This system actually has big benefits to people who live in Manhattan and California when they move abroad, even if they move to a higher tax jurisdiction!
As the system is reciprocal, they also get tax credits for the taxes they pay above the US federal rate (35%) when abroad
As far as I know this law is one of the main reasons there are US Expats all over London, as they basically get to live in London and pay effectively 35% tax (50% to UK and a 15% TaxCredit against future income when they move back to US) Versus 50% Total approx if living in Manhattan or California after state and city taxes are thrown in.
So basically they pay 35% no matter where they are. They have to stump up the difference if living in Singapore say (20%, so pay 15% to the IRS) OR the IRS gives them a credit if they live in London
35% top rate to live in a city like London is very very appealing, espec if you get an ex-pat package thrown in where you can avoid BIK for 3-5 years or so
Alas, very very wrong.
I'm an expat and am only too familiar with all this.
If you live in a country for more than 180 days in 1 year or 250 days in two years (either condition is met) you are considered a tax resident of that country and pay taxes there.
So a yank comes to Ireland to work, they pay Irish tax returns, file us tax returns, calc there income via their w2, and calculate how much tax they owe the USA. Then they list Irish tax paid and get credited this off their us tax bill. Usually it washes its face and the tax owed/refunded is quite small, a couple of k for someone earning over 100k. The us tax allows for a large number of deductions, all these help reduce bill.
The above days are aprox - give of take 5-10 days either side of 180 and 250.
The us tax system is obtuse, bizarre and very complicated IMO. For example, pro nba players technically have to pay tax in every state they earned money in (played a game) and they get a refund and return from their home states. Usually, this isn't strictly monitored but is the law.
For example, famous case of a v.wealthy hedge fun guy living on long island with an office in the city. City claimed he worked from the city and not his home. They wanted 3 years of tax returns aprox 25mm. He had to prove via diaries, credit cards etc that he wasn't working in the city.
Another thing, the IRS do not mess around. Wesley snipe a recent example.