In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS.
The costs of complying with FATCA are likely to dwarf the extra revenue it raises (see “Tax evasion: Dropping the bomb”). The law is also having unfortunate unintended consequences. The 7m Americans living abroad now wear a scarlet letter (presumably an “F”), thanks to FATCA. Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched.