This week Switzerland became the 52nd country to sign an OECD initiative which will enable automatic exchange of financial account information among the tax authorities of each country. Among other things, that means the end of bank secrecy, a long standing Swiss institution dating back to 1934.
Bank secrecy in Switzerland has been under attack for years, but it got a big boost from the vigorous efforts of the Obama administration in recent years, particularly the Department of Justice suing all of the major Swiss banks on charges of tax evasion. As part of that effort, the administration pushed the Foreign Account Tax Compliance Act (FATCA), which was passed in Congress and signed into law in 2010 and put into force in July of this year. It requires every bank on earth to file with the IRS and submit account information on American citizens, or risk steep penalties and isolation from the world’s financial system. The compliance costs are estimated at about $8 billion a year, while the revenue expected is one-tenth of that, $800 million per year.
(Editor’s Note: This OECD initiative is known as GATCA, more on that here.)
This compliance burden of FATCA has caused foreign banks to simply end their relationships with Americans, leaving Americans living abroad no options for banking. American citizens abroad have responded by renouncing their citizenship at the rate of about 3,000 a year and growing. The U.S. government has responded by increasing the exit fees.
And now, as turnabout is fair play, Switzerland and other countries have pushed for a reciprocal deal with the U.S., i.e. they want U.S. banks to experience FATCA for themselves. It means what was once considered private financial information, even in the U.S., will now be swapped among tax authorities all over the world. Sure hope we can trust the Chinese and Russian governments to do the right thing.
All of this in pursuit of rich people and their money. The U.S. has for a hundred years taxed the income of its citizens no matter where they live on earth. Now the U.S. is one of only two countries to continue to do so (the other is Eritrea). The idea is flawed for two reasons. First, income, particularly investment income, is very hard to track and also economically harmful when taxed. Second, it involves enforcing a suspect definition of income on sovereign countries throughout the world. To the extent that it is enforced, it oversteps our bounds and risks infuriating our friends and trading partners, who often have very different ideas about what is taxable. I can attest that many in Switzerland, a distinctly neutral and peaceful country, consider the recent enforcement actions a kind of American imperialism, “economic warfare”, a kind of trade war, which is why they are now pushing for retaliation in the form of the OECD’s automatic information exchange protocol.
The absurd part is that no amount of enforcement will produce much in the way of returns. $800 million a year is a pittance when you consider the economic damage of $8 billion a year in compliance costs, the international lawyering up of the banking sector, the increased cost of financing, the loss of privacy, the restriction of international capital flows, and the consequent reduction in competition, both among banks and among tax authorities.
Editor’s Note: FATCA beget GATCA, which will beget something truly horrible. To find out the shocking real reason for FATCA and what comes next, check out this article.