Wednesday, January 22, 2014

FATCA Repeal : Tax-Avoiding Super Wealthy with Secret Bank Accounts Find a Friend in GOP

Internal Revenue Service
by Nomad

Once again, the Republican Party has demonstrated which side it supports. Between the average taxpayer or the 1%, its call for a repeal of Obama's anti-tax haven law of 2009- before it has even had a chance to be put into effect- provides us with a clear answer.  

Some Facts on FATCA
Reuters is reporting that the Republican Party is expected to approve a resolution this week, calling for repeal of an Obama administration law that is designed to crack down on offshore tax dodging.
The law, Foreign Account Tax Compliance Act (FATCA) requires foreign banks to find any American account holders and disclose their balances, receipts, and withdrawals to the US Internal Revenue Service (IRS), or be subject to a 30-percent withholding tax on income from US financial assets held by the banks. Owners of these foreign-held assets must report them on US tax returns if they are worth more than $50,000.

It was always going to be controversial and not beloved by banks, libertarians and some Americans living abroad. Another example of Big Government overreach, they howled. Lobbyists have been successful at delaying the law in operation. Its effective date has been pushed back repeatedly, with enforcement now set to start on July 1. 
If the Republicans have their way- and there doesn't seem to be much chance they will- FATCA would never start at all.

After the economic meltdown, a lot of Americans were shocked at reports how corporations and the super-wealthy were escaping paying their share of taxes by stowing their money in tax-dodging off-shore account or in foreign banks. About $250 billion in tax revenue is lost by governments worldwide due to offshore accounts each year, according to one tax reform organization. It has been estimated that the U.S. Treasury loses as much as $100 billion annually to offshore tax non-compliance.

With its reputation for client shielding, Switzerland tops the list of the world's best tax havens. However it is my no means the only tax shelter. Other countries like The Seychelles, Liechtenstein, Singapore, Belize, Bermuda and the Bahamas, have all proved to be very attractive to those wishing to avoid attracting the attention of the tax collectors. 
The amount of wealth being stowed away in tax havens around the world is, if the figures are in any way accurate, utterly mind-melting. According to Tax Justice Network estimates, worldwide there are assets worth at least $21 trillion  are being held in offshore havens. That vast sum is essentially un-taxed by governments.

It's important to mention too, that most of what goes on is not illegal. But it had become a tried and true method to hide wealth from the "snooping" of the IRS. However, the economic crisis highlighted the need for tighter control.

In a letter to the Obama Administration in 2009, U.S. Congressman Lloyd Doggett (D-TX) and Senator Carl Levin (D-MI) urged the Administration to tighten oversight on the tax haven loopholes.
In this time of economic distress, we can no longer afford to ignore the billions of dollars of tax revenue lost to the U.S. Treasury due to the bank secrecy practices of Panama and other tax havens.
Forthwith, relevant legislation was drawn up and introduced by Max Baucus (DMontana); Charles Rangel (DNY-13) on October 27, 2009. It was approved by both Houses the following year after a committee review, and signed into law by President Barack Obama on March 18, 2010. 
The law also required drawing up a series of intergovernmental agreements to provide reciprocity of reporting for other countries. In effect, therefore, U.S. banks would report on the holdings of foreign citizens and residents to their respective tax authorities. That little provision also drew the ire of customers of US-based financial institutions.  

Costs of implementing the legislation are all over the map. How much additional tax revenue will be collected also vary according to who you speak with. Some critics  put it as low as $8.7 billion. The estimated cost of compliance by financial institutions are even less precise. One reason for the lack of clarity on how much tax revenue FATCA will generate is simply because of the secrecy of bank that are used as tax havens. 
Privacy Means Keeping Secrets
Privacy is one of the most attractive parts of tax havens. When the curtain is lifted- even for a moment- the whole system shudders in dread of exposure. 
Last year, a leak of 2.5 million files detailing the offshore bank accounts and shell companies of wealthy individuals and tax-averse companies revealed the names of of 4,000 Americans, celebrities as well as more mundane doctors and dentists. (When a similar thing happened in austere-stricken Greece, the journalist responsible for publishing the list was thrown in jail.) 

As the New York Times reported last April:
“There will be people all over the world today who are now scared witless,” said Richard Murphy, research director for Tax Justice Network, a British-based organization that has long campaigned to end the secrecy that surrounds assets held in offshore havens.
And that's no wonder when you begin looking at the numbers. And when names of tax-dodgers are made public, a lot of hypocrisy could be revealed.
“This could be a game-changer,” said Mr. Murphy, the author of a book about offshore tax shelters. “Secrecy is the key product these places sell. Whether you are a criminal laundering money or just someone trying to evade or avoid taxes, secrecy is the one thing you want.” Once this is gone, he added, “it creates an enormous fear factor” and has a “massive deterrent effect.”
Regarding the leak of information, Robert Palmer, a policy adviser for Global Witness, a London research group that focuses on corruption, said that  it showed that "if you are wealthy and well connected you play by different rules.” This information, he added, “adds to the picture of how easy it is to move money around and will build up the anger of people who are being asked to make cuts but see that there are people out there who benefit hugely from the system.”

Therefore any attempt by the Obama administration to regulate the system by using FATCA reforms has some powerful people in suits wetting themselves.   

