"Simply put, TAX equalization pays the difference in Taxes both to the US and Foreign governments on your "Taxable income" over what you would pay the US government as if you still lived in the US."
I feel that I need to clarify this tax equalization....the way I read it. It seems that a lot of folks DONT understand it. First, there is no reason to pay the same taxes as if you were in the US, because you ARE NOT in the US, and you are entitled to an $82000+ exclusion, after meeting certain criteria. Now, I agree that with CDG it will be to ones benefit. But in countries that will tax you at a lower %, you could be better off without the equalization.
Take SFS. An FO, married with two kids, no property in the US, no gains on any investments, will pay around $3000 federal per year. That is because he first takes his income, say $150K, subtracts his $82.4K for foreign earned income exclusion, that leaves $67.6K. Then he takes out his housing deductions and others. The number you come up with is what you would pay taxes on. If SFS had the equalization BS, we would be paying a lot more than we do!!!!
Now, HKG is around 17% tax on your income. At $150K, that is about $25,000 in taxes you pay to the HKG government. Then, you would pay Uncle Sam the same as you would in the paragraph above. That amounts to a total of $28500 in total tax liability.
Now, throw in the tax equalization into the pic. The company gets the credit for your foreign earned income exclusion (82,400). YOU LOSE THAT DEDUCTION, THE COMPANY GETS IT!!!!!! Basically, if you would pay taxes on what you would have in the US, as far as HKG goes, I think your taxes would be more than if you didnt use the equalization. But, as I said, with countries that have a higher tax rate, you would be better off with the equalization.
Hopefully, I have explained it in an understandable way.