Few know better than Americans living overseas the punitive and capricious nature of U.S. tax policy. Writing in today’s Wall Street Journal, law professor and former Deputy Assistant Secretary of State Colleen Graffy provided a clear and concise accounting of FATCA‘s destructive flaws from the point of view of an American overseas.
The legislation is Fatca, the Foreign Account Tax Compliance Act. To appreciate its breathtaking scope along with America’s unique “citizen-based” tax practices, imagine this: You were born in California, moved to New York for education or work, fell in love, married and had children. Even though you have faithfully paid taxes in New York and haven’t lived in California for 25 years, suppose California law required that you also file your taxes there because you were born there. Though you may never have held a bank account in California, you must report all of your financial holdings to the State of California. Are you a signatory on your spouse’s account? Then you must declare his bank accounts too. Your children, now adults, have never been west of the Mississippi but they too must file their taxes in both California and New York and report any bank accounts they or their spouses may have because they are considered Californians by virtue of one parent’s birthplace.
Extrapolate that example to the six million U.S. citizens living around the globe. Many, if not most, don’t know about these requirements. Yet they face fines, penalties and interest for not complying—even if they owe no U.S. taxes, own no U.S. property, have no U.S. bank account and haven’t lived there in years—if ever.
Fighting the FATCA Menace
I’ve previously exposed how FATCA puts Americans citizens and businesses at a disadvantage, providing opportunities for China or some other nation to assume the dominant position in the financial sector, but also undermining American interests both at home and abroad. CF&P has been working hard to bring these facts to the attention of lawmakers, and so were pleased to note Congressman Posey’s recent letter to Treasury Secretary Lew raising serious concerns over the FATCA process. Ms. Graffy noted the letter as well expands on this argument:
Foreign financial institutions trying to avoid these new requirements have two alternatives: to drop American clients, or don’t invest in the U.S. Neither scenario benefits America. And yet it’s hard to believe that Chinese financial institutions will acquiesce in reporting their clients’ account information to the U.S. Imagine the howls down the halls of Congress if China informed U.S. banks that they must report to China all of the bank accounts held by Chinese citizens in the U.S. or face penalties.
This infringement on the sovereignty of other nations has not gone down well abroad and has only served to reinforce the most negative stereotypes of America. To address this, the U.S. Treasury has been negotiating “Inter-Governmental Agreements” which promise reciprocity in return for compliance. But in a letter to Treasury Secretary Jacob Lew, U.S. Congressman Bill Posey—a member of the House Financial Services Committee from Florida—alleged that Treasury had exceeded its authority in promising reciprocal financial reporting to foreign nations. If Congressman Posey is wrong, U.S. banks will face enormous reporting requirements and costs. If he is right, the U.S. government will face enormous international embarrassment after having coaxed nations into signing IGAs.
The IGA process is deeply flawed, as I’ve noted repeatedly. But perhaps more importantly, the entire law exists only because the U.S. wrongly taxes outside its borders. Ms. Graffy concludes:
The core injustice in America’s tax policy is that it is based on citizenship rather than residency.
…Dual citizens like me who live bi-continental lives are aware that there is no upside in our tax position. We are required to file in both countries, we pay taxes where the taxes are highest, and we can take none of the tax advantages either country has to offer. But for many others, whose lives are only in one country—and that one country is not the U.S.—this type of taxation is particularly destructive. It forces honest people with affection for their ties to America to either keep quiet about their heritage, or spend potentially thousands of dollars a year to prove that they owe no U.S. taxes. Or, as is increasingly occurring, it forces them to give up their U.S. citizenship. The result is that the U.S. is turning millions of “good will” ambassadors into “bad will” ambassadors.
President Obama is willing to delay his administration’s signature legislation, the Affordable Care Act, when confronted with clear evidence of its negative impact on businesses and ordinary Americans. FATCA is no less destructive and its implementation should be similarly halted. Congress should also consider following in the footsteps of Sen. Rand Paul, who has introduced legislation to repeal FATCA for good.
