FATCA and Hobby Lobby

The Economist ran a good article in its June 28-July 4 edition, "Dropping the Bomb," on the burdens FATCA (Foreign Account Tax Compliance Act) has placed on financial institutions and expat Americans ( and other, poorly defined "US persons") around the world. "In essence, FATCA turns foreign banks and other financial institutions into enforcement arms of America's Internal Revenue Service (IRS). They must choose between turning over information on clients who are "US persons" or handing over 30% of all payments they receive from America to Uncle Sam. The threat appears to be working. More than 77,000 firms have signed up. Over 80 countries have struck agreements with America to allow their banks to hand over data."

The compliance costs that FATCA imposes on those financial institutions are substantial relative to the income to be earned by a foreign bank from servicing Americans' banking needs. "[T]he overall costs of complying, borne mostly by non-American banks, are likely to far exceed the extra tax receipts." No rational economic actor will just absorb costs of compliance without looking at how it can change its behavior to mitigate those costs. So, "of the 7M Americans who live abroad, thousands have been told by their local banks and investment advisers that they no longer want their [business] because it is too much hassle. Many others will have to spend thousands of dollars to straighten out their paperwork with the IRS, even if they owe no tax (and most do not, since they will have paid a greater amount abroad, which counts as a credit against tax owed in America)."

So, what does this have to do with Hobby Lobby, the Supreme Court case decided last week holding that a closely held, for-profit business is a "person" as defined in the Religious Freedom Restoration Act, enacted during the Clinton Administration, and is entitled, under that law, to be excluded from the mandate in the Patient Protection and Affordable Care Act that employers who provide health insurance to employees must include free contraception in that coverage?

This: both laws -- FATCA and that contraception mandate -- represent a growing and problematic trend of the US government forcing private sector organizations to carry out government policies unrelated to their business without compensation (subject to whatever tax reductions result from deducting the costs of compliance).

This practice is the mirror image of the problem complained about on the left of "tax expenditures", i.e., the dollar cost of allowing taxpayers to take deductions, exclusions and credits for an assortment of activities that are, says the left, functionally equivalent to collecting taxes under a regime with no such deductions etc., and then appropriating government spending on those activities in the amount of the lost revenue. The mortgage deduction is the largest example of such a "tax expenditure"; if it were eliminated from the Internal Revenue Code, it is hard to imagine Congress passing a housing subsidy that gave wealthier homeowners more money every year than middle-class homeowners, although that is the economic equivalent of what the deduction does.  It's a question of framing and hiding the perquisite (and probably also, to be cynical, a question of the extent to which the deduction benefits the finances of members of Congress and the inside-the-beltway class).

The compliance costs of laws like FATCA and the employer mandate should be seen the same way. As with tax expenditures, the government could appropriate money directly to fund its enforcement objectives. If it wants citizens to receive free contraception, it could appropriate funds to manufacture or purchase various forms of contraception and to distribute them directly. Or it could send vouchers to citizens who request them.  It's not essential to the policy to involve private sector firms in its implementation. Justice Alito makes this point very well in his majority opinion.  

Similarly, if it wants foreign banks in their non-U.S. operations to maintain records, it can pay them for the cost of keeping the records, or hire a staff of IRS agents to go overseas and make the records. Of course that would be expensive and the cost/benefit of the proposal would have to be confronted. But that is the point of the “tax expenditure” argument as well. No one disputes that Congress has the power to pursue the policy in question; it's the obfuscation of the tax/subsidy, in contrast with the transparency that representative government needs to achieve, that is the objection.

These aren't the only laws that impose costs on the private sector.  In another article, the Economist cites a Competitive Enterprise Institute estimate that American businesses spend more than $1.86 trillion to comply with government mandates.  To put that in perspective, recent CBO estimates put the tax expenditure revenue loss at over $900 billion.

This is not a question of whether the substantive policy, promoting contraception or combating tax evasion, is one that government should pursue.  I happen to support both.  Nor is it a question of whether regulation of the private sector is good or bad, in any instance.   Many costs of compliance relate closely to the activity of the private sector organization in question: environmental regulations, for instance, and it is obviously sensible to internalize to those businesses the costs of the externalities they generate.  But tax collection is a quintessential governmental function, not a private-sector operation.  Contraception has nothing to do with selling craft kits to hobbyists.  The question, rather, is the loss of transparency a supposedly democratic government should maintain toward the electorate.  By shifting the costs of pursuing policy objectives off of its budget and onto the private sector’s, the political class hides from the electorate the costs of those objectives -- which is even worse than the tax expenditure practice, which, since 1974 at least, has been reflected in annual CBO and other budget reports. 

Imagine if a government said, if you want to open a restaurant, you have to feed government employees at a discount, to help keep the fisc’s expenses down.  Or, if you want to start up a moving company, you have to donate a truck to the army.  Or if you want to remodel your house, you have to take responsibility for potholes on your street for the next year.  All these are the same thing as FATCA or the contraception mandate, the government dragooning private sector actors into carrying out its functions so as to avoid presenting to the electorate a budget process with integrity that forces a debate over the tradeoffs the electorate needs to understand.

Ironically, after I had drafted this, I was traveling back from Europe and I went through immigration control in Europe, and at a relatively quiet time in the airport, so I wound up having a fairly long chat with the U.S. customs officer who processed my passport. He has a great job, getting to live for several years at a time, at taxpayer expense, in various European nations.  One of the things I asked him about was if it had become harder recently to be an American national opening up bank accounts in foreign nations.  He said, “not for me.  The US has diplomatic arrangements for all of its employees overseas and works all that out for us with the foreign banks.”