I recently co-authored with Dan Mitchell an article in the Swiss magazine Schweizer Monat explaining the many problems with the Foreign Account Tax Compliance Act (FATCA), and the schizophrenic nature of US tax policy in general.
The key points:
The rationale behind FATCA is simple in its destructiveness. Even though the United States has a very high compliance rate for tax laws compared to the rest of the world, U.S. politicians decided that more enforcement was needed to get more money to fund more spending and bigger budgets in Washington. Throwing aside any semblance of cost-benefit analysis, they then decided to spare no expense to capture every last dollar of potential tax revenue. Unfortunately, FATCA was not a wise approach. Ordinary Americans will suffer from the ensuing damage to the economy. Foreign financial institutions (FFIs) will endure higher regulatory burdens. And the FATCA law creates a powerful disincentive for foreign investment in the United States. FATCA thus has the net impact of potentially reducing both economic prosperity and government tax revenues.
…The worst part is the utter pointlessness of the entire endeavor. FATCA imposes a mountain of economic damage in exchange for a molehill of tax revenue.
The compliance costs for the entire banking system over the next ten years have been estimated at $190 to $220 billion. For these bureaucratic burdens, U.S. politicians expect to raise less than $1 billion per year from FATCA. Because it is likely that the new rules result in flight of capital of both foreigners in the US and US citizens living abroad, these expectations are very optimistic. They ignore that the taxable basis might shrink more than by what is hoped to gained under FATCA. And even if the expectations of one billion per year turns out to be accurate, this amounts to an infinitesimally tiny share of the U.S. federal government’s expected budget deficit for 2011.
…Ultimately, lawmakers should consider better policies that would simultaneously boost compliance and improve prosperity. Fundamental tax reform, for instance, would eliminate the double taxation of saving and investment, thus making the entire FATCA issue moot. With a Hong Kong-style flat tax, there would be no second layer of tax on interest, dividends, and capital gains. As such, the IRS no longer would care whether Americans were investing in New York or Zurich.
See our issue page for more information on FATCA.
