As the IRS implements new rules to crack down on tax evaders, the finance industry is putting up a big fight.
There’s no shortage of doomsayers trolling the Internet today, warning of imminent financial collapse.
But there’s something about next week’s deadline for financial institutions to become compliant with the Foreign Account Tax Compliance Act (FATCA)—which requires foreign banks to divulge information about their American clients—that have these Cassandras in a particular tizzy.
One firm, Stansberry Research, is using the deadline to whip up fear that the U.S. dollar will “collapse” on July 1, when the law goes into effect, because foreign financial institutions will no longer want to deal in dollars. That’s because, according to Stansberry’s logic, firms would rather refuse to own dollar-denominated assets than hand over information on their American account holders.
More mainstream outlets, like The Wall Street Journal, are also coming to the defense of wealthy American expats who see the law as too onerous. In a recent article, it listed the trials of several Americans living abroad who claim to be suffering from its effects:
No doubt, these anecdotes represent real burdens faced by Americans, as foreign financial institutions adjust to the law. But there is no logical reason foreign financial institutions should be discriminating against Americans, as the law applies to all foreign financial institutions regardless of whether they serve American customers. While there may be some growing pains as American expats and foreign financial institutions get used to the new law, there’s no reason why Americans abroad ultimately shouldn’t be able to get the financial services they need.
Furthermore, it’s laughable that large foreign firms would consider abandoning use of the dollar because of added compliance issues. Despite the weakness in the U.S. economy in the past decade, the dollar has become more, not less, important, to the global economy because there simply is no alternative reserve currency waiting in the wings to take over.
It’s also worth remembering why this law was necessary in the first place. The Department of Homeland Security estimated in 2008 that the U.S. government loses $100 billion per year in revenue as a result of tax evasion aided by offshore bank accounts. To put that in perspective, recovering that amount could pay for nearly all federal spending on food assistance requested by President Obama in his 2015 budget.
And this isn’t strictly an American problem, either. Economist Gabriel Zucman recently estimated that $7.6 trillion in wealth was stashed illegally in offshore tax havens, a figure that represents 8% of the world’s wealth. That’s a staggering amount of money that, if properly taxed, could go a long way in alleviating all sorts of social ills.
According to law professors Joshua Blank and Ruth Mason, FATCA is leading the charge in encouraging wealthy governments to finally start cracking down on jurisdictions that encourage this type of tax evasion. Instead of being an instrument of U.S. imperialism, FATCA is actually encouraging countries to come to bilateral agreements with the U.S. to share important tax information. They write, “While complaints about the unilateralism and extraterritoriality of FATCA are not without merit, FATCA has enhanced multilateral cooperation in combating tax evasion, and it has spawned similar legislation and treaties in other jurisdictions.”
Blank and Mason point out that the U.S. has reached dozens of agreements with foreign countries to share tax information, and that the G-5 group of nations announced that they would launch a multilateral effort to fight tax evasion. Meanwhile, Britain and France have drafted legislation that would implement FATCA-like laws in those countries.
Financial institutions don’t like new rules, and the implementation of FATCA will inevitably lead to disruptions in some financial services for Americans living abroad. But in an increasingly globalized world, where the wealthy have more and more tools at their disposal to evade taxes, FATCA will increase government cooperation to catch tax cheats.
By helping the government to find the people who aren’t paying what they owe, the rest of us can either enjoy greater services or reduced taxes. And that’s something we should all get behind.