UNITED STATES FEDERAL TAXATION OF EXPATRIATES: AN EMPIRICAL INVESTIGATION OF THE EQUITY OF THE FOREIGN EARNED INCOME AND HOUSING EXCLUSIONS (FOREIGN EARNED INCOME EXCLUSION, HOUSING EXCLUSION)

Although both the U.S. Congress and the private sector use equity arguments to justify the foreign earned income and housing exclusions (IRC S911), no study has investigated the extent to which these provisions enhance equity. The purpose of this study is three-fold: to document descriptive characteristics of expatriate taxpayers, to empirically examine the equity effects of the IRC S911 provisions, and to investigate the impact of the Tax Reform Act of 1986 on taxpayer's elections of the IRC S911 provisions.; The coefficients of variation and residual variation are used to examine the horizontal equity effects of the IRC S911 provisions. The Suits index and the tax liability and residual progression coefficients are used to examine the vertical equity (progressivity) effects of the IRC S911 provisions. Adjusted expanded income is used as a measure of income and two alternative measures of taxes are used: tax liability and effective tax rates computed on both a U.S. and worldwide basis.; The equity measures are computed for two tax regimes: one with the IRC S911 provisions and the other without the IRC S911 provisions using a unique database, the 1987 Statistics of Income foreign sample of taxpayers filing for the IRC S911 provisions. Foreign tax rates and foreign exchange rates are used to recompute the tax liability of the expatriates under a tax regime without the IRC S911 provisions in place.; Data from 86 countries are used to assess the use of the IRC S911 provisions across time. The countries included have data available in both the 1987 and 1983 Statistics of Income foreign sample, State Department estimates of expatriates, and an estimated foreign tax rate available.; The results are inconsistent with the hypothesis that horizontal equity increases with the inclusion of the IRC S911 provisions. The results of the tests examining the progressivity of the tax regimes are mixed. Using the Suits Index, the tax regime with the IRC S911 provisions is more progressive than the tax regime without the IRC S911 provisions in place. The results using the tax liability and residual progression coefficients indicate the opposite. However, both tax regimes are very progressive. The results indicate that the use of the IRC S911 provisions declined between 1983 and 1987.