I wrote yesterday about banks starting to pull their investments out of US markets in response to FATCA. Many banks are already refusing to deal with Americans entirely.
In a recent article by Larry Elkin, president of Palisades Hudson Financial Group LLC, he explains that “FATCA encourages foreign financial institutions to limit their exposure to U.S. assets.”
Some, including US ambassador to Canada David Jacobson, have argued that FATCA looks to bring much-needed revenue into the United States. But the US government have failed to consider the costs passed on to banks around the world.
All of this is designed to bring in an estimated $9 billion in tax revenue over a 10-year period, according to the IRS. For a country with a $3.8 trillion annual budget, that’s small change. The thinking, however, seems to be that even a small amount of income is worthwhile – so long as someone else is paying all the costs.
But even if the anticipated revenue were more respectable, it does not include the effects of the withdrawal of foreign investments that can be expected in response.
In many ways, FATCA is similar to the ill-fated Form 1099 scheme that was smuggled in through the health care reform bill. That law, allegedly intended to offset the costs of the health care initiative, would have introduced a flood of new paperwork by requiring companies to issue 1099 tax forms to all individuals or corporations that they pay more than $600 for goods or services each tax year. By making businesses effectively document each other’s revenue streams, the IRS hoped to cut down on unreported income. Congress apparently saw no problem with making business owners do the IRS’ work.
Once business owners got wise, however, they were quick to voice their displeasure, and the measure was repealed before it ever went into effect. Unfortunately, since the first blows will fall on foreign companies, which tend to have far less leverage with American lawmakers, repeal may not be so easy with FATCA. Americans may need to see the law’s effects first-hand before they understand how it will ripple through to them.