A Weak Defense of FATCA

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The FACT Coalition’s Clark Gascoigne yesterday attacked efforts to repeal FATCA as intended to “defend tax evaders.” Most generously, his arguments might be considered extremely naive, but many come across as mendacious spin. Nevertheless, I will address his points and explain why they are mistaken.

FATCA is a sensible transparency initiative — adopted in 2010 with overwhelmingly bipartisan support (70 to 28) — which, while modest in scope, began a global movement to protect honest taxpayers from those who shirk their civic responsibilities.

There’s a lot to unpack here. First up is the ongoing effort to brand the erosion of privacy rights as merely promoting “transparency.” It is a practice of good government for institutions to be transparent and open to the people. It is a practice of tyranny for individuals to be made transparent to the government. These concepts should not be confused. Privacy is essential to protecting rights against government overreach and abuse.

Next, FATCA is hardly a bipartisan initiative. It was thrown into the unrelated HIRE Act—a so-called jobs bill—as a “pay-for” at a time when Congress was desperate to show action combating the economic downturn resulting from the financial crisis. It’s highly unlikely that more than a handful of legislators at the time even knew what FATCA was about, other than that it raised a small sum of money, much less carefully considered the means by which it did so.

Today, there’s no question that FATCA lacks bipartisan support. FATCA repeal has been adopted by the Republican Party platform, and no Republican has stepped up to defend it. This is understandable considering what we know about the destruction it has wrought across the globe.

To clarify, FACTA adds no additional burdens on U.S. taxpayers.  It does not change the amount of tax owed nor create any new liability.  It simply helps to prevent cheating.

This argument is completely off base. FATCA did not raise or impose new taxes, it is true. But to suggest that taxes themselves are the only ways in which taxpayers can be burdened by the government is absurd.

FATCA created the privacy-invading Form 8938 for individuals, which requires reporting of total assets held overseas under threat of significant penalty, and which clearly constitutes a “burden.” Moreover, FATCA’s unintended consequences have dramatically burdened Americans banking overseas, especially those who live abroad, and even created a whole class of FATCA victims who shouldn’t owe U.S. tax at all, so-called “accidental Americans.” Many Americans have been shut out of financial institutions that are fed up with the financial costs which FATCA has attached to accepting Americans as clients. It’s no surprise that renunciations of U.S. citizenship skyrocketed after FATCA was adopted.

Even the IRS’ own Taxpayer Advocate has acknowledged the heavy burdens that have been created by FATCA.

Tax dodging is a serious problem. Offshore tax evasion by individuals is estimated to cost law-abiding taxpayers between $35 billion and $70 billion per year.  Surely, the WSJ doesn’t believe in letting wealthy tax cheats hide offshore, while the rest of us must pay full freight?

Simply identifying a problem is not enough to make a case for a specific policy response. It is typical of FATCA supporters to expect that citing the boogeyman of tax evasion is all that is needed to justify the unilateral imposition of FATCA on the rest of the world. But this doesn’t attempt to identify whether FATCA even helps with tax evasion, much less to weigh the purported benefits against its significant costs.

In addition to highlighting FATCA’s burdens, the IRS Taxpayer Advocate also acknowledged that “The weight of FATCA is being felt not by tax evaders, but by U.S. taxpayers who likely would be compliant regardless.” As for singling out overseas Americans, she also admitted that those targeted by FATCA “are generally at least as compliant as the overall U.S. taxpayer population.”

If the tax haven lobby and The Wall Street Journal believe that wealthy citizens are paying too much in taxes, then we should have an honest discussion about the tax rate.  However, once we set a rate, people should pay what they owe.

If the tax grabber lobby wants to have an honest discussion about tax enforcement, they have to be willing to acknowledge that there are costs. No matter how much one dislikes tax evasion, it must be admitted at some point that not every legally owed dollar can be collected.

It would make no sense, for instance, to spend $10 to collect $1, nor to curtail basic liberties to squeeze out a few more percentage points of tax compliance. That’s especially true when there are much easier ways to increase compliance—namely, by simplifying the tax code and lowering rates. By ignoring the cost side of the equation completely, and even worse, pretending despite considerable evidence that there are no downsides to FATCA, the FACT Coalition has demonstrated that “honest discussion” is the last thing it hopes to achieve.