Should America help corrupt officials hide wealth?
By Scott Sumner
The New York Times has a new piece discussing the importance of foreign buyers at the top end of the NYC real estate market:
The foreign owners have included government officials and close associates of officials from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico.
They have been able to make these multimillion-dollar purchases with few questions asked because of United States laws that foster the movement of largely untraceable money through shell companies.
Vast sums are flowing unchecked around the world as never before — whether motivated by corruption, tax avoidance or investment strategy, and enabled by an ever-more-borderless economy and a proliferation of ways to move and hide assets.
One can make a good argument that the benefits of privacy outweigh the costs. Unless of course it is other countries that try to provide privacy, then the US attitude changes just a tiny bit:
AT A recent conference for offshore wealth managers in Geneva, Basil Zirinis of Sullivan & Cromwell, a law firm, began his presentation with a discussion of events in Iraq, where Islamist fighters were advancing on Baghdad. Barack Obama, he claimed, was drawing a red line around the city and, if necessary, would “drop FATCA on them”. Worse, they would get no deadline extension. The nuclear option, he added, was to treat them as if they were Swiss.
The analogy was tasteless, but also telling. FATCA stands for Foreign Account Tax Compliance Act, an American law passed in 2010 to crack down on the use of offshore banks, particularly in Zurich and Geneva, to hide taxable assets. . . . One senior banker denounces it as “breathtakingly extraterritorial”.
. . .
FATCA has already sent a chill through the 7m Americans who live abroad. Thousands have been told by their local banks and investment advisers that they no longer want their custom because it is too much hassle. Many others will now have to spend thousands of dollars to straighten out their paperwork with the IRS, even if they owe no tax (and most do not, since they will have paid a greater amount abroad, which counts as a credit against tax owed in America).
A record 2,999 of these exasperated expats renounced their citizenship or green cards in 2013. More than 1,000 did so in the first quarter of 2014. (Before FATCA the number was a few hundred a year.)
Even worse, the law cannot even be justified on utilitarian grounds:
Related to that is the question of whether FATCA will pay for itself. Counting only the expense for American financial firms, the answer is maybe, if it brings in at least the $800m a year estimated by Congress. (The law was passed without any formal cost-benefit analysis.) However, the overall costs of complying, borne mostly by non-American banks, are likely to far exceed the extra tax receipts.
FATCA is about “putting private-sector assets on a bonfire so that government can collect the ashes,” complains Richard Hay of Stikeman Elliott, a law firm. Mark Matthews, a former deputy commissioner of the IRS now with Caplin & Drysdale, another law firm, argues that the effort put into hunting offshore tax evaders is disproportionate: the sums they rob from the public purse “look like a pinprick” compared with other types of tax dodging, such as the under-declaration of income by small businesses.
There are two types of left-wingers. Some are idealistic reformers who favor redistribution because the poor get more utility from an extra dollar than the rich. Others are like former Chinese leader Mao, those who hate the rich so much that they are quite willing to make everyone suffer, just so that no one will become wealthy. It’s not clear which philosophical justification was used for this law.
As more countries are pushed to share tax information systematically, the focus will turn to America’s willingness (or lack of it) to reciprocate. Latin Americans, for instance, are big users of banks in Florida, but America remains choosy about which governments it will share data with, and how much. It also has only limited information to give on the owners of shell companies because it does not collect their names itself. In some respects, America is less upright than the tax havens it deplores.
It seems breathtakingly arrogant for the US to insist that other countries have the same privacy laws that we have. But this is worse. How would you describe a country that used its awesome power to intimidate small countries to abandon their long cultural tradition of protecting privacy, and then turned around and drew in vast amounts of ill-gotten gains from overseas by shielding those investments from public scrutiny?
Words fail me.