Since 1926, Congress has granted substantial tax benefits to encourage U.S. citizens to accept employment positions abroad so that they might, in turn, support the export of U.S. goods and services. The purpose of this study was to determine whether changes in the taxation of foreign earned income have any effect on the presence of American employees in foreign countries.

The results of prior studies disagree on whether the U.S. income tax law may be used as an incentive to encourage Americans to work abroad. The present research addressed this issue once more using an ex post facto analysis of changes in American employment abroad following two recent tax law changes--the Tax Reform Act (TRA) of 1976 and the Foreign Earned Income Act (FEIA) of 1978. Since employment data for Americans working abroad are not available, the annual number of passports issued to individuals traveling for business purposes was selected as a suitable surrogate.

The first hypothesis tested was that American employment declined subsequent to the TRA. This hypothesis was divided into four sub-hypotheses, three of which were supported by the ensuing analysis. Therefore, it was concluded that American employment did decline as a result of the TRA.

The second hypothesis stated that American employment abroad changed subsequent to the FEIA. This hypothesis was divided into two sub-hypotheses. The analysis supported both sub-hypotheses indicating that the presence of American workers abroad increased as a result of the FEIA.

The third hypothesis also centered around the FEIA. Since the provisions of this act granted larger tax deductions to American employees residing in high-cost countries relative to those residing in low-cost countries, it was hypothesized that American employment in high-cost countries increased more than did American employment in low-cost countries subsequent to the FEIA. This hypothesis was divided into two sub-hypotheses, only one of which was supported by the analysis. No conclusion could be reached regarding hypothesis three.

The overall conclusion of the study was that changes in U.S. income tax laws do affect the decisions of U.S. citizens to accept employment decisions abroad.