A economist friend, who I email correspond with, has made some broader salient observations and points about the recent EU FATCA meeting, which Victoria has eloquently blogged about here.  As he points out, FATCA has greater impacts than just those on Dual Citizens and accidental Americans living in Europe that we all should be concerned about irrespective of our status.

I thought I would ask his permission to share his thoughts to add and expand the discussion.   Rather than just bury them in a comment stream, here or here, I thought I would make a separate post as they are extensive.  He wishes to maintain anonymity for the purpose of this post.

Note to Reader:  When you watch, and/or read the testimony of the US Treasury guy, Mr Robert Stack ( Deputy Assistant, Secretary for International Tax Affairs, International Tax Council of the United States Department of Treasury) you will notice that there has been no mention of the IRS. However, he represents the face of the IRS for FATCA administration and enforcement.  The IRS Commissioner reports directly to Treasury Secretary Jack Lew who reports to Obama. The IRS is NOT an independent government agency. The International Revenue Service (IRS), as guided by the Administration and Treasury are the ones that implement the Treasury FATCA IGAs specifically and 544 pages of FATCA regulations generally.

So, when you hear Treasury in the context of this EU public hearing, think IRS, as they are the ‘heavies” given the task, with full enthusiasm for the mission, I might add.   The Economist commentary below used IRS terminology only, but I have included both for clarity, as it relates to this EU FATCA Public hearing.

What follows are his comments with a little editorial license:

The Economist writes:

OK, everyone, I just had the chance this morning to watch the  1 hour and 22 minute video of the “public” hearing. Here is my bottom line: WHAT A JOKE!!

Each MEP had one chance to speak for 5 minutes while the interlocutors -Treasury/IRS, OECD, Euromap (? – Lewis) get a second round to refute Sophie or support some of the others, and leave their last words. But the biggest joke, to me anyway, is how there IS a public hearing on FATCA in the EU that NO American has ever been accorded by our own government!!

Listening to the Treasury/IRS guy Mr Stack talk about policy and Congress, etc., was absurd, but everyone in that room assumed he knew what the hell he was talking about and/or had the authority to make these promises and deals! They have no mandate at all on policy or most of these things!! This is an Treasury/IRS bamboozle of the entire EU and European Parliament – and they’re buying it!

Reciprocity as a replacement for Fiscal Imperialism:  FATCA, as we all know, was not a piece of legislation that received open public hearings, nor even committee discussions and sanctions – none of the things that the EU is doing now, however rudimentary and badly done.

FATCA was quite literally slipped into an oblique piece of legislation having absolutely NO relevance whatsoever to the subject of taxation. It had absolutely no mandate or implication with respect to IGAs at all, let alone data exchange agreements. None of those items were mentioned ONCE in the FATCA legislation. This auto exchange mechanism is ALL fabricated by the Treasury/IRS because they quickly found out that FATCA is fiscal imperialism!  And, not surprisingly, people don’t particularly like fiscal imperialism. So suddenly “reciprocity” was presented as the solutions, but where is reciprocity ever mentioned in FATCA legislation? Answer: IT IS NOT

Policy Laundering:  Sophie is right! This IS “policy laundering”, and more disturbing, it is  ‘policy-making’ by an Department of government that has no power to make it. It should not be doing this. It is the domain of State Department!

Treasury/IRS is promising things that they can’t deliver, have no power to deliver, and probably won’t deliver given the current political realities in DC!

Why do countries who have territorial systems of taxation need any reciprocity from the USA at all?? For what? Do they want to identify all Germans living on American shores having accounts in Kansas Credit Unions? Aren’t Tax evasion problems inside the boundaries of the EU enough of an issue to solve, without rushing abroad to stop it there too?

What’s the Reciprocity Point:  What is the ultimate point of all of this reciprocity and data exchanges among OECD countries supposedly to combat tax evasion? How much money are people in the USA hiding in Germany or France, do you think, for tax evasion purposes? And why would they actually want to tell the USA about this money that is there at all?  That money is being put to work earning a return, (and is taxed) on which the local governments are gaining multiple levels of taxation – sales taxes, property taxes, employee taxes, VAT, et.al. Why send it scurrying to other jurisdictions outside this EU/US exchange mechanisms they are salivating about?

