Despite plenty of media hyperbole, President Donald Trump's recent tax reform package did far too little. Apart from the reduction to corporate taxes, there were marginal improvements at best, and one salient flaw remains in place: the Foreign Account Tax Compliance Act (FATCA).
Passed in 2010, FATCA follows US citizens across the globe and turns foreign banks and financial institutions into de facto enforcement arms of the Internal Revenue Service (IRS).
While FATCA is an American law, foreign countries are obliged to follow its burdensome provisions. FATCA mandates that all foreign financial institutions register with the IRS, and if they do not comply with FATCA standards, the US government can impose a withholding tax of 30 percent on the foreign bank’s earnings.
Not only does FATCA present a major threat to the privacy rights of US citizens living overseas, it substantially increases the difficulty of earning a living abroad. Many foreign banks have opted to drop American clients altogether as a way to avoid FATCA’s burdensome compliance costs.
Naturally, FATCA’s cumbersome regulations force American expatriates to make tough decisions. A story from Bloomberg paints a shocking image of what Americans abroad are compelled to do to make ends meet under the Brave New World of FATCA:
The number of Americans renouncing their citizenship rose to a new record of 5,411 last year, up 26 percent from 2015, according to the latest government data.… Since Fatca came into being, annual totals for Americans renouncing citizenship have reached their four highest historic levels.
The following chart paints a lurid image of the increasing number of Americans renouncing citizenship:
To make matters worse, FATCA has provided governments with the necessary tools to implement global data-sharing programs that could subject US citizens with foreign bank accounts to increased regulatory hassles and levels of taxation.
Interestingly, the 2016 Republican Party platform called for the repeal of FATCA. Under the banner of pro-growth reforms, the GOP won resoundingly in the 2016 elections by promising to scale back Obama-era anti-market policies such as FATCA.
But when presented with the opportunity to do so during the tax-reform debate, not a peep was made about reforming FATCA, let alone repealing it.
Despite this hiccup, policymakers should move towards a system of territorial taxation, where governments only tax income that is earned in that particular jurisdiction. Given the degree of institutional inertia, a pragmatic first step in achieving the bold goal of territorial taxation is outright repeal of FATCA.
For dignity’s sake, Americans deserve to be treated like productive citizens as opposed to tax cattle when they take their talents abroad.