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Special Report
New IRS Rule Benefits Only Foreign Dictators
The Internal Revenue Service is doing its part to drive foreign investment from the U.S.
Since when is it the U.S. government’s job to report on the financial activities of foreign nationals to their home governments? It is now. The IRS has rolled out a new rule that will force deposit institutions, such as banks and credit unions, to report how much interest nonresident aliens have earned on their U.S.-held accounts to the IRS, who will then report it to their home country governments.
The rule isn’t tailored to accommodate special circumstances, which means U.S. banks might be forced to report the earnings of foreign dissidents made in the U.S. to their home regime. The IRS and the rule’s supporters say this fear is baseless. But even if it were tailored to prevent disclosures to certain “unfriendly” regimes, it’s worth remembering how quickly friends become adversaries. Libya’s Muammar Gaddafi went from friend to foe almost overnight. If the rule had been in place a few years ago, Syria’s Bashir al-Assad might now have a wealth of data about his opponents’ finances.
Why is the U.S. government subsidizing the tax collection efforts of foreign regimes? Because the U.S. wants other governments to do the same for it. The IRS taxes Americans globally, and through the Foreign Account Tax Compliance Act (FATCA) of 2010, wants to require any transnational financial companies to report account information on U.S. clients. The IRS claims that it’s only fair to require U.S. banks to fulfill a similar requirement.
But the FATCA is already an extraterritorial power grab of doubtful legitimacy. In December 2011, the United States led the charge at the United Nations against the attempt by Eritrea to impose a Diaspora Tax on its citizens abroad. The Security Council resolution was passed on the grounds that it violated human rights. The U.S. has not imposed a Diaspora Tax on its citizens. They are free to leave the country as they wish — unless they happen to earn more than $9,350 abroad, at which point they are subject to significant punishment from the IRS for failing to file a tax return.
The FATCA was passed and new IRS regulations were proposed with hardly any foreign consultation. Foreign governments are furious, and for good reason. The head of Canada’s banking association has said the FATCA is “conscripting financial institutions around the world to be arms of U.S. tax authorities.” Implementing the law would even violate privacy laws in countries like Singapore and Hong Kong. Nonetheless, the IRS wants to impose a 30 percent tax on any U.S. assets held by firms that fail to comply. It’s hard to think of a better way to scare foreign investment away from our shores.
The IRS doesn’t tax foreigners’ interest on U.S. deposits, but this new reporting rule would actually be worse than if it did. Conservative estimates of a previous version of the rule, which affected just 15 countries, found that it will suck at least $87 billion out of the economy. This is because foreigners often invest in the U.S. because their money is protected from their home government. Consider that as much as one third of all bank deposits in Florida are owned by foreigners, which might be surprising until you look immediately south, to Cuba, Venezuela, and beyond. Many Florida banks could go under if this rule goes ahead.
These costs are also a problem for the IRS. Executive Order 12866 requires that any regulation with “an annual effect on the economy of $100 million or more” to be subject to a cost-benefit analysis. Yet the IRS hasn’t performed any such analysis for its proposed rule. It is easy to see why. The costs, as we have already seen, are likely to be huge. The benefits? They amount to some goodwill from the few legitimate foreign governments that take an interest in offshore holdings of their citizens (most, like the United Kingdom, do not), and a lot of goodwill from dictators who will use this information to monitor and punish dissidents.
This rule’s timing couldn’t be worse. The unfolding European debt crisis could send capital flooding into the U.S. Yet rather than let the money roll in, the IRS wants to discourage foreigners from investing in the American economy, by imposing extra costs on the fragile banking system, to the benefit of no one — except dictators.
If IRS officials think that is prudent policy, Congress should ask them to explain why. It is high time for reform of this agency, before it impoverishes us all.
About the Author
Iain Murray heads the Center for Economic Freedom at the Competitive Enterprise Institute and is the author of Stealing You Blind: How Government Fatcats Are Getting Rich Off of You.
Letter to the Editor View all comments (16) | Leave a comment
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PecosPete| 3.8.12 @ 6:37AM
" It is high time for reform of this agency, before it impoverishes us all."
Better yet, eliminate both the income tax and the IRS.
The Bishop| 3.8.12 @ 9:19AM
The income tax has been eliminated on almost 50% of the population. But as to eliminating the IRS, that's not going to happen. You can call it by another designation but there's no human government that doesn't have an agency that administers revenue collection. However, reform that is not a tool of political correctness certainly is something worth pursuing. And, yes, I'm an IRS retiree, so feel free to pummel me. :)
PecosPete| 3.8.12 @ 12:04PM
Bishop: No pummeling from me. If anyone understands the insanity of IRS regulations it would be an IRS retiree.
I agree that there was to be a taxing scheme for any government to survive. I'd go along with any form of a flat tax or a national sales tax administered by a new agency.
Old Soldier| 3.8.12 @ 8:26AM
If we didn't tax savings and investments, we would be so much more free.
We wouldn't need 401k's or 529 Savings plans. We wouldn't need to chase down people trying to save their already taxed money so we can tax them again. And we wouldn't need to invade the privacy of citizens and foreigners so we can track exactly what they do with their money.