As noted before, when FL, TX, NV,  WY and DE get wind of what the reciprocity promise of Treasury means to the economies of their states, how many members of Congress are going to stand up and vote on it? We should send the exchange of Mr Stack of the Treasury/IRS to the DE delegation immediately, along with VP Biden, so they can hear for themselves just what the Treasury/IRS is proffering the EU in their names!  Maybe Senator Reid would like to consider the impacts on his state. Wonder if he thought of that when he pulled the lever for an “aye” vote on FATCA?

Treaty?  Indeed, lost in a lot of the shuffle was a minor note by the EC representative who mentioned the magic word to govern all of this: “Treaty”  Normally that means full Senate exposure to something they’ve spent not a nano-second on! Of course, by Treasury declaring it is just a Competent Authority Agreement, no Senate ‘advise and consent’ is necessary, so they won’t get a half of nano-second if Treasury has their way.  Of course, Treasury/IRS hopes that it will be a fait d’accompli from the EU side, so the Senate will have no choice since but accept it if they ever wake up to discover that has happened. Ironically, all of this will be in response to a stealth paragraph or two from the HIRE Act that they never saw because it was slipped in, won’t remember, and many didn’t vote on, but is, in fact, US LAW.  FATCA is boomeranging back onto American shores and they never saw it coming.

The Cost Benefit is assumed:  Here is the other unspoken argument in the entire hearing: The cost-benefit is assumed! They assume that if FATCA and its IGAs is matched with an internal exchange of data first within the EU and then with America, then tax evasion will be defeated and governments will solve their budget problems.What the hell gives any of these guys that idea?? And at what cost??

Do any of these Eurocrats and MEPs know that the W&M Committee scored FATCA at providing a whopping $800 million in additional revenue if implemented? If it is that little for America, what a pittance it will be for them. In the process of that, it is costing global financial institutions tens of billions of dollars!!?? And just how much money will the EU have to spend to actually create systems for the exchange of data to implement FATCA? And what will they receive at the end of it? This is such an absurdity!  It is a nightmare of quite literally global proportions!

Listening to how the USA and EU, and ultimately OECD members will set up this standardized exchange of information among tax authorities all supposedly to combat tax evasion is almost amusing. Now that Switzerland caved due to other US DOJ pressures, no one in their right minds, who wants to evade taxes, will place their money in Switzerland or the EU now, just makes the entire exercise a monumental JOKE on everyone else.

Government Debt = Slavery:  The Treasury/IRS Stack’s comment on “austerity” is such a low-blow (though effective) foundation of why anyone is taking this seriously at all. I’ve written before that government debt = slavery. Some of you might have thought that was crazy Economist with his conservative polemics, but here it is in real form: If governments do not overspend in terms of debt, their ability to service that debt with the income they already take in in taxation, this issue would be irrelevant!

Who pays?   But the problem is they have, and they are now coming to the realization that they will at some point have to increase taxes to pay for it. Well, in a democracy the majority of people at any given time are loathe EVER to vote to increase taxes on themselves. So government polemics start screaming about how “the rich don’t pay their fair share” (even though they pay 80% of ALL income taxes), and “we have to close those loopholes” (that they wrote!), and “we have to go after tax cheats who use tax havens” (even though they have no clue how much it is or what it means in additional tax revenues) – all the while they continue to increase the debt by spending more than they take in!! And who pays for it ultimately?? We ALL do of course – that’w when the politicians will simply blame their predecessors for all the problems they make.

But what about tax havens and tax evasion? The first thing to bear in mind is the perspective on this problem. The second is understanding that the two are NOT the same things at all! The third thing is realizing that NONE of what was discussed at this public hearing will solve this problem AT ALL!

A global perspective: Let me give you some perspective on the issue first.  The IMF tracks the global economy pretty well. The global GDP is $67 trillion. The Bank for International Settlements (BIS) also tracks the financial assets around the world.

Tax neutral grounds: The #1 off-shore tax haven is the Cayman Islands. It actually has roughly $1.3 trillion “parked” there. A big amount of money, to be sure, except…. Except that money belongs to people all over the world, not just in the USA. It is a “tax haven” not for nefarious reasons (though no doubt there is SOME black money there for sure) but actually for perfectly good, economic reasons. It is the legal home of most of the US-based international funds that invest around the world, but specifically not IN the USA! And the reason for that is because these funds are also sold to lots of people from around the world, too, ALL of them having different tax liabilities based on the local laws. The Cayman Islands, therefore, is tax neutral grounds – a tax “haven”.

