New GAO Report on Exemption for Foreign Earnings of Nonresident "US Persons"

The GAO likes to call the foreign earned income exemption a tax expenditure, on grounds that a deviation from the norm of income inclusion is in effect a subsidy. Under this theory, exempting a nonresident US person's foreign earned income constitutes a deviation from the normal rule that for US persons, income means "income from whatever source derived."

But exempting foreign income earned by nonresident persons is absolutely not a tax expenditure. 

This is because the potential inclusion of foreign income earned by nonresident individuals in the first place is itself an anomaly that exists only in the US income tax. All other countries exempt foreign income earned by nonresident individuals as a foundational principle. It is only the US that does not do this. If the US sensibly followed the rest of the world, it would have no need for a foreign earned income exemption.

The anomaly of taxing nonresidents as if resident is what falsely leads the GAO to the conclusion that an exemption for foreign income constitutes a deviation from the normative baseline. When the true source of the deviation is correctly located in the extraterritorial definition of resident instead, it is clear that an exemption of foreign income earned by a nonresident individual does not constitute a subsidy or expenditure but rather a limited correction of a category error. 

In any event, read the whole report here.