Ol' Will| 5.10.12 @ 4:51PM
Old Soldier,
A national sales tax will easily do everything you want. All earnings, investments, and savings would be pre-tax and structured how the individual wants - not according to idiotic government rules.
Please look into the Fair Tax campaign.
Timothy L. Pennell| 3.8.12 @ 9:04AM
The IRS is NOT Benefiting Foreign Dictators. The IRS is NOT doing what it can to drive Foreign Investment from the U.S. The IRS hasn't rolled out any NEW RULES.
The U.s. Government is NOT Subsidizing the Tax Collection Efforts of foreign Countries.
The EPA did not shut down the XL Pipeline. The EPA is not trying to shut down the Coal Industry.
It wasn't the EPA or the Interior Dept. or the Department of Energy, that has BLOCKED the issuance of PERMITS for Drilling. It wasn't the EPA or the Energy or Interior Departments that put an ILLEGAL Drilling Moratorium in place.
And, no, Pete. The IRS will NOT impoverish us all.
Its all Barack Hussein Obama/Barry Soetoro/Abu Hussain. We can never forget that. And, until we cut the Bullsh*t, and stay focused on who the REAL ENEMY of this Country is? We will never prevail.
Remember your Exorcist.
When Father Marin, first comes to the house to perform an Exorcism, the "Psychologist" Priest, who is already there, tells Father Marin that he has witnessed more than one Demon inside the little Girl, and maybe up to ten.
Father Marin replies: "No. There is only one."
"But Father!"
"THERE IS ONLY ONE."
We could use such a man, right now.
Someone who KNOWS who the Real Demon is.
Someone who realizes that it isn't all of his Minions, that threaten our existence.
It's only THE ONE.
Arrow| 3.8.12 @ 10:58AM
It's encouraging to see that US media is finally waking up to the potential for economic collapse caused by the US byzantine tax policy. But if you think this domestic measure is going to suck investment out of American banks, wait until you see the effects of FATCA.
Global investors are slowly waking up to the fact that FATCA, and its onerous, extra-territorial compliance measures, is making just about any US investment -- equities, bonds, you-name-it -- highly toxic. Investment advisors all over the planet are telling their clients to divest themselves of US investments. I've already issued instructions to my adviser to cleanse my portfolio of anything American.
If you are lucky, Congress will wake up to this before the whirlwind hits. But I wouldn't bet money on that, either.
old white guy| 3.8.12 @ 11:21AM
congress wake up. heh, and pigs will soon start flying.
TrueBlue | 3.8.12 @ 7:29PM
It could happen, Bill Maher was defending Rush Limbaugh's right to free speech.
Just Me| 3.8.12 @ 1:18PM
This article follows a editorial yesterday by Senator Rubio and Rep Posey in the Miami Herald called "A Destructive IRS Mandate." Interesting. Wonder if that was planned? If so, good timing as this subject needs the light of day.
Iain, while I think your headline above is a little too narrow in its focus, (an editors decision?) I do believe what you have written is pretty much on point. I would like to expand on an irony of the IRS rules which I posted to the Congressman....
Senator Rubio and Rep Posey, may I respectfully suggest that you start in the Senate and the House by repealing FATCA (Foreign Account Tax Compliance Act) which Congress passed in the dead of the night as an amendment buried in the 2010 Hire act.
FATCA requires ALL Financial institutions in the WORLD (more than just banks) to report on all U.S.Persons (that is more than just citizens) who might have accounts with them directly back to the IRS. IE, it turns them ALL into IRS tax collectors with some very punitive penalties for failure to comply.
FATCA was passed silently without debate or any basic cost vs benefit analysis! (Thank you Carl Levin) It was done without any regard to the huge cost of implementation on financial institutions around the world, and without any regard to any other countries privacy laws. There was no thought of what impact it is having on US Expats abroad who are being shut out of normal banking arrangements as a result. There was no consideration of the systemic risks that arise from capital flight, and/or the consequences for inter-bank transaction freeze up between compliant and non compliant banks.
Now, the IRS who had a hand in crafting the language of FATCA, knew they would have a BIG task dealing with the world wide opposition to these actions and so thought, "What is good for the goose, should be good for the gander." They unilaterally are imposing this same type of FATCA requirement on US banks using their regulatory authority just as Congress has imposed FATCA on the WORLD using its legislative statutes.
So now you are feeling the unintended BLOW BACK of stupid imperial Congressional action in the first place! You, Congress, created these “destructive mandates” by your own Congressional actions! You wonder why the US is disliked in so many quarters around the world, well it is because of just this type of unilateral hubristic action. And, I dare say you don’t understand this any more than "W" did when he wondered after 9/11 “Why do they hate us?” It is not because of our freedoms, it is because of our actions!
The IRS and you, Congress, have been in cahoots since 2010 creating a new World Order of bank tax data exchange, and now you are coming up against “The Monster” of your own creation.
