Perpetuation of the Foreign Earned Income Exclusion
This Article discusses Section 911 of the Internal Revenue Code, also known as the Foreign Earned Income Exclusion (FEIE), as an example of a provision that has been sustained, not on the basis of sound economic analysis and compliance with established U.S. international tax policy, but rather because of effective lobbying and political circumstance. First providing an overview of the U.S. system of worldwide taxation, and the place of the FEIE within that framework, Mr. Sheppard explores the forces underlying the perpetuation of the FEIE. He demonstrates that FEIE is inconsistent with each of the primary components of U.S. international tax policy, including meeting the revenue needs of the U.S. government in a fair and equitable manner, minimizing the burden of tax compliance and administration by reducing tax complexity, fostering economic efficiency through international tax neutrality, and ensuring the competitiveness of U.S. multinational businesses, but explains that the repeal of the FEIE is nevertheless improbable in the foreseeable future as a result of various political realities, such as the rebuilding of Iraq, the upcoming elimination or radical modification of major tax-based export promotion programs, a dwindling global presence of U.S. citizens due to fatal diseases and terrorism, and significant U.S. unemployment rates. He concludes by reemphasizing the complexity of tax policy issues, and by reminding the tax practitioner that a failure to comprehend the policy rationales behind a particular provision or set of provisions compromises the ability to dispense accurate and thorough advice.