I think the issue is that even if the foreign earned income is excluded, it is still added for purposes of calculating marginal (and hence average) tax rates. In a hypothetical example with hypothetical tax rates: Let's say you have $50,000 income from the US and you would be taxed on that at 12% (on average). If you also have $30,000 income from abroad and exclude it, you are still only taxed on the $50,000 income from the US, but at a higher rate, because you are taxed at the marginal tax rate starting at $30,000 now. It's as if you earned $30,000 first and that was tax-free, but the marginal (and hence average) tax rate for the $50,000 income from the US is calculated considering that you earned a total of $80,000.