What the IRS is doing with it's new destructive mandate, is as plain as the nose on your face. It is using US bank non resident interest data as a bargaining chip. This is a tactic to try to get EU countries to drop their opposition to FATCA and go along meekly with a reciprocal tax data exchange pact between taxing authorities. It is bribing Italy, Germany, France, UK and Spain with an exchange of tax information from US banks, rather than require those countries Financial Institutions to report directly to the IRS as was required by FATCA.
So, if you want to kill this destructive domestic version of FATCA, which I call DATCA, then
repeal FATCA and it will be history!! It is that simple!
BTW, maybe now you there in Florida will have a little sympathy for how Switzerland must feel besieged as they are by the IRS, DOJ and Congress with its FATCA!
Rick| 3.8.12 @ 3:03PM
"If IRS officials think that is prudent policy, Congress should ask them to explain why. It is high time for reform of this agency, before it impoverishes us all."
The IRS did make this up on their own, this was a law passed by congress in the HIRE ACT of 2010, congress wants this law.
http://en.wikipedia.org/wiki/H.....oyment_Act
Stan Redmond| 3.8.12 @ 3:58PM
Everytime I read these stories I keep hearing the song "Driving nails in my coffin" over and over and over.
JJ| 3.8.12 @ 9:57PM
By foreign dictator, you mean Barack Obama right?
POST American| 3.10.12 @ 12:56AM
---Great piece!
Meanwhile, how about a little glance
in the direction of capstone Princeton
EUGENIST, Dr Peter Singer's call for
reclassifying children up to 3 as 'disaposable'
and eligible for selective extermination?
"--In the camps you'd hear the dismal
refrain --again and again and again
'WHY did we do NOTHING when we could
have? ---WHY ---WHY?"
-Auchwitz Memoirs
"Comfort makes cowards of us all."
-G B Shaw
(1933)
THAT'S WHY
SO ----Keep a goin' kiddies!
--------------Keep a goin'
------camp humor ----and death camp truth
-------------------------JUST KEEP ON GOIN'!
Jefferson D Tomas | 5.16.12 @ 9:29AM
In addition to scaring away foreign capital, FATCA penalizes Americans trying to do business and/or take up employment worldwide. Despite the US press frequently concentrating on very rich Americans living abroad or with assets abroad (the so called FATCAts), US policies especially crush middle class USPs (US Persons = Green Card or US Citizenship) Abroad whether they are tax compliant to the US or not. The reporting requirements of FATCA and FBAR (FATCA having apparently been passed as a rider to the HIRE act without much real open Congressional debate on the issue) are causing US Persons abroad, many of whom are dual nationals of their country of residence or a third country, to lose their jobs, be refused even basic bank accounts, and be shunned by prospective non-USP business partners who don’t want to deal with dual-reporting and taxation requirements to the IRS.
Most working and middle-class “minnows” abroad pay local, regional, and national taxes in the countries where they live, as well as VAT, excise and other taxes and fees. Whether these taxes are lower or higher that what they would pay as “homelanders” (USPs resident in the US) is immaterial. They all pay their fair share where they live according to the local system negotiated through whatever political means extant. They have to deal with the advantages and the drawbacks of their local countries’ system and do not need and often cannot survive with the additional variables imposed by the IRS.
US extraterritorial taxation policy does not take into account the disparities caused by the shift in exchange rates (thanks perhaps largely to US “quantitative easing”) that pushes people into higher US tax brackets despite no increased local purchasing power, the cost of living in each foreign country, as well as the tax structure in the foreign countries (for example, some countries have a much higher VAT than the US sales tax, but VAT paid outside the US is not eligible for a Foreign Tax Credit in the US).
US Double Taxation also takes money rightfully earned in a foreign country out of the local economy, where USPs should be free to spend or invest their money. Non-USP family members of USPs are also adversely affected, despite having no allegiance to the US.
Working and middle-class USPs have recently reached retirement age to discover that they have outstanding US tax liability, or while having no US tax liability due to the (limited) Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credit (FTC), might owe confiscatory penalties on foreign tax-deferred or tax-exempt retirement plans that were not reported to the US (see FBAR). Many USPs abroad renounce nationality because their pensions would not count as “Earned Income” and they could not survive if they paid US double taxes. Nonetheless, the renouncement process is time consuming and costly.
To obtain a fair picture of the issues facing Americans abroad in light of FATCA, FBAR and Double Taxation, one needs to look at the whole spectrum of US Persons living abroad.
Although, at least on the surface, US policies are meant to prevent people from earning money in the US, avoiding income tax on it, and hiding the proceeds in interest-bearing accounts abroad, the effect of the policies discriminates against middle class (and even some working-class) people abroad who already pay taxes where they live. Whether Congress did this inadvertently, or vindictively, is not always clear. What is clear is that many of the 5-7 million Americans abroad will no longer stand for this, especially as most probably never benefited from the bubble of the 90's and up through 2008, never had McMansions, and now are doubly affected by the threat of double taxation and confiscation of life savings and retirement funds under FBAR, as well as reeling from the global effects of the recession, which was kicked off by the subprime business and other financial irresponsibility in the US which culminated in the crisis of 2008, and the various waves we have seen since.
site of interest: http://www.isaacbrocksociety.com