Rand Paul' latest crusade against tax havens might have a lot of ears in Congress. According to the best estimates there are at least 268 Congress members had a net worth of at least $1 million in 2012. The Center for Responsive Politics website puts the percentage of millionaires in Congress at more than 50 percent. According to the report, this is the first time a majority of Congress is composed of millionaires. The very same people we are trusting to vote on repealing FATCA. 

Crusader for the One Percenters
Republican Rand Paul who sponsored a bill to repeal FATCA,  spoke out against the anti-tax haven law citing privacy concerns. Since Snowden and Manning, the GOP no longer counts terrorism as its all-purpose excuse, now it's privacy. 
“My bill is drafted with the intention of removing only FATCA provisions that undermine Americans’ constitutional privacy protections and add burdensome regulations with a negative economic impact on the United States.
No doubt that's true. There are a lot of people who like to keep this issue private. Paul also claimed that customers of financial institutions would have to pay for implementing FATCA.
Such a requirement not only diminishes U.S. privacy protections, but also imposes billions of dollars in compliance costs here at home, which will be passed onto customers and the American public.
Libertarian organizations like The Center for Freedom and Prosperity hailed Rand Paul's FATCA repeal bill.
“Senator Paul's bold stand against FATCA has come at an opportune time. The world is fed up with U.S. fiscal imperialism, and the economy can ill afford another pointless and self-inflicted wound, as FATCA is the worst economic idea to come out of Congress since Smoot-Hawley.
See how the discussion changes like water into wine? It starts being about calling the super-wealthy to pay their share of taxes  and then suddenly it changes into privacy and, economic prosperity and most oddly, fiscal imperialism.
Andrew Quinlan co-founder of CFP, urged the Congress "accept defeat and abolish this fatally flawed law."

As we all know, fear turns to action for the 1% faster than a knife fight in a phone booth. Bankers in Texas and Florida were so livid at FATCA they launched a lawsuit against U.S. Treasury Department and the Internal Revenue Service. Specifically the bankers associations objected to releasing privileged client banking information to foreign governments. A judge was not impressed with the arguments against the law, noting that tax haven reforms had to work both ways. 

However, if US bankers were displeased then the requirements of the new law that didn't sit well with those foreign institutions either. Since early 2011, European banks, as Deutsche BankCommerzbankHSBC, and Credit Suisse, began retaliating against the tax haven law by closing brokerage accounts for all US customers citing "onerous" US regulations.

All this pushback doesn't seem to have fazed the Treasury Department, according to the Reuter's article.  In a press statement, Treasury Department spokeswoman, Erin Donar, said:
"FATCA continues to gain momentum and international support as we work with partners around the world to fight offshore tax evasion."
Senator Rand Paul, always on the prowl to make a name for himself in the already sensationalist GOP, will carry on his fight for the super-wealthy tax dodgers. 

Exposing the Trickle-Down Lie
However, there is, of course, one glaring contradiction for the Republican Party about this method of tax-avoidance. It calls into question the long-held idea of the trickle-down theory, popularized by Ronald Reagan. If the money is no longer tucked away in American banks, and cannot be utilized to re-invest in the American economy, how can it trickle down. It might trickle-down in Switzerland or the Bahamas or Panama, of course. 

On top of that, if there is no tax being paid on the hidden wealth where it might be used by the government, then it doubly exposes the trickle-down lie. Even when taxed here in the US, the 1% enjoy a fairly easy ride with the never-ending Bush tax cuts.
With this attempt to repeal the anti-tax haven laws, we see what the conservatives have always been about. First, it was about giving the top richest citizens a tax break, now it is about keeping that wealth secret and safe and forever tax-free.

Today Senator Rand Paul has demonstrated the highest priority for the Republican party: the privacy of the super wealthy and  making the banks that served the 1% very happy.

Update: There is another side to this story. This post provoked an interesting discussion from expats about the impact this law will have on individuals and families that live abroad but whose income does not originate from America.

They point out that America is one of two countries in the world whose tax system is Citizenship-based taxation and not based on where you live, that is, a Resident-based taxation system. This law therefore will place unnecessary hardships on a lot of people who may not have been to the US in years or have not taken advantage of the benefits of living in the States.
Even those who have less than $50,000 in their accounts will be forced to pay expensive tax consultants to sort out their status according to the law. Foreign banks that do not comply with American law (i.e. to provide information on any US accounts they manage to the IRS) will face a a 30% withholding tax.

Expats who have not paid taxes- thinking they were exempt while abroad- may face outrageous penalties for non-compliance. Foreign companies that hire Americans- and foreign spouses, by the way- may be discouraged from doing so because of the added paperwork and possible penalties for non-compliance to American tax law.
Revenue in these cases will not come from recovering unpaid taxes, as one would expect, but from fines imposed on people who are hardly wealthy to begin with. (And some would probably fall below the poverty line and be eligible for government assistance if they lived in the US.) These people are definitely not the intended target of the law, we would hope.
As one comment states:
82 percent of long term expat families would owe ZERO tax. There's no need to be targeting these people. Instead they should go to [Resident-based Taxation] and then target those living in the U.S. who are actually "off shoring" while gaining from living there!
I want to thank all the readers who left comments bringing this to my attention.  

And now for a short music interlude...