“Peaceful resistance” to FATCA will result in an alternative financial system

Ever since the FATCA discussion started, I have always wondered:

Why would the rest of the world  comply with FATCA? I read about compliance costs. I read about trying to cut deals with the IRS. What I don’t understand is why countries don’t take a much longer term view of this. Remember:

People always overestimate what they can do in one year and underestimate what they can do in ten years.

Let’s put this into perspective. The U.S. is one of the biggest debtors in the world. Evey year it goes “cap in hand” begging other countries to buy its debt. As you know, China is one of the biggest buyers of this debt. The debtor does NOT set the terms of the arrangement! This is why, there are numerous articles (whether true or not) that China will simply not comply with FATCA. I suspect that in the short run, many countries will claim to be complying with FATCA, but will be looking for a way to bypass the U.S. financial system. They will do this because  the U.S. is a declining power (or to put it more kindly – other countries are becoming very relevant). This means that it’s survival will depend on it  becoming less of a bully and  playing more nicely (if it wants anybody to play with them at all).

Came across this interesting comment this morning by todundsteuer*, which should be a separate post. The most relevant paragraph (The post is about: Senate Bill 1813 Passport Confiscation and “Stop Taxhaven Abuse”) is:

The greatest threat to the effectiveness of both Charlie’s FATCAT and Carl’s STHA is the very real possibility that they will trigger a reaction that attempts nothing less than the establishment of an alternative world financial system parallel to that based on the Tokyo-NY-London-Frankfurt axis.

Johannesburg, Dubai, Mumbai, Jakarta, Singapore, Sao Paolo, Shanghai suggest themselves.

One highly-regulated, highly taxed, safe but stagnant and the other looser, lightly taxed, risky but freewheeling and dynamic.

Just this week China unleashed its “new yuan” – signalling its intention to make the yuan a serious world currency. The establishment of an alternative financial system CANNOT be established on one year. An alternative financial system CAN be established in ten years! Furthermore, it will not be the world’s biggest debtors who control the new world order!

Some advice to the U.S. and Senator Levin:

Stop citizenship-based taxation – Repeal FATCA!

*Here is this most insightful comment in its entirety:

todundsteuer

The “Stop Tax Havens Abuse” (Section 100201 of MAP-21) is the legislative baby of Sen. Carl Levin (D. Mich.). His original draft legislation by that name was introduced in 2009 and was much more aggressive than this comparatively mild iteration.

His original bill was aimed at the US tax code (Title 26 United States Code) and contained a list of countries that would be statutorily decreed to be what the bill defined as “offshore secrecy jurisdictions”. It did everything except authorize the 82d Airborne to take these countries “out”.

Sen. Carl was said to have been dissuaded from pursuing his original bill in favor of allowing Charlie Rangel’s FATCAT bill (Yes, the original FATCA had a ‘T’ on the end for 2009.) Charlie was then the Chairman of the House Ways and Means Committee.

FATCAT, as we all know, took the tactic of end-running governments by going after banks and the big money they represent. The theory being that if you have ‘em by the banks their hearts, minds – and governments will follow.

As we can now see, Charlie Rangel’s approach is proving prophetic. At least 5 European governments are already lined up to play ball and Israel (and, according to rumor control: China) also making noises in that direction.

Unlike Sen. Levin’s original “Stop Tax Havens Abuse” bill, the latest iteration has abandoned the anti-country approach and instead also takes the approach of threatening to kick the opponent in their banks – where it really hurts. His draft law also uses Title 31 of the USC (where the FBAR regulations are located) rather than the income tax title.

The greatest threat to the effectiveness of both Charlie’s FATCAT and Carl’s STHA is the very real possibility that they will trigger a reaction that attempts nothing less than the establishment of an alternative world financial system parallel to that based on the Tokyo-NY-London-Frankfurt axis.

Johannesburg, Dubai, Mumbai, Jakarta, Singapore, Sao Paolo, Shanghai suggest themselves.

One highly-regulated, highly taxed, safe but stagnant and the other looser, lightly taxed, risky but freewheeling and dynamic.

We shall see.

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3 thoughts on ““Peaceful resistance” to FATCA will result in an alternative financial system

  1. recalcitrantexpat

    This is what I have been advocating for ever since FATCA was born. It makes entirely no sense that there is not room for more than one banking system in this world. If the U.S. wants to play games with New York and use access to its banking system as a means of extortion then it should suffer the consequences that ensue from such anti trading behavaviour.
    Money is a commodity and it should trade like any other commodity, which means that it should be free from political interference. The amount of money that FATCA compliance will cost to banks of Third World countries will negate the benefits of better tax collection. For them they can get better results just by improving their governance.

    Reply
  2. A Gentleman's Rapier

    The issue is that many banks fund their operations on the US markets. At the moment, there is no viable alternative, and setting something up to rival it would take a generation – even more than 10 years.

    There was an effort, unsuccessful, to try to refocus European markets away from London and towards Frankfurt, to be closer to the ECB amongst many other reasons. Never took off (and it resulted in Frankfurt becoming a much more boring place than it was before.)

    Frankfurt isn’t London, and nowhere else is New York or Chicago. Place and amenities have a lot to do with the successful location of markets.

    The resistance must come from governments and not banks. The US – rightly – feels they have the banks by the short-and-curlies.

    Reply
  3. statelessman

    There is already a new worldwide financial system called Bitcoin and already a market for those who wish to jump to the system.

    Learn more at http://weusecoins.com

    It’s small now just like the Internet was say 15 years ago, no one owns it, it’s P2P and protected by strong cryptography.

    Reply

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