(Daily Times) -- As Congress considers overhauling the tax code, it should give a high priority to one reform in particular: It should stop driving Americans who work abroad from renouncing their citizenship.
The US is one of only two countries in the world (the other being the tiny East African nation of Eritrea) that taxes the income that its citizens earn in foreign lands, even though that income is already taxed by the host country. That is bad enough. But the real mischief lies in the onerous reporting requirements that the US government imposes on Americans with overseas incomes, even if they don’t owe any taxes.
Most of the nine million or so Americans who work abroad don’t owe any taxes at all — most qualify for an income exclusion under IRS regulations. But the fact that they don’t owe taxes on their incomes does not exempt from the reporting requirements, which are often burdensome.
Congress made a bad situation worse when it passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA requires foreign financial institutions, such as banks, hedge funds and private equity funds to provide the IRS with the names of their US clients and information on their assets. Those institutions that do not comply are subject to a 30 percent withholding penalty on certain transactions originating in the US — like dividends on investments in US companies, for example. FATCA also toughened the reporting requirements for Americans with assets overseas, with the threat of crippling fines for those who neglect to file the required forms.
In the case of Americans married to foreign spouses, compliance can be particularly awkward. If they have joint bank accounts, they need their spouses’ permission to disclose the information required by FATCA. Understandably, many spouses who are foreign nationals are reluctant to share their personal financial data with American tax authorities.
Because of the costs involved in complying with all this red tape, foreign banks have come to regard their American clients as “toxic liabilities” and are refusing their business. Other foreigners don’t want Americans as business partners. Some Americans working abroad find their careers stunted — companies are reluctant to promote or even hire Americans for fear of potential FATCA complications. As a result of all this pressure, American expats are renouncing their citizenship in record numbers. Last year alone, 5,411 Americans turned in their passports, nearly four times as many as in 2010.
FATCA was enacted to catch tax cheaters. Proponents of the law claimed that between $100 billion to $150 billion a year in tax revenue was being illegally sheltered abroad. Yet later studies say that the actual figure is much less. One study, by Congress’ nonpartisan Joint Committee on Taxation, estimates lost revenue at about $870 million annually. And that figure is dwarfed by the colossal costs of complying with FATCA. According to reports by the US Chamber of Commerce, foreign governments and banking authorities, these costs amount to between $200 billion and $1 trillion a year. Curiously, FATCA was not subjected to a cost/benefit analysis by the House Committee on Ways and Means before it was enacted. Furthermore, there is little reason to suppose that FATCA is effective in doing what it was enacted for in the first place — catching tax cheaters. FATCA, after all, applies only to financial institutions. As critics of the law have pointed out, cheaters don’t usually leave their money sitting in bank accounts waiting to be discovered. Instead, they find ways of hiding it in legitimate businesses that are beyond FATCA’s reach. As a result, FATCA hits millions of law-abiding Americans who live and work abroad a lot harder than it hits the tax evaders. Comedian W.C. Fields long ago quipped that the tax man “would strike down a child for his marbles.” FATCA is fresh proof that Fields was right. It is a bad law whose costs vastly outweighs its benefits, and whose consequences bear more heavily on honest citizens than the tax cheaters it was meant to catch. The Republican Party called for the repeal of FATCA in its 2016 platform. The GOP should keep its promise before any more good Americans feel pressured to renounce their citizenship.