws alone cost the company $17,000 a worker, it cut back its U.S. staff in Hong Kong from 36 to 24. At the same time, it increased its total employment by 50% by hiring less costly employees from other countries.

Trade experts maintain that replacing Americans with workers from other nations can lead to a decline in U.S. exports. Reason: the difficulty of adapting to American-style operations. Says Gibson Durfee, president of Westinghouse Nuclear Belgium: "Obviously, if you whittle away American representation abroad, you carve away at America's competitive position." Adds Karl Gelbard, who is leaving Merrill Lynch's Hong Kong office partly because of the tax burden: "I need Americans to sell American stocks. But I cannot afford to bring them in from the U.S."

The U.S. is the only major industrialized nation that taxes its citizens on salaries earned outside their own country. A Japanese or West German businessman living abroad pays taxes to the local government but not to Tokyo or Bonn. Congress initially imposed taxes on U.S. citizens living abroad in 1926. But employees with three consecutive years of overseas residence had enjoyed a $25,000 exemption, a measure that left most executive salaries untouched. In 1977, however, Senator William Proxmire of Wisconsin gave his famous Golden Fleece of the Year award to the Treasury Department for its efforts to delay enactment of changes in the Internal Revenue code that would have sharply increased taxes for those he called "mink-swathed Americans who spend their waking hours in gambling casinos in Monte Carlo." The following year the rules on the income tax exclusion and the taxation of benefits were tightened.

U.S. businessmen around the world, protesting loudly, have organized a lobbying campaign in Washington. Says Edward Gottesman, president of the American Chamber of Commerce in London: "Every other major country in the world has adopted an attitude that when its citizens live abroad, they should be taxed in the place where they live rather than according to their passsports. But the U.S. curiously has an anachronistic attitude on taxation."

Belatedly, help is coming. The next tax bill, which will probably be passed early in 1981, is almost certain to contain some relief for Americans abroad. The Senate Finance Committee has approved an increase in the salary tax exemption to $50,000 for workers in developing countries or employees of largely export-oriented firms. The Administration has proposed a more modest measure that would lessen the tax load for Americans in hardship posts like the Middle East, but not for those, for example, in Western Europe, Canada and South Africa. Insiders believe that the Senate's version is more likely to be passed. One stumbling block in the Carter proposal is how to define a hardship post. But under the present tax laws, Americans abroad consider almost any country a hardship post.

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