FATCA and US fiscal imperialism threaten to sink global economy

Government is larger than ever, and Americans are growing increasingly wary about expansions of federal power. To overcome public objections and justify the continued growth of government, politicians exploit grievances and sell their programs with emotional appeals. The most frequent such appeal in recent years has been to perceptions of fairness, but the policies promoted under the banner of fairness are often anything but. One such law passed in 2010 and soon to be fully implemented, the Foreign Account Tax Compliance Act (FATCA), is not only decidedly unfair, but also devastatingly destructive.

FATCA, ostensibly aimed at combating tax evasion, seeks to strong arm every financial institution in the world into doing the job of the IRS. To many, this might not sound bad. After all, the U.S. is powerful enough not to care how much pain and suffering American policies inflict on non-Americans. And who can be against stopping tax evasion? The problem is that FATCA doesn’t actually do anything to combat tax evasion, and we should care about the pain inflicted on foreign institutions if for no other reason — and there are obviously other reasons — than that it will blow back onto American citizens and the U.S. economy.

Included as a provision to help pay for the 2010 HIRE Act, FATCA essentially conscripts foreign financial institutions (FFIs) as deputy tax collectors for the IRS, and even expects them to pay for the privilege. FFIs are required to identify all of their American clients, spy on their financial activities, and report their information and activities to the IRS. Failure to do a satisfactory job will result in a 30% withholding tax on all U.S. source payments to that institution.

Directed at rich tax evaders — President Obama has claimed that there is $100 billion lost to tax evasion each year — FATCA actually hits middle-class, law-abiding Americans the hardest. The Joint Committee on Taxation estimated that the law would raise less than $1 billion per year in new revenue while inflicting high costs on both the global financial industry and the millions of Americans who live and work overseas. The European Banking Federation and the Institute of International Bankers place the total compliance cost for just the top 30 foreign banks at $7.5 billion.

Many banks, faced with paying hundreds of millions of dollars in compliance costs, are opting instead to drop their American clients and abandon the U.S. market. Trillions of dollars are invested in the U.S. from foreign sources each year. If even a tiny fraction of that were to leave because of FATCA, the economic costs would easily surpass the limited revenues expected to be raised by the law.

For besieged Americans living abroad, FATCA is a nightmare. Many expats have reported being turned away by local financial institutions. These ordinary workers often seek nothing more than a place to deposit their earnings, which Uncle Sam is making all but impossible — and they can forget about mortgages and pensions. As a consequence, the number of Americans renouncing their citizenship is growing steadily each year. This loss of talent is bad for America.

By any rational analysis, FATCA is all pain and no gain.