If Congress set out right now to craft a law to sabotage the global competitiveness of the U.S. economy, they’d have trouble coming up with one better than what they passed in 2010 in the Foreign Account Tax Compliance Act.
The law is ostensibly aimed at combating tax evasion and requires every foreign financial institution in the world to act at its own tremendous expense as a deputy U.S. tax collector. They must report to the IRS information about financial accounts held by U.S. citizens. FATCA will turn the United States into an economic pariah and American citizens into toxic assets.
FATCA 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. The U.S. government is also 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 U.S. market in hopes of avoiding its heavy costs. It will exact a heavy toll on all Americans.
Banks Turning Away Americans
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 and have been denied mortgages and unable to participate in pension funds simply because they are American citizens.
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 of limiting opportunities for Americans overseas. Not only do Americans living and working abroad serve as ambassadors of goodwill, they enhance the performance of American exports. According to PricewaterhouseCoopers, American expatriates and multinational companies are more likely to purchase U.S.-made goods and raw materials from U.S. suppliers than are foreign individuals and corporations. Americans even cause the foreigners around them to buy more U.S.-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.
Reliant on Foreign Investment
Due to excessive government spending, the U.S. 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 its fiscal sovereignty to U.S. tax collectors. Moreover, the Chinese can circumvent FATCA by passing foreign currency transactions through government-owned banks that are exempted from the law’s regulations.
It’s only going to get worse as Treasury looks to bring U.S. banks into the FATCA crosshairs. The United States 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 United States. Without such basic human rights protections as financial privacy, they will take their money elsewhere.
Foreign sources invest mrillions of dollars annually in the United States. 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 in the private sector.
The U.S. 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 U.S. institutions from many international transactions. Greedy politicians will cause U.S. banks to be treated like outcasts.
Making the World Tax Collectors
Perhaps the worst part of the FATCA debacle is its utter pointlessness. The United States 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 the Center for Freedom & Prosperity to be based on nothing more than guesswork.
A certain amount of tax evasion will always exist, but it is not a serious problem for the United States. Moreover, academic research consistently shows that high tax rates drive up tax avoidance and evasion.
But instead of implementing a sensible, pro-growth tax policy, U.S. 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 to attack, but the time to act is now. Everyone with a stake in the health of the U.S. economy must speak up and call for an end to this nonsense.
Andrew F. Quinlan ([email protected]) is president of the Center for Freedom & Prosperity.