If Congress set out right now to craft a law to sabotage the global competitiveness of the US economy, they’d have trouble coming up with one better than what they passed in 2010 in the Foreign Account Tax Compliance Act (FATCA). The law is ostensibly aimed at combating tax evasion and requires every foreign institution in the world to act at their own tremendous expense as deputy US tax collectors. FATCA will instead turn the US into an economic pariah and Americans citizens into toxic assets.
The many burdens created by FATCA have been well covered here and elsewhere. As I previously discussed, it will divert untold billions of dollars per year away from productive activities in order to pay lawyers to comply with a law optimistically expected to raise less than $800 million in tax revenues per year. I also recently explained how the US government is looking to saddle our own domestic banks with the same costly requirements, making a crazy and destructive law even worse.
Lawmakers imagine they can avoid making the hard choices over spending by finding an untapped pot of tax evasion gold overseas, but it’s a fantasy. In the real world, FATCA will compel institutions to flee the US market in hopes of avoiding its heavy costs and exact a heavy toll on all Americans.
American Citizens and Businesses Abroad Put At a Disadvantage
FATCA threatens American competitiveness in several ways. Americans living and working overseas are reporting being turned away by local financial institutions. Americans have had their bank accounts closed, been denied mortgages, and been unable to participate in pension funds all simply because they are American citizens. FATCA has turned them into toxic assets.
As a consequence, the number of Americans renouncing their citizenship is growing steadily each year. This is an unnecessary loss of talent. Being able to work overseas is a tremendous benefit for Americans and the economy. It helps relieve domestic unemployment and expand the pool of jobs available to Americans, while making it more likely for Americans to land top jobs within multinational firms and corporations. FATCA is closing the door on these valuable opportunities for Americans.
There are also broader economic consequences for limiting opportunities for Americans overseas. Not only do Americans living and working abroad serve as ambassadors of goodwill, but they enhance the performance of American exports. According to PriceCoopersWaterhouse, American expatriates and multinational companies are more likely to purchase US made goods and raw materials from American supplies than are foreign individuals and corporations. Americans, by example, even cause the foreigners around them to buy more US made goods. Making it harder for Americans to live and work overseas is thus not simply a burden on those individuals, but a blow to the economy as a whole.
US Global Dominance Threatened
Thanks to excessive government spending, the US economy relies heavily on foreign investment to supply the capital that functions as the lifeblood of a free market economy. When FATCA scares away some of this critical investment, it will mean slower economic growth and fewer domestic jobs for Americans. Investment will instead go to places like China, where the government is unlikely to sign away their fiscal sovereignty to US tax collectors. Moreover, the Chinese can circumvent FATCA by passing foreign currency transactions through government-owned banks which are exempted from the law’s regulations.
It’s only going to get worse as Treasury looks to bring US banks into the FATCA cross-hairs. The US has long reaped the investment rewards that come with offering secure, safe and private financial services to foreign investors. Individuals living under tyrannical, corrupt or incompetent governments seek refuge and protection in the US. Without such basic human rights protections as financial privacy, they will take their money elsewhere.
Trillions of dollars are invested in the US from foreign sources. If only a tiny fraction of that were to leave because of FATCA, it would far outstrip the limited revenues projected to be raised by the law – nor is money in the hands of politicians anywhere near as productive as that of the private sector.
The US financial sector is among the nation’s most globally competitive. The threat of FATCA withholding taxes will not only knock it down a peg, but also isolate US institutions from many international transactions. Thanks to greedy politicians, American banks will be treated like the smelly kid on the schoolyard playground – an outcast to be avoided at all costs.
A Better Way Forward
Perhaps the worst part of the FATCA debacle is its utter pointlessness. The US is a leader in tax compliance among developed nations. And the oft cited $100 billion lost to offshore tax evasion each year was long ago proven by CF&P to be based on nothing more than guesswork. The truth is, tax evasion will always exist to a certain extent, but it is not a serious problem for the United States. Moreover, academic research consistently shows that high tax rates cause more tax avoidance and evasion.
But instead of implementing sensible, pro-growth tax policy, greedy US politicians have decided to make it the responsibility of the entire world to help chase down every potential dollar for them to waste.
The good news is that it’s not too late. FATCA’s complexity makes it vulnerable, but the time to act is now. Everyone with a stake in the health of the US economy must speak up and call for an end to this nonsense. CF&P is leading the effort by educating lawmakers, industry and the media. Thanks to these efforts we are confident that legislation to reverse FATCA is just around the corner, but it will take continued vigilance, public pressure and the support of hard working Americans to put an end to this lunacy.