In light of multiple revelations on the extent of NSA spying upon U.S. citizens, Americans are increasingly weary of government infringement on privacy rights. First, it was revealed that the NSA was mining data from internet companies with a program called PRISM. Later we learned this information was used for much more than just hunting terrorists, with the DEA and IRS getting tips from the NSA and using information collected by the dragnet in the course of ordinary investigations. But as shocking as these and other revelations have been, perhaps the most breathtakingly invasive program remains largely unknown among the general public.
The Foreign Account Tax Compliance Act (FATCA) grants the IRS power to do with financial information what the NSA has done with communications data. Similar to how the NSA justifies their invasion of privacy on the need to prevent acts of terrorism, FATCA cites reducing tax evasion as reason to treat any American living, banking or investing overseas as guilty until proven innocent and undeserving of basic constitutional protections.
A Costly and Ill-Conceived Tax Grab
Passed in 2010 as part of the HIRE (Hiring Incentives to Restore Employment) Act, FATCA conscripts foreign financial institutions as agents of the IRS, demanding that they monitor and report at their own expense on U.S. clients. Should they refuse or otherwise fail to convince the IRS that they are doing a sufficient job at spying on American citizens, they will be slapped with a 30 percent withholding tax on all U.S. source payments. Anyone considered a U.S. taxpayer is also required to reveal all of their foreign-held assets to the IRS, with stiff penalties for even the slightest oversight or delay.
The law is ostensibly aimed at curbing tax evasion, but in practice it will do little to accomplish that goal. Rather than target individuals or institutions at risk for engaging in tax evasion or unlawful behavior, FATCA hits every financial institution in the world with unreasonably costly burdens that have caused many to simply refuse to accept American clients.
Likewise fed up with excessive paperwork and invasive rules, record numbers of Americans are renouncing their citizenship. To make matters worse, institutions that seek to avoid FATCA’s high costs are also taking their investments out of the U.S. economy. With trillions invested in the U.S. from foreign sources each year, a loss of a mere fraction of this could spark another recession. It’s thus easy to see why the Joint Committee on Taxation estimated the law would raise a paltry $800 million per year, which is less than 1 percent of the $100 billion the law’s backers dubiously claim is lost to tax evasion each year.
The End of Financial Privacy
FATCA’s counterproductive economic burdens and invasive requirements would be bad enough, but the IRS has pursued an implementation strategy that threatens to vastly expand the dangers posed to individual privacy rights. Because the law was hastily conceived and passed without a single hearing or debate, it contains major flaws. These include the fact that FATCA’s requirements often conflict with domestic privacy laws. The logistics of monitoring and assessing every financial institution in the world, furthermore, quickly proved overwhelming for the bureaucracy.
Faced with these obstacles, regulators could have kicked the issue back to Congress to reconsider. But rather than let an opportunity pass to vastly expand their powers, the Treasury Department has sought – unilaterally and without proper congressional authority – to negotiate with foreign governments so that they would first collect information on American clients and then pass it on to the IRS. While perhaps solving some of the logistical problems with the law, this approach has opened up even more avenues for abuse. Treasury’s pursuit of unratified and unconstitutional “intergovernmental agreements” adds another set of government hands – this time completely unelected by and unaccountable to the U.S. public – through which the personal financial information of millions of American citizens would flow.
To add insult to injury, the Treasury Department is enticing foreign governments into the agreements by promising reciprocal information flows, again without any congressional or legal authorization to do so. For Americans who share accounts with a spouse who has foreign citizenship, their financial information may one day be sent to foreign governments. And given the demonstrated willingness of the IRS to exploit the tax code for political purposes, it would be especially foolish to expect them to safeguard personal financial information from potentially corrupt or incompetent foreign governments.
Americans who neither live nor invest overseas, or have a foreign spouse, might think they are safe from FATCA’s privacy invasions. But few bad ideas that come out of Washington are not expanded upon once established. Once tax collectors have become accustomed to peeking at will at the entire financial information for a subset of Americans, they will demand the ability to do so for all Americans.
Rethinking FATCA
Senator Rand Paul has introduced legislation (S. 887) to repeal FATCA’s invasive provisions, but none of his Senate colleagues have yet stood up to support his efforts by co-sponsoring the bill. Some on the other side of the aisle are even seeking to expand FATCA’s scope and powers. Even the House GOP has yet to produce a companion to Paul’s legislation, though there are indications it may do so soon.
Washington’s myopic obsession with tracking down every last unpaid tax dollar no matter the cost is ultimately a symptom of political greed. The United States is the only OECD nation that taxes its citizen’s earnings throughout the entire world. Yet despite boasting the highest tax compliance rates in the industrialized world, U.S. politicians are never satisfied with the amount they are able to extract from the productive sector of the economy.
There is a better way. Instead of piling counterproductive and oppressively invasive reporting regimes on top of our already bloated and incomprehensible tax code, politicians could instead adopt simple, low, pro-growth tax policies while opting to reduce spending. But that would require limiting their own power to spend other people’s money.
Financial privacy isn’t typically considered as sexy as other forms of privacy, like our right to private beliefs, health care, property, and communications. Infringement of financial privacy doesn’t evoke the kind of outrage as other violations, because most overlook the vital role it plays in preserving human rights and protecting individuals from governmental abuse. Without financial privacy, for instance, law-abiding citizens around the world would be in danger of having all of their financial information shared with corrupt governments or criminal organizations, potentially exposing them to extortion, blackmail, or even kidnapping.
Just as supporters of the police and surveillance state argue that individuals with nothing to hide should be willing to forfeit their right to privacy, those obsessed with collecting taxes think that the vast majority of Americans who do not engage in evasion should be willing to relinquish their financial privacy rights. Recent scandals have exposed these claims as naïve and dangerous. Innocent Americans must zealously guard their privacy against government intrusion and reject invasive laws like FATCA passed under the false pretense of catching criminals.
Andrew F. Quinlan is the co-founder and president of the Center for Freedom and Prosperity.