This article appeared in Forbes’ Capital Flows on July 17, 2014.
This month finally marked the much delayed implementation of the Foreign Account Tax Compliance Act (FATCA). The massive financial dragnet’s diminishing group of supporters shouldn’t pop the champagne just yet, however, as the feat represents only a Pyrrhic victory. FATCA remains both politically and legally vulnerable, and ultimately represents a doomed effort to treat the symptoms of the tax code’s many inadequacies rather than root causes.
Even with the law now supposedly in force, the Treasury Department has pledged to go easy on enforcement for the first two years. This is because, despite numerous delays and so many claims to the contrary, the world remains unable to comply with FATCA’s costly dictates.
Only Treasury’s creative and extra-legal invention of intergovernmental agreements (IGAs) to enforce the law has made its implementation even remotely possible. The IGAs will route US taxpayer information through the hands of foreign governments, with all the privacy concerns which that entails. Even worse, they convinced foreign governments to sign the agreements by promising reciprocal information sharing. Not only would this require FATCA-style costs be imposed on American banks, but it would threaten America’s status as the premiere destination for foreign investment and drive capital overseas.
Congress is unlikely to follow through with such a self-destructive policy, which means the IGA partners will have sold out their fiscal sovereignty for nothing in return. Once they realize FATCA is a one way street, they may band together to fight back against US fiscal imperialism.
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.
A legal challenge with a realistic chance of success may force FATCA’s obstinate supporters back to the table to address its abundant flaws. The alternative would be to risk losing the entire costly enterprise.
Even if by some miracle FATCA survives its current challenges, in several years time Congress will be forced to take it up again as recognition sets in that it simply is not capable of accomplishing its intended goals. For all the acrimony and international financial upheaval it has caused, FATCA is a poor excuse for a solution to tax evasion.
There’s a direct correlation between the severity of a tax code and the level of effort individuals are willing to put into avoiding or evading taxes. Attempting to address the latter while ignoring the former is a fool’s errand. It’s the fiscal equivalent of the war on drugs – a costly enforcement-minded solution in which government agencies are always two steps behind their targets. And like the drug war, FATCA will produce considerable collateral damage and invasions on innocent Americans.
What makes the whole thing even more baffling is the fact that the United States already outpaces the industrialized world when it comes to tax compliance. Evasion is less common in the US than it is in Europe because the US tax code is, at least for the time being, less onerous than its European counterparts. Reducing tax evasion and enhancing fairness even further is as simple as instituting basic pro-growth reforms that eliminate double taxation on savings and investment, while also lowering other rates and closing loopholes. Tackling the issue at its source in this fashion would promote growth and prosperity, rather than FATCA’s international confusion and hostility.