Let me give you a practical example: If there are 10 individuals with $1 million to invest in an international fund, each from a separate country, the fund is $10 million. If its ROI is 10%, it earns $1 million. Each shareholder receives $100,000 and is required to deal with the tax authorities back in their home countries individually – the fund itself is NOT liable.An American – like Romney – is, therefore, required to report that $100,000 to the IRS for taxation – which he did, paid his taxes on it as determined by the laws written by Congress… and then accused of using an “offshore tax haven” as if he somehow cheated, which he did not! But, OOoooohhhh, see how naughty he was?!!Now bear in mind that that $1 million (Romney’s or others) can perfectly well have been from post-tax savings (as was the case in Romney), so the principle invested is NOT necessarily tax-free, black money and all; quite the contrary.

You should also know that despite the popular press of the Cayman Islands as a “tax haven” is somehow disrespectful of the IRS, quite the contrary is the case. They have a very strong relationship with the IRS because they want to be squeaky clean in order to keep attractive international fund business – that’s how they make their big money, not on the dirty money that also co-exists there!

Now let’s get back to the macro-numbers. So if Cayman Is. is the biggest offshore center, if you add up the BIS (Bank of International Settlement) numbers (I haven’t yet), I’m willing to bet that the total amount comes to perhaps $4 trillion at most. By itself that seems like a lot of money. But as a percentage of the global economy it is less than 5%. And, of course, while you’ll hear this number connected to “lost taxes”, not all of that would go to governments even if it were ALL black money.

On a global average, the “lost” taxes – assuming this is all black money – would be roughly 35% if it was OECD sourced (not an outrageous assumption given the size of the % of the global economy by the OECD members).OK, so we are now at $1.4 trillion. Now I’ll assume that 67% of that money is actually either net of tax paid, or not likely to produce taxes anyway. (The latter because most countries don’t tax income generated outside of their sovereign territory if it isn’t repatriated, so any smart owner would keep it there!) So we’re now down to a MAXIMUM of maybe $500 billion “lost” in taxes by OECD members.

The OECD’s total GDP is $43 trillion, or 63% of the world. Apply that percent against the $500 billion “lost” and now we’re down to $335 billion, and where where the US portion might be ~$125 billion of that.

Now the Treasury numbers. This would imply a loss of 5% of of the $2.6 trillion of revenue the IRS delivers to the Treasury, and only 3% of the $3.8 trillion of the Federal government’s budget. It is equal to 0.7% of our entire GDP.

It’s the Perspective that matters, not the number:  Those are the real likely numbers in the best case scenario for a supposed “loss of tax revenue” to keep it in perspective – because they will come back in this argument later! It is the perspective that matters, NOT the number. Billions sound big only to we who don’t make a lot; for governments – esp. the USA with $3.8 trillion in its budget – it is quite literally peanuts, and certainly is minuscule compared to the loss of freedom and the potential compromise of individual data.

But here is what I heard coming out of this “public hearing”.

1. Harmonize: In order to institute FATCA, the EU would have to harmonize internally its data collections by local/national tax authorities. Clearly they have been discussing this for some time; FATCA is being seen and used by tax authorities to push this forward faster (before the people and their parliament know what it means).

2. US Demands Drive Action: To harmonize with the eventual demands of FATCA, that data would have to comport to US demands – because ONLY the US demands from FATCA are driving this! (I’ll have more to say about Giegold below on this).

3. Divide and Conquer?  So EU data collections are being designed essentially only to satisfy US Treasury/IRS demands. Who will determine moving forward how those demands will change? National parliaments? The US Congress? The IRS? the European Parliament? The national tax authorities? The European tax authority? Is there ONE? If not, who will be THE authority to comply with FATCA! This isn’t being addressed at all, yet we’ve seen specifically because of what the Treasury/IRS has done with FATCA what can happen next if it isn’t discussed.

4. A Global TIN: In order to satisfy the demand for this data, you  heard heard them talk about an EIN or TIN number for everyone, companies and individuals alike, USA, EU, OECD. So much for your individuality! I’ll assume they’ll what to brand it on your forearm to save time…. Oh, sorry – that’s SOOO yesterday – now they’ll just implant a chip under your skin instead!

