Inequality Statistics Are Distorted By Foreign Earned Income Of Americans Living Abroad

As can be seen from the following table, there are a significant number of high income US tax returns filed by US citizens living and working abroad that distort the reported income inequality statistics.

From IRS Statistical Tables, "Individual Income Tax Returns With Form 2555: Source of Income, Deduction, Tax Items, and Foreign-Earned Income and Exclusions, by Size of Adjusted Gross Income, Tax Year 2006":

Individual Income Tax Returns With Foreign-Earned Income by Size of Adjusted Gross Income, Tax Year 2006

Adjusted Gross Income	Number of Tax Returns
$200,000 under $500,000	24,326
$500,000 under $1,000,000	7,180
$1,000,000 under $1,500,000	2,034
$1,500,000 under $2,000,000	843
$2,000,000 under $5,000,000	1,341
$5,000,000 under $10,000,000	309
$10,000,000 or more	209

There were a total of 334,851 US tax returns filed with foreign earned income, but the above table is for returns with over $200,000 in AGI.

From IRS publication, International Tax Overview, Statistics of Income Bulletin, Summer 2010, "Statistics of Income Studies of International Income and Taxes" by Melissa Costa and Nuria E. McGrath:

Foreign income earned by individuals living abroad rose substantially between Tax Years 2001 and 2006. For 2001, about 295,000 taxpayers reported $27.4 billion of foreign earned income ( in constant 2006 dollars), while for 2006, about 335,000 taxpayers reported almost $37 billion, an increase of about 18 percent.***Of the total number of U.S. individuals reporting foreign earned income for 2006, 8.4 percent lived in the United Kingdom and earned 17 percent of the total foreign earned income reported. One noticeable shift, however, is the growth of foreign income earned in Iraq. While no taxpayers listed Iraq as a tax home for 2001, 18,325 did so for 2006, reporting a total of $1.8 billion of foreign earned income ( Figure J ). Other countries with large increases in foreign earned income include China, with a real increase of 110.2 percent, and the United Arab Emirates, with a real increase of 80.2 percent. However, foreign earned income from taxpayers with a tax home in China or the United Arab Emirates accounts for less than 7 percent of the total.

The US is the only country to tax its citizens on their foreign earned income while they reside outside their country of citizenship.

Additionally, many foreign countries have moved away from an income tax and rely on VAT (valued added sales tax), other consumption taxes, such as a gasoline tax, Social Security taxes and wealth taxes as their countries' sources of tax revenues. The US does not allow a tax credit to its citizens for foreign taxes paid as VAT, social security or wealth tax. In effect, the tax burden on US citizens of foreign earned income can be greater than the US tax burden on US earned income.