Defenders of the executive branch claim that U.S. Persons abroad should direct their anger at Congress, and not the IRS, for the current holy crusade against people who dare to live and save outside of the United States. But over at Tax, Society & Culture, tax prof Adam Rosenzweig makes an interesting argument which points to the hole in that logic:
Conventional wisdom seems to hold that Congress must act for there to be any reform of the taxation of “carried interest” (the type of fees earned by investment fund managers such as Mitt Romney) But if the goal is to tax carried interest at the same rate as, say, salary earned by auto workers, Congress need not act at all. Rather, the Treasury Department could accomplish this on its own today.
This somewhat surprising conclusion comes from the fact that the Code already authorizes the Treasury Department to prevent taxpayers from using partnerships to convert certain types of income that would have been taxed at the ordinary 35% rate into income taxed at the preferential 15% tax rate. For somewhat technical reasons, carried interest requires a partnership to be used for tax purposes. Thus, Treasury could simply issue a regulation disallowing the 15% rate for carried interest. Voila! Carried interest fixed.
So what other ridiculous aspects of the U.S. tax system might Treasury be able to fix through its power to issue regulations? Perhaps something related to U.S. Persons abroad?
Geithner can’t exclude us from payment of U.S. tax — but most of us barely owe any tax anyway. What he can exclude us from, however, is the need to pay the Tax-Industrial complex thousands of dollars to help us file thirty pages of useless forms every year, or from being subject to the life-altering penalties aimed at Homeland whales for not crossing our “t”s and dotting our “i”s, or from imposing punitive withholding taxes on banks which refuse to violate our countries’ democratically-enacted personal data privacy laws which are supposed to protect all residents of our countries regardless of their nationality.
Don’t believe me? Read the laws yourself, and look at how much power they give to Mr. Secretary. First, let’s start with 26 USC § 1471(a) and (f), “Withholdable payments to foreign financial institutions”, part of FATCA’s infamous 30% withholding regime:
(a) In general
In the case of any withholdable payment to a foreign financial institution which does not meet the requirements of subsection (b), the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment …
(f) Exception for certain payments
Subsection (a) shall not apply to any payment to the extent that the beneficial owner of such payment is … any other class of persons identified by the Secretary for purposes of this subsection as posing a low risk of tax evasion.
Like, for example, Americans overseas who do not owe you thieves any tax despite all this stupid paperwork you keep flinging at us to generate $10,000 penalties? So how about the next section of FATCA, 26 USC § 1472(a) and (c) (“Withholdable payments to other foreign entities”)?
(a) In general
In the case of any withholdable payment to a non-financial foreign entity, if—
(1) the beneficial owner of such payment is such entity or any other non-financial foreign entity, and
(2) the requirements of subsection (b) are not met with respect to such beneficial owner,
then the withholding agent with respect to such payment shall deduct and withhold from such payment a tax equal to 30 percent of the amount of such payment.
Subsection (a) shall not apply to … any payment beneficially owned by … any other class of persons identified by the Secretary for purposes of this subsection
That’s “any other class of persons”. Not just persons with a “low risk of tax evasion”.
So what about non-U.S. ETFs and mutual funds, which are supposed to be a way for unsophisticated investors to get some exposure to the markets, but with the U.S.’ PFIC laws turn into an accounting nightmare — effectively forcing U.S. persons to invest only through U.S. ETFs and mutual funds, regardless of what any free trade agreements might say about non-discrimination? 26 USC § 1298(f) (“Special rules”):
(f) Reporting requirement
Except as otherwise provided by the Secretary, each United States person who is a shareholder of a passive foreign investment company shall file an annual report containing such information as the Secretary may require.
What about our RDSPs, MPFs, CPFs, second pillars, and other tax-advantaged purpose savings schemes for education and retirement and the benefit of the disabled, which the legislatures of the places where we actually live have democratically granted simple tax and paperwork treatment? Does the IRS really have no authority whatsoever to save us from filling out 3520s and 3520-As intended for Mitt Romney and his multi-billion dollar blind foreign non-grantor trusts? Obviously they do, otherwise they couldn’t have created Form 8891 in the first place. How broad are their powers? 26 USC § 6048(d)(4) (“Information with respect to certain foreign trusts”):
(4) Modification of return requirements
The Secretary is authorized to suspend or modify any requirement of this section if the Secretary determines that the United States has no significant tax interest in obtaining the required information.
In the toy model of government that many of us learned in school, our (s)elected (un)representatives in Congress pass all the laws of the land, and the only job of the executive branch, including government agencies such as the IRS, is to faithfully execute those laws down to the last letter. Of course, back on planet Earth, practically every law passed by Congress gives the executive branch significant power to modify the execution of the law through regulations. And even if it doesn’t, the executive branch can always change its enforcement priorities. And of course, perfect enforcement of laws in general is not compatible with a free society.
So is Treasury going to use the power given to them by Congress to stop wasting the time and money of U.S. Persons abroad, even if that means a couple of dollars here and there slip through their grasp? Don’t hold your breath.