5. Reciprocity for the US: The IRS implied that for the USA to honor “reciprocity” they would force – sorry, “support” – this same process onto US Financial Institutions (USFIs) the same as the US is demanding in its IGAs.  Indeed, he even implied that they would turn over to the EU data already collected beyond the scope of FATCA – and, of course, NEVER AUTHORIZED UNDER FATCA ANYWHERE!!!

6. Carrot-Stick Measure: This EU-USA exchange would then be matched by the OECD acceptance and supposedly forced compliance on other members – that little “carrot-stick measures” wasn’t lost on me.

7. End Result:  So the end result of all of this joyous and wonderful “co-operation” brought on by FATCA would result in how much actual lost tax revenue returned to national Treasuries??? Remember, THAT is ‘supposedly’ the purpose of this entire exercise! The answer is a veritable pittance. But we will have a global GATCA cemented in place to show for it.

BUT WHAT WILL BE LOST?? Any sense of individuality at all!! Remember, in America, the IRS is the only agency of our government where you are assumed GUILTY until you prove your innocence! This principle is extremely important to bear in mind when discussing anything having to do with providing the Treasury and the IRS with more power over anything!

Orwell on Steroids   George Orwell, right now, is spinning around in his grave like a pinwheel in a stiff breeze, totally fraught with the very idea that his original monstrous idea of Big Brother could evolve to an EVEN BIGGER BROTHER!! After all, even in 1984 he still imagined mega-states competing with each other on the peripheries (though using supposed conflicts as excuses for those governments to maintain control over their populations specifically in this manner).

So this hearing and its implications is the most diabolical play for bureaucratic dominance I’ve ever seen and I can quickly imagine the total loss of individual freedom as a result. Why the latter? My friends, if they have figured out how to exchange tax data, and open all financial institutions to total transparency, they’ve figured out everything! This is the final link in the BIG DATA collection world.  A bold statement? Yes, I know. But here is why I make it.

I sent around to some of you that “questionnaire” that those supposedly “low level bureaucrats” (yeah, right!) at the IRS in Cincinnati was requiring tax-exempt organizations to answer (even though “officially” “Legally” none actually had to answer. The implied threat of an IRS audit, however, was all that was needed).

Now imagine how the tax bureaucrats could structure everyone’s tax returns in the “need for more accurate data” – and then that data was exchanged around the world. And then it was connected up to say, I don’t know, passports, airline reservations, car reservations, credit card applications, mortgage appplications, utility hook ups, etc., where access to those basic services comes at the expense of some BIG DATA report on  your compliance.  The IRS is already well down this track with its collection of data on Citizens as told in this recent News and World Report article  Who needs FATCA when you have google maps for the Tax man to track you down?

The Real Danger: Since we know law enforcement can already collect data internally in most OECD countries – though mostly governed by legal restrictions – what restrictions will be or could be placed on our fiscal gestapo?

Congress doesn’t designed the tax forms, the instruction booklets or the process; the IRS alone does that! And since we’ve seen what they’re willing to do to target tax-exempt organizations, to what extent will they go for tax-required organizations or individuals? The real danger here is – and always has been – permitting the bureaucrats to determine how these things are actually implemented. That, after all, is really how we got to this phase of FATCA at all!

How did we arrive here?  We are here because FATCA was injected into an unrelated piece of legislation having nothing to do with tax legislation, data collection, the opening of US financial markets, the exchange of data of US resident citizens, and without any regard to any aspect of reciprocity, or any aspect of a legislative process that is meant to safeguard American rights!

It was then left to Treasury and the IRS alone to figure out how to implement!  And, as a result, a Global GATCA is what is being created.

Now we finally have EU FATCA public hearing of the most despicable nature, where other bureaucrats who limit MEP members’ time but not their own, discussing processes and procedures to put EU citizens’ rights at risk, all to satisfy an unbelievable and innocuous US clause in an equally innocuous piece of legislation that 99.9% of Americans know nothing about.

Power Transfer:  Not only is Sophie correct that this is “policy laundering” and an imposition of US procedures affecting EU citizens rights – BUT IT ISN’T EVEN SOLVING THE PROBLEM FOR WHICH IT IS SUPPOSEDLY BEING ENACTED, TAX EVASION!! IT IS ONLY TRANSFERRING POWER TO BUREAUCRATS BEYOND THEIR AUTHORITY TO DISRUPT THE LIVES AND INDIVIDUAL FREEDOMS OF EVERYONE!!

