Via Just Me on Twitter, we learn that Congresswoman Carolyn Maloney (D-NY), head of the House’s Americans Abroad Caucus, posted a video of her questioning Treasury Secretary Tim Geithner on, among other things, banking issues faced by U.S. Persons in non-U.S. jurisdictions. For those of you who hate watching videos (like me), after the jump I’ve made transcript of the relevant section, which begins around 3:14.
3:14/Maloney: Also, I’ve been corresponding with your office and you on the challenges that Americans living abroad — I represent many Americans working abroad, and they are reporting that they’re having problems gaining access to bank accounts abroad. And I know that we’ve requested a meeting with your office — and you’ve granted one in April, I want to publicly thank you for that — so that they can work out why they’re being denied access to these bank accounts.
3:40/Maloney: Now your office is saying that there is no policy in the American government that in any way denies American citizens or makes it more difficult for them, but the testimonials that are coming into my office tell a very different story, and I certainly support all of your efforts to improve tax compliance, and to determine the ownership of U.S. assets of foreign accounts — but these efforts should not impair or hurt law-abiding American citizens. My basic question is really on the fact of the US PATRIOT Act and foreign bank and financial services, and basically what are you doing to help accomodate American citizens so that legitimate American citizens are able to access bank accounts abroad? With more and more people in the world economy it’s becoming a growing problem across the country.
Leaving aside the fact that I am not trying to access a bank account abroad and it’s a growing problem across the world outside the U.S., it’s heartening to see someone in the U.S. Congress taking up this issue.
4:37/Geithner: Very important question, and you’re right, there’s been some concerns with the impact of this set of laws, particularly what we call in shorthand “FATCA”, and the [inaudible] rules. We are working very closely to try to meet the Congressional intent, in making it harder for U.S. citizens overseas to avoid U.S. taxes, without putting undue burdens on their ability to have a bank account, for example.
5:12/Geithner: And we’re doing a lot of things to provide more time for banks around the world to adjust and to try to make sure that we’re designing the rules in a way that creates a better balance between the important objective you spoke to of preventing tax evasion, but also to make it easier — a lot of Americans live[d?] overseas, or are living overseas, and it’s perfectly legal, and needs to be possible, for them to have bank accounts overseas. So we’ve got some work to do on that, I’m happy to work with your office and your colleagues on how to make sure we’re as responsive as we can to those concerns.
Some readers may think that Geithner misspoke, or is misrepresenting the Congressional intent. I would disagree. Ever since the U.S. started putting limits on the foreign earned income exclusion in the 1950s, every succeeding generation of Congresscritters has made its belief in American economic exceptionalism very clear — they think that the U.S. is the only place anyone could make any money, and that Americans abroad are all movie stars and other rentistas leeching off of the U.S. economy and spending their money in tax havens. So there’s a pervasive and destructive myth that taxation of Americans abroad only affects “the undeserving rich” thanks to the Foreign Earned Income Exclusion. And even the FEIE is subject to attack on the grounds that it’s a “tax expenditure” which violates the principle of “horizontal equity”. Once you’ve accepted these myths, you’re reduced to trying to defend the FEIE in terms of benefits to homelanders or to higher causes, such as promoting American exports or relieving burdens on Americans who live in hardship areas in developing countries. Indeed, people like Senators Chuck Grassley (R-IA) and Tom Coburn (R-OK) disbelieve those latter arguments, and on that basis argue that the tax code should put more burdens on U.S. citizens abroad, especially those who use their “American brains” to the benefit of foreigners. As the latter put it in his Back in Black: Reforming Tax Expenditures and Ending Special Interest Giveaways tax plan (at p. 35):
Regardless of where they live, U.S. citizens with identical incomes should have similar tax liabilities. The Congressional Research Service also found this provision is potentially a subsidy for business because it “subsidizes employers sending employees overseas” and it “may work against U.S. domestic interests by encouraging highly compensated U.S. citizens to work overseas … expatriating U.S. intellectual capital and reducing U.S. tax revenue.”
Also of note, citizens working overseas are not just working for American companies. In the 21st century global economy, many Americans are working overseas for non-U.S. companies, yet taking advantage of this tax break. The tax exemption is provided for these employees, but is not necessarily encouraging U.S. competitiveness. In fact, depending on the country, some employees working for non-U.S. companies may not be subject to Medicare and Social Security taxes, in addition to enjoying the income tax exclusion.
Once you’ve accepted the argument that the FEIE is a “subsidy”, nothing else looks like an “undue burden”. So Congress finds it perfectly reasonable to make U.S. Persons outside of their jurisdiction spend thousands of dollars on professional help to file ridiculous international tax forms allegedly aimed at catching onshore tax-evaders — like Form 8890 for an RRSP, Form 3520 for an RDSP, Form 8621 to buy an ETF or mutual fund from your local bank, Form 8858 to register a sole proprietorship and work for yourself where you live (or Form 5471 if you’d rather incorporate), Form 8938 if you sell your house, FBAR every single year — and to impose $10,000 failure-to-file fines on each and every one of the above items on those U.S. Persons who think they are “tax compliant” by virtue of filing Forms 1040, 1116, and 2555.