In Dubai, international firms increasingly pass over American citizens in favor of less qualified applicants from other countries. The problem is not anti-Americanism, but rather practicality: The paperwork required to hire Americans because of Internal Revenue Service regulations is an expensive headache. Even when firms are willing to help facilitate documentation to take the burden off American employees, the fact that Americans living abroad pay double means they often ask for higher salaries that make them less competitive in the hiring process. Dubai is not alone. The same pattern repeats in other international business cities such as Berlin, Johannesburg, and Tokyo.
For Americans living abroad, paying taxes was always a bureaucratic hassle. But after an informant in 2008 blew the whistle on how Swiss banks were helping wealthy Americans avoid tax liabilities, Congress decided to fix the problem with an ax rather than a scalpel. The 2010 Foreign Account Tax Compliance Act (which you may know as FACTA) required anyone born or with prior residency in the United States (perhaps 9 million Americans in all) to undertake onerous and often redundant reporting requirements. The issue is even trickier for “accidental Americans,” many of whom have not stepped foot in the U.S. in decades and have no roots in the country but now face life-ruining penalties.
Almost all affected parties recognize that FACTA is counterproductive. While some wealthy Americans seek tax havens, many of these are residents inside the U.S. FACTA fails to recognize any difference between those seeking offshore tax havens and those living abroad who seek to utilize local banks. Not only are reporting requirements onerous, but for the IRS, they actually cost more money to fulfill and manage than normal domestic enforcement mechanisms and bring in far less revenue. In other words, while Congress initiated FACTA to target cheats seeking foreign tax havens, it actually diverts money from more effective means to recover money lost to tax cheats.
The U.S. also seeks to compel foreign financial institutions to report upon American citizens directly under penalty of sanctions. By some estimates, bank compliance could cost an additional $200 million in administrative costs. This, in turn, leads many banks simply to refuse to allow American citizens or green card holders to open accounts, which in turn creates a huge burden when living and working abroad, as many local banks effectively remain off-limits.
Even when banks do allow Americans to open accounts, there can be a Catch-22, as many banks in developed countries refuse to supply all information to the IRS freely because of local privacy laws. This can put Americans in legal jeopardy. Developing countries, meanwhile, often lack the capacity to fulfill U.S. requirements even if they were so inclined. Ordinary Americans, such as retirees living abroad, often must pay specialized accountants a fee far greater than their tax liability if they were able to report their assets and income more simply and directly, as before the FACTA era.
Increasingly, there is also a national security issue, as country-by-country reporting requirements could open American multinational companies’ books to inspection by Chinese Communist authorities already prone to downplaying or stealing intellectual property. Multiple European tax authorities have suffered hacks that exposed sensitive data. In effect, while the U.S. government speaks about the growing threat of cyber crime, its commitment to nonsensical regulations now makes Americans abroad more vulnerable.
While the Government Accountability Office recognizes FACTA’s problems, Congress has yet to address the problem. Increasingly, partisan posturing fills legislative time, leaving little room for bipartisan cooperation to resolve an issue that will not lead to sound bites on 24-hour cable news. More broadly, there is also a systematic issue: When problems strike a particular district or state, representatives and senators spring into action, but when claimants are spread across every state and congressional district, individual politicians find little incentive to respond in any meaningful way. Many vocal anti-FACTA activists compound the problem by substituting bombast for effectiveness. Anti-FACTA activists compare the U.S. to Eritrea, one of the world’s worst regimes and one that taxes based on ethnicity and imprisons relatives to compel noncitizen Eritreans to subsidize the regime. While FACTA is bad policy, overwrought comparisons make it easier for legislators to dismiss expatriate citizen activists.
President-elect Joe Biden ran as a centrist and defeated multiple candidates who confused the policies promoted by the progressive Twitterati with the desires of the mainstream Democratic base. He triumphed in November’s elections because both Republicans and Democrats want to steady a system that appeared poised to derail. As divided as the country is, there is broad consensus among those in both red and blue states that representatives should reach across the aisle for the common good rather than simply engaging in partisan warfare. Biden’s team may focus on reversing President Trump’s initiatives on day one, but, if Biden wants to uphold his promises to restore trust in government and reach across the aisle, there are few better places to start than in revoking FACTA and replacing it with something that targets tax cheats rather than suffocating law-abiding Americans.
Michael Rubin (@Mrubin1971) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a resident scholar at the American Enterprise Institute and a former Pentagon official.
