It’s bad enough that U.S. citizens have to deal with the Internal Revenue Service and its incomprehensible rules, but Congress is about to export much of this bureaucracy overseas. In the name of taxing away a bit of profit made by Americans living overseas, much more costly harm will be done to the U.S. economy.
Thanks to the Foreign Account Tax Compliance Act (FATCA), law-abiding American expatriates are in for a rude shock as they find it increasingly difficult to access banking services overseas. This obnoxious statute imposes sweeping and privacy-invading reporting requirements on every financial firm operating outside the United States.
The idea was to prevent Americans from using hidden offshore trusts to evade taxes - never mind that Americans should be free to move their funds as they see fit. Under FATCA, every foreign financial institution, and every foreign firm that has American taxpayers as beneficial owners, must now verify the American-held accounts are in compliance with the legislation. Failure to comply results in a withholding charge of up to 30 percent on any income and capital payments the company might receive from the United States.
The cost of compliance is astronomical, as foreign banks must re-tool their computer systems. One Swiss expert estimates implementation would run $200-500 billion just so the IRS can collect $870 million a year, by the Joint Committee on Taxation’s estimate.
Like most taxes, the Treasury isn’t likely to get what it expects. Foreign banks aren’t just going to spend that kind of cash if it would be cheaper to dump U.S. accounts. That would mean Americans living abroad wouldn’t have access to bank accounts to pay their rent and utilities or cash their paychecks. These law-abiding expats, already burdened by double taxation, will find it increasingly hard to access financial services.
At a higher level, foreign banks may respond by spinning off subsidiaries that won’t deal with U.S. financial instruments at all. If this happens, the inevitable long-term effect on the U.S. financial industry will be negative. Wall Street became a global financial powerhouse, just as London and Hong Kong have, because of its open and fair regulatory and legal frameworks. As the U.S. environment becomes more hostile and rapacious, financial transactions will move to more open markets. The result will be loss of the comparative advantage we’ve long enjoyed in the provision of financial services.
Congress is causing all this disruption for a few million a year, what passes for chump change in Washington. There is still time to stop this train wreck from happening. FATCA does not go into effect until June 30, 2013, under the most recent extension granted by the IRS, which is still struggling to cope with this act. It would be better to scrap the law entirely before the damage is done.
The Washington Times