On FATCA and the Law of Unintended Consequences...Or Not

From a recent Bloomberg article:

Go away, American millionaires. That’s what some of the world’s largest wealth-management firms are saying ahead of Washington’s implementation of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts. HSBC Holdings Plc (HSBA), Deutsche Bank AG, Bank of Singapore Ltd. and DBS Group Holdings Ltd. (DBS) all say they have turned away business. “I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

One might imagine that implementing such legislation would have the effect of pushing those who care greatly about tax losses to friendlier jurisdictions (while presumably not everyone can just up and go to other countries whenever they please, this is clearly less of an issue for the types of inviduals impacted by legislation like FATCA). On the evidence they would be correct, with Facebook co-founder Eduardo Saverin serving as a recent example.

Some amateur economists in the crowd might be eager to cite the loss of wealthy individuals due to tax policy as an example of the law of unintended consequences. But I wonder...maybe losing millionaires like Saverin isn't unintended at all?

Those who value favorable tax regimes above all other political hot buttons will, on balance, side with Republicans around tax time. Some of those wealthy individuals might also be inclined to write checks to super PACs to help Republican candidates during election season. Maybe some Democrats considered this all when writing this legislation, deciding that the loss of these wealthy, tax conscious individuals was no loss at all, and might even become a gain at election time. 

Some might (rightly in my mind) point out that losing these high net worth individuals, especially those who have shown a predisposition for innovation (even if they had been shifting some income offshore), is a net loss to the economy. However, it is probably naive to think that legislators consider the state of the economy as anything but a means on a road with the endpoint being reelection.

And, for any readers who are saddened by the potential loss of the 1%, I can assure you that not all wealthy Americans will be pushed away by FATCA. There are some, perhaps anchored by red carpets and the bright lights, who will always remain, no matter what the tax situation is. I can assure you that the Obama administration has no fear of losing this crowd, or the benefits which come with it...


  1. Anonymous15/5/12 13:12

    There are also enormous benefits to being a citizen in what is, for now, the most powerful nation on the planet. I doubt that Eduardo's new home will be able to intervene on his behalf half-so-successfully as the United States should he find himself in a pickle with, for instance, Somali pirates boarding his yacht.

    To say nothing of the fact that Singapore has done away with trial by jury, or that the same political party has won each of its elections since it became a Parliamentary democracy (in name at least).

  2. Thanks for the comment. Point taken on the benefits of living in the US. I will certainly concede that one to you, dear reader.

    I would, however, point out that whether one lives in the US, a parliamentary democracy, a oligarchy, a kingdom, or any shambolic mash-up of the above, money talks.

    I of course cannot guarantee that Singapore will be able to protect Mr. Saverin from Somali (or more likely Malaccan) pirates, though the valiant efforts of the Singaporean navies and the public good created by the presence of the US and Chinese navies should be able to provide some comfort.

    In any case, Mr. Saverin is a rich man, and I doubt that he will face many of the legitimate problems facing the average Singaporean, including the loss of trial by jury.

    The same could be said of most of those who are wealthy enough to renounce their US citizenships for money reasons, so I doubt such 'small' problems will lead many of them hesitate in making foreign moves if they are so inclined.


  3. I think the international banks are fooling themselves. I have been spending a good deal of time with FATCA lately and my growing impression is that it is actually a good deal worse than they think. In order to avoid the withholding taxes in question, banks have to register with the IRS. One of the requirements once they have registered is that they impose a 30% withholding tax on all financial institutions that are NOT registered with the IRS. A cigarette company couldn't come up with a better model for enforcing compliance. What it is, is financial imperialism. In 10 years time, when this absurdly expansive system is finally up and running, every bank in the world will be obligated to report its information to the US Federal government.

    As a small government kind of guy I find this to be a horrifying development. I think it should bother everyone though. Luckily the IRS is helping out with that. Apparently the banks of most rich white countries are exempted from this bit of financial imperialism. http://www.treasury.gov/press-center/press-releases/Documents/020712%20Treasury%20IRS%20FATCA%20Joint%20Statement.pdf

  4. Thanks so much for the comment, good to see you back on the site.

    I think that this is the type of legislation which, perhaps intuitively, but most counter-productively, rears its head during uncertain economic times.

    It is a lot easier to tell people that tax dollars will stay when budgets are tight, but the results most typical Americans aren't considering (to the extent they even know about this legislation) are the protectionism, lack of choice, and strong governmental interference in the banking system.

    I wonder whether those who voted for this did so in spite of, or because of, such results...