by Chad Higgenbottom
It certainly has not received as much, if any, television coverage as it deserves, but this law that went into effect on July 1st is one that you need to keep an eye on.
The Foreign Account Tax Compliance Act, or FATCA, was originally attached to the Hiring Incentives to Restore Employment Act during the 2010 session as an attempt to curb tax evasion from “US Persons” living abroad. This law is so disastrous that it may not even raise any short-term benefits to defend its economically-crippling defects over the long run:
America is the only large economy to tax its citizens on everything they earn anywhere in the world. FATCA’s purpose is to ensure that not a centime or rouble that a “US person” has stashed away goes undetected by the IRS. In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS.
The costs of complying with FATCA are likely to dwarf the extra revenue it raises (see article). The law is also having unfortunate unintended consequences. The 7m Americans living abroad now wear a scarlet letter (presumably an “F”), thanks to FATCA. Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched.
The Center for Freedom and Prosperity has published a comprehensive list of the legislation’s significant issues, including its infringement upon financial privacy that could inhibit some persecuted minorities abroad from having a safe financial institution to cling to. It seems that President Obama never likes to miss a chance to compromise peoples’ privacy, even when the benefits are highly dubious or nonexistent.
Fortunately, there is substantial hope that the bill may be prevented from unleashing the extent of its chilling effects on the economy. Andrew Quinlan, president of the Center for Freedom and Prosperity, deems FATCA a “doomed effort to treat the symptoms of the tax code’s many inadequacies rather than root causes,” as he goes into greater detail regarding the bill’s inadequacies:
In addition to the practical obstacles to FATCA’s implementation, a coming legal challenge could potentially reopen debate on the law’s overall viability and effectiveness. Attorney Jim Bopp, who had a leading role in the successful effort to strike down McCain-Feingold, plans to challenge FATCA on three points. Namely, that Treasury’s unilateral intergovernmental agreements violate the Senate’s treaty power, that FATCA’s excessive penalties violate the 8th Amendment, and that its privacy invasions violate the 4th Amendment.
These arguments hold considerable merit with anything but the most deferential or obsequious reading by the courts. However, it may not be necessary for the legal challenge to proceed to its conclusion before it bears political fruit. Already FATCA is under heavy political siege, with the Republican National Committee joining with Republicans Oversees to adopt repeal as the official party position. Even Democrats Abroad have called for drastic changes to the law, despite its unwavering support from their party’s leadership.
It’s comforting to know that FATCA won’t have much energy over the next couple of years, for as Republicans Overseas CEO Solomon Yue has said, the GOP would likely need to control the House, Senate, and White House in order to repeal the law. One can only hope that 2016 will be the year in which that trio is assembled…
However it is done, this disaster movie of a bill needs to be cut before it gets past the previews.