The Internal Revenue Service’s Taxpayer Advocate Service, an independent advocacy office within the agency, says some reporting requirements for expatriate Americans are duplicative and unnecessary.
The Foreign Account Tax Compliance Act (FATCA) requires expatriates to fill out two forms to report the same information to the Department of the Treasury. FACTA suggests merging the forms to reduce the regulatory burden on Americans living abroad.
‘FATCA Does It All Wrong’
Brian Garst, the director of policy for the Center for Freedom and Prosperity, says FATCA needs more reform than just merging two forms into one.
“FATCA has many serious problems,” Garst said. “First and foremost, it’s completely unnecessary. The United States already has the highest tax compliance rate in the developed world, but even if there was a problem worth addressing, FATCA does it all wrong.”
Garst says U.S. tax laws impose high regulatory costs on other countries, making foreign banks less willing to do business with American investors.
“FATCA is also impractical and totally out of proportion,” Garst said. “It’s costing the world hundreds of billions of dollars to comply with but has been estimated to bring in around only one billion [dollars] per year in revenue. Plus, it exacts a high price on Americans overseas, in terms of added paperwork burdens, privacy erosion, and huge inconveniences from being denied services by local financial institutions.”
Cato Institute Senior Fellow and Institute for Global Economic Growth Chairman Richard Rahn says FATCA is too vague to be properly enforced.
“Not everyone seems to know what a financial institution is,” Rahn said. “People think of banks, but there’s all kinds of insurance companies, a whole variety of companies that hold money in one form or another. In fact, some of the domestic regulations are extended to auto dealers, and pawn shops, and on and on and on, so this definition could be so expansive as to include everything.”
Rahn says FATCA was designed to pry into private citizens’ financial records.
“The basic objective was to get full information about Americans who may have accounts in foreign countries that they perhaps are not paying taxes on,” said Rahn. “That was the motivation. My view on this from the very beginning was that this was going to be a disaster, and it’s turned out to be exactly as predicted.”
Where’s the Authority?
Rahn says the government lacks the authority to force foreign banks to comply with U.S. government demands.
“First of all, there’s the question about the right of the United States to require foreign financial institutions to supply information to the IRS,” Rahn said. “If these financial institutions do not have U.S. branches, where is the authority to do this?”
‘Used to Punish People’
The government’s real-world use of FATCA differs from the stated goal of the law, Rahn says.
“The argument originally was revenue, that these people should pay their fair share, etc.,” Rahn said. “The purpose of taxes, in theory, is to raise revenues to operate the government. It’s not supposed to be used to punish people.
“Increasingly, they are being used to punish people,” Rahn said. “From an economic standpoint and from sound public policy, taxes shouldn’t be used to punish people; they should be used to raise revenue.”
Rahn says tapping some sources of extra tax revenue is just not worth the effort.
“If the tax can’t be collected, then we shouldn’t bother having it,” Rahn said. “If folks can find so many loopholes to avoid the tax, the sensible thing is to abolish the tax rather than to waste taxpayer resources on trying to collect the uncollectable.”
Jeff Reynolds ([email protected]) writes from Portland, Oregon.
Frederic Behrens, “Using a Sledgehammer to Crack a Nut: Why FATCA Will Not Stand,” Wisconsin Law Review: https://heartland.org/policy-documents/using-sledgehammer-crack-nut-why-fatca-will-not-stand/