Let’s have a little fun this week with a “paranoid conspiracy” version of the column.
I’m an open minded guy, and in the years following the 2008 financial crisis I’ve strived to take an even more multidimensional view of the world.
So when I’m exposed to numerous, unrelated, typically rational people asking about the supposed imminent collapse of the U.S. economic system due to obscure new tax laws, I’ve trained myself to at least take notice, and have a little fun with it.
While I haven’t heard anything myself, I have to believe some of these ideas are coming from commercials on satellite or talk radio, and one particular theory seems to be gaining traction right now.
The paranoia involves a law about to go into effect called the Foreign Account Tax Compliance Act. FACTA is actually a real law, and it does begin to phase in on July 1. The law is designed to reduce the use of foreign bank accounts to evade U.S. taxation and requires foreign financial institutions to report certain information about U.S. taxpayers to the IRS (U.S. firms already do this).
The paranoid conspiracy take on FACTA is the cost of complying with this seemingly draconian new law will be too high for many global financial institutions and as a result institutions will stop facilitating financial activity for customers when the activity involves Americans or American interests. This will supposedly cause much of the estimated $20 trillion in foreign capital invested in the U.S. to flow out, crashing the stock market and the dollar and ending our way of life.
I have to admit, this sounds plausible and scary on the surface, but that’s kind of where it ends. U.S. tax compliance is already burdensome and expensive, and yet companies and individuals continue to invest here. Why? The answer is our economy is huge and our markets are well regulated and liquid.
While some financial institutions may find themselves initially unprepared to comply with the new IRS rules (some research indicates the law will be phased in gradually), it would be extremely costly for any global financial institution to refuse to do business with Americans for any length of time. The post 2008 world is full of new regulatory burdens for financial institutions, while these companies may not like it, they will adapt.
While I’m totally opposed to more regulatory or tax burden, quite frankly where else can investors invest capital and enjoy the depth, liquidity and stability offered by the U.S.? Yeah, I can’t think of anywhere either. While I’ll keep my eye on FACTA, it certainly won’t keep me up at night.