It’s not just American expats and non-US banks that stand to lose from FATCA, but the US itself could be irrevocably harmed. Most recently, four US congressmen have warned that implementing FATCA could severely damage the US economy, just at a time when it can least afford to take the hit.
Congressmen Blaine Luetkemeyer, Ron Paul, John Campbell, and Donald Manzullo, members of various House of Representatives committees dealing with finance and foreign affairs, have warned US Treasury Secretary Tim Geithner that enforcement of FATCA will discourage investment in US securities by making it too costly for foreign investors.
FATCA, enacted last year as part of the HIRE Act, requires all foreign financial institutions to discover whether they have American clients, and to report those clients’ financial affairs to the Internal Revenue Service, starting in 2013. Banks that refuse to cooperate will have a 30 per cent withholding tax deducted from interest payments, dividends or other investment income earned in the USA. Foreign banks would also have to agree to impose the withholding tax on other foreign banks on the IRS’s behalf – meaning that payments between non-US institutions would be subject to US tax.
If a significant number of global investors pull out, the immediate effect will be a rapid drop in US stock and bond prices, which could be devastating to American citizens’ pensions.
Indeed, with a year and a half left before FATCA comes into effect, the repercussions are already being felt. Many investment bankers are already warning their clients to stay away from US securities (as discussed in this Reuters article, for example).
This phenomenon is called a perverse incentive. For the sake of the global economy, we can only hope that the US realizes before it’s too late that shooting jaywalkers is not an effective means of increasing traffic safety.