My post the other day about the Foreign Account Tax Compliance Act (FATCA) generated a lot of interest among readers, both in the U.S. and abroad. In concluding that FATCA wouldn’t have a material effect on the value of the dollar or the U.S. economy, I was addressing a fairly restricted set of circumstances. Given the depth of interest in this topic, and the fact that the law does have serious implications—just not for the dollar—let’s dig in a bit more.
FATCA’s impact on investors
The law is an attempt to stem tax evasion by U.S. citizens and entities that hold assets and investments outside the country. So far, so good (and also consistent with yesterday’s post, about the government’s increasingly aggressive efforts to raise revenue). Per the IRS’s Summary of Key FATCA Provisions, U.S. taxpayers will be looking at a minimum $10,000 fine for not reporting foreign financial assets, plus a 40-percent penalty on taxes due. This is not small change.
The real teeth in the law, though, are directed at foreign financial firms, which are required to identify U.S. taxpayers, monitor and report directly to the IRS on their accounts, and, in the event of any uncertainty, withhold 30 percent of the investment income from those accounts and pay it directly to the U.S. Treasury.
What do we lose?
A move toward a more punitive system
But the real issue here, in my opinion, is that FATCA has reset the bar for how the U.S. government can deal with revenue collection. Despite its fearsome reputation, the IRS has, up to this point, overseen a largely voluntary system. FATCA is the first step in making the system much more punitive, in requiring taxpayers to prove their innocence rather than the government to prove their guilt—even before any taxes are assessed.
FATCA marks a real change in the rules. And if it can be done with foreign institutions, it can certainly be done here as well. What if banks and brokerages were required to ensure that clients have paid their taxes—and if not, to withhold client funds until such proof is provided? This type of move would be consistent with FATCA, with the government’s need for more revenue, and with the general shift toward raising taxes and fees across the board.
This, not the effect on the dollar, is the real problem with FATCA.