This article was last updated on April 16, 2022
I am frequently being reminded of the non-wisdom of using treaties to sort out immigration and immigrant policies. This occurs to me in the course of some springtime volunteer work I do, helping grad students at a Washington-area university with their income tax returns. (By immigration policy I mean decisions about the admission or non-admission of migrants; immigrant policy, in contrast, deals with how governments handle migrants after they have arrived.)
Many of those with whom I discuss income taxes are from abroad, including many from China and India. Students from these nations, usually on F-1 visas, benefit from what are supposed to be equal-treatment clauses in tax treaties.
But the equality of individual treatment does not mean equality of total impact. The United States is giving away the store, the Asian students are saving oodles of money, and that amount cannot possibly be equaled by the savings of American students in China and India.
The broader problem of letting these kinds of policies be the subject of treaties was raised by my colleague Jessica Vaughan, more than 10 years ago in a CIS Backgrounder on trade treaties, “Be Our Guest: Trade Agreements and Visas”. She pointed out that Congress was out of the loop when our One World-oriented negotiators worked out these arrangements with other nations, often undercutting our immigration policies.
Well, tax treaties are devised by people with similar mind-sets, and, once ratified, the documents stay with us, if not forever, at least for a very, very long time.
They are based, in part, on the sensible notion that nation A’s citizens in nation B should be treated with regard to taxation the same as nation’s B’s citizens are treated in nation A. Such treaties are also based on the sound idea that one’s work overseas should not be taxed by both nations.
So far, so good. But let me tell you how this works out in practice with the exchange of students between the United States and these two big Asian nations — the vast majority of the benefits flow from here to there.
Here, for instance, is the relevant text in the treaty between the U.S. and China (Section 20):
A student, business apprentice or trainee who is, or was immediately before visiting a Contracting State, a resident of the other Contracting State and who is present in the first-mentioned Contracting State solely for the purpose of his education, training or obtaining special technical experience shall be exempt from tax in that Contracting State with respect to:
(a) payments received from abroad for the purpose of his maintenance, education, study, research or training;
(b) grants or awards from a government, scientific, educational or other tax-exempt organization; and
(c) income from personal services performed in that Contracting State in an amount not in excess of 5,000 United States dollars or its equivalent in Chinese yuan for any taxable year.
Sounds OK, and the dominance of the U.S. dollar is recognized in the final item — the earnings limit is not set in yuan, after all.
But there are two basic problems: 1) the differing numbers of foreign students from the two countries, and 2) the differing education funding practices of the two host nations. Let’s look at these factors in turn.
Numbers of Students. Here are the basic numbers of international students, according to recent surveys, in the China-U.S. context:
- From China (in the United States): 235,000
- From the United States (in China): 15,647
So there are about 15 times as many Chinese students in the United States as there are American students in China. So, if exactly the same tax break is extended to both sets of students, it costs the United States 15 times as much as it does China. Obviously equitable treatment of individual students does not equate to equitable treatment of the two treasuries.
Education Funding Practices. While the numbers above are rock-solid, my next point is based on anecdotal evidence about the funding of post-grad educations in America, and my strong suspicions regarding the same situation in China. While I see only grad students with incomes in my tax work, and while I know that most BA and many master’s students do not receive much taxable income while in the United States, I sense that many PhD candidates at the university where I volunteer are paid (as graduate assistants) at $18,000-$20,000 a year. (Free tuition is common, too, but it is not taxable.)
I doubt that many American grad students are being paid at the same level by Chinese universities, if they are paid at all.
When you combine these factors you can see how lopsided the treaty is in terms of its impact on the treasuries of the two nations. Though the specific mechanisms in the treaty with India are different, the overall impact on the American treasury is about the same as in the China-U.S. situation.
A Different Comparison. Meanwhile, how are foreign students with incomes treated as opposed to American students with incomes when it comes to federal income taxes?
A large number of foreign students come from nations with which we have no tax treaties. They pay more taxes than their U.S. peers, largely because they do not have access to the standard deduction (this year it is $6,100 for individual filers) that is available to American students. In practice, only state income taxes paid can be deducted from federal calculations on taxable income. That deduction is never more than a fraction of the $6,100.
Another large number of foreign students, because of tax treaties, pay about as much income tax on comparable incomes as do American students.
A small number, such as Chinese students on fellowships, pay less in taxes than Americans, as all such grants (with no upper limits) are tax-free.
Looking at the whole equation, the treaties with China and India regarding students are mass giveaway; perhaps other parts of these tax treaties work in the other direction; but I doubt it.
My sense is that when treaties are written, the interests of our treasury are largely overlooked, and those regarding our immigration and immigrant policies are completely forgotten.
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