Here’s a quick question: What do you consider more dangerous for the issue of individual rights moving forward: “Policy laundering” or “money laundering”?

No procedures for oversight:  Moreover, no one spoke of procedures or oversight committees, etc., in terms of limiting or sanctioning the authorities for the misuse or inaccuracy of this information. Consider the story of Jon’s Worth’s visit to the European Parliament and Mr. Vincent Chiarappa little Napoleon attitude. Who or what will stop this in the future if this  auto data exchange takes place?

Consider the Patriot Act’s “No Fly List” for a nano-second, and how people have been misidentified and prohibited to fly as a result of that? How would anyone challenge their data?

Hell, let’s accept that the assertion that the IRS scandal out of Cincinnati really was by low-level bureaucrats!! The tone that leads to that practice comes from somewhere, (Leadership that is unaccountable and takes no responsibility?) and acting alone without oversight and control is enough on its own that should scare the hell out of everyone!

The difficulty of challenging the bureaucracy is not a mythical hypothetical. Recently it was reported on how tax cheats inside America! – stole the identities of 10 members of the Tampa Police Dept., including the Chief of Police (!), and then applied for fictitious refunds – which the IRS paid. But, of course, when they were found upon review by the IRS to have paid too much, the IRS put liens on the policemen’s properties and accused them of fraud! But if that wasn’t an insult enough for our law enforcement agents, the IRS for “legal reasons” refused to even give the police the addresses to where the fraudulent checks were sent so they could go investigate and actually catch the thieves! That was because it would be against their internal policies on disclosure because of IRS secrecy laws – so they were protecting the crooks against the police!!  Now put that one on a FATCA/GATCA scale.

How do you challenge mis-sent, inaccurate data or foreign stolen FATCA id? The homeland explosion in Tax ID Theft and fraud as has been reported since 2011  but now the IRS wants to export the problem around the globe.  They have let this problem fester in the homeland, at a huge cost to the US Treasury, and yet they expend large portions of their limited resources on a global witch hunt trying to create a global GATCA of automatic exchanges with no assurances of data security, rather than solve the far greater problems on the homeland shores.

Where are the priorities?

There are numerous other media reports about the nature and scope of ID tax return fraud in America, including many damming TIGTA reports.  Does Congress ever read these before they send the IRS out on global missions?  They can’t even stop  Tax fraud by prisoner inmates for gods sake. And then they hand out Child tax credits to illegal workers in America representing 4 times the amount of fraud in one year that they plan to collect from FATCA over 10 years!

Here is a link to another  CBS Morning Report that details how common criminals engage in simple practices. No wonder ex Commissioner Shulman doesn’t want to take responsibility for failures on his watch!  He just regrets them. Well, I regret his enthusiasm for FATCA!

Now, we have the most recent solution…  Deputize the police to be Tax Revenue agents and share Taxpayer information with them! So now we have the IRS deputized police with guns running around in American trying to stop tax fraud, and while it sounds like a good idea for the recent problems in Tampa, I can just imagine the repercussions of this across the nation. That policeman in your city may soon have access to your tax data, just for the purpose of stopping tax fraud of course, but the overreach never ends there!

BTW, the problem is all solved now.  We are now doing quicker investigations.

All of this is just illustrative of what is going to happen with in Global GATCA ID Theft problem explodes around the world once FATCA is up and running.  Will we be deputizing the U.S. Special Forces to be Tax Revenue fraud protection and enforcement Agents around the world, and sharing taxpayer information with them about Americans living abroad to help in the round up?

My fellow overseas Americans, there is NO WAY the IRS can satisfy ANY EU authority on the issue of identity security – and indeed, of their own systems from fraud.  The report you will hear said the IRS has stopped 87% of tax filing fraud.  Really??  How would they know?  Moreover, that still leave 13%!  Of course, if you are within that 13% you become just a statistical error as far as they are concerned – which you would be… but you’d still have to figure out how to dig yourself out of it.  Remember, you are Guilty until proven innocent.

Note the revenue lost comparisons:   In ALL of the estimates, that even by the IRS itself  points to, homeland ID and tax fraud amounts to multiples of the estimated “loss of revenue” from “offshore tax evasion”.  Here is what I would tell the IRS/Treasury if I were the EU and everyone else around the world:  Clean up your own back yard before walking into mine demanding a chaisse longe! 

The very thought that the IRS, EU and OECD would set up a monster data exchange when the IRS can’t figure out how to stop fraud by what appears – from the arrests made – from uneducated low-level crooks is simply mind-boggling!  Think of the hay day the real sophisticated international criminal networks and hackers are going to have when they get a hold of the new International Tax numbers these fools are wanting to create.  They must be salivating.

If you watch the CBS video to the end you will hear the CBS reporter sum up the problem this way:  “When you see that big time drug criminals giving up drugs to scam the IRS because there is more money, less likelihood of getting caught, and the sentence for stealing millions of dollars is just 5 years, you know we have a problem.”  I guess this is one way to end the War on Drugs.  Given them an easier target for making money rather than drug running? Yea, that works.

My friends, if FATCA goes GATCA, then any semblance of individual freedoms and liberties will have been flushed down the toilet in the name of “stopping tax evasion” by bureaucrats who have no controls placed on them by compliant Parliaments and Congress who don’t bother going through the process of actual public hearings, committee hearings, floor debates, and actual voting only after this ‘due process’ takes place.

BIG GLOBAL initiatives like this only come in the back door through collusion amongst like minded ideologically driven bureaucrats back up by co-enabling Capitalist Compliance Complex of BIG Accounting firms and tax practitioners who can clearly see an increase in their budgets, billable hours and grants of new powers beyond ANYTHING they would actually recoup in revenues for their treasury from the effort. It is a FATCAnatics wet dream!  It is about Control, not Collection. If sold at all to a compliant populace, it is an agenda hidden behind some vague notion of ‘fairness’ and Tax Justice. who can be against that, right?

Here is something that must always be remembered: There is never a perfect process in a democratic state; perfection is only achieved in dictatorships. The very idea that ALL of this expensive effort would somehow stop tax evasion or root out tax cheats (“once and for all” as Max Baucus said)  is sheer nonsense.  More importantly, this global auto exchange process will NOT miraculously solve the problem of governments spending more than they can afford, and and the so called new revenues will not help balance budgets. That is simply the most absurd arguments of all.  GATCA WILL DO NONE OF THESE THINGS!!  But, it will lead to more ‘dictatorship of the ‘bureaucrat’ at the expense of the democratic process, and again, Sophie is wise to worry about the direction FATCA ‘policy laundering’ is taking Europe.

Finally, back to the EU FATCA hearing and something Herr Giegold said.   I’m sure he’s a wonderful guy, though I don’t know him personally. This is what got to me viscerally however:

He spoke that the history of efforts for data exchange to stop “tax cheats” as being a long one going back to the League of Nations. I won’t argue that point; I’ll accept that he’s done the history. All I’ll say is I would be more receptive to that argument if a French, Dutch, or English person made the point. I, personally, have a hard time hearing that out of a German’s mouth. Not only because of why the League of Nations was instituted to begin with, but also as I consider what the subsequent history of the Nazis aggression across Europe and the impacts on another diaspora. Had Himmler had access to a data exchange agreement like the one proposed by FATCA and the additional call for a global automatic exchange which Giegold seems to believes should be done, what would they have wrought?  When he thanked the IRS for spurring the EU into “action” my visceral response was “Well, No thanks!! I have seen the results of those actions before.”

I apologize for the length of this missive, but as you probably can tell, I was at once appalled and frightened at the same time at what I heard, what I saw, and particularly all of the things that simply aren’t being said at all!

May I suggest – if we haven’t done so already – someone inform Sophie of the very UN-parliamentary way FATCA was “passed”, and the VERY limited power of the IRS to write or influence ALL of this exchange of data and reciprocity issue they have promised.

The IRS has NO authority to even suggest they have the power to make Congress do these things! They are the biggest frauds I’ve seen in a long time. Madoff could have learned some things from this! Perhaps you can also suggest that she organize a visit to the European Parliament by members of the JCT, so they hear what is being proposed and proffered by the IRS supposedly in the name of the US Congress. I have no doubt they would be absolutely appalled as well.