The Real Story Behind Rand Paul’s Challenge to Obama’s Insane Treaties
Last week President Obama got into a spat with Senator Rand Paul over tax treaties, but you likely paid little attention to the details surrounding the bickering.
Obama has taken issue with Senator Paul “blocking” eight tax treaties from receiving ratification in their current form. Now, you might expect this to be a story about the tax treaties’ role in easing excessive taxation (or double taxation), while promoting cooperation in tax compliance among nations. But the tax treaties are actually being used as a tool for nations to share the private financial data on individuals with bank accounts overseas. This is all done without regard for privacy protections, a warrant or any allegations of wrong-doing.
Sharing data without privacy protections is also a notable departure from past practice. For example, former treaties between the U.S. and Switzerland allowed these countries to share sensitive data on bank customers – but only if a crime, like tax fraud, was being committed. The key here is that data could only be shared if there was probable cause – essentially, a Fourth Amendment style protection for private data. However, the tax treaties now in question lack that same protection, and allow any and all information to be shared between governments, no questions asked.
Therefore, Senator Paul has requested an amendment to the treaties to provide additional privacy protections – among them, that there at least be probable cause of wrongdoing before individual financial data is shared between governments.
Yet, this request is unacceptable to the Obama administration, and the reason is far more nefarious than meets the eye. The tax treaties are merely part of a deeper web of data gathering to enforce a law I dubbed “the most dangerous law you’ve never heard of”- or, the Foreign Account Tax Compliance Act (FATCA).
To understand the treaties, you must realize how they fuel an even worse law: FATCA.
What is FATCA?
FATCA is a law that requires every foreign bank in the world to provide the Internal Revenue Service (IRS) with the financial data on every bank account or asset owned by an American citizen living abroad.
Any foreign bank that fails to comply with this request is penalized. The penalty subjects the bank to a 30 percent withholding tax, or in other words, the U.S. government seizes 30 percent of any transaction that belongs to that foreign bank. Since the U.S. economy is the largest and most interconnected in the world, foreign banks have little choice but to go along with this U.S. law.
FATCA is a law that effectively treats Americans living overseas with the presumption of guilt, since an individual’s private financial data is turned over to the government without any privacy protections.
The law was passed under the guise of catching tax cheats. Unfortunately, it has done little to catch rich Americans trying to hide their loot. Instead, it has punished over seven million Americans working abroad, many of whom have been outright banned from banking with foreign banks, who no longer want to work with U.S. citizens due to the high compliance costs and oversight complications that stem from FATCA. As a result, thousands of Americans have forfeited their U.S. citizenship to avoid the obstacles they now face trying to do simple banking overseas.
Intergovernmental Agreements (IGAs)
The key to FATCA is an intergovernmental agreement (IGA). First, it must be understood that foreign banks don’t have to comply with FATCA. After all, FATCA is a U.S. law that is not recognized by foreign banks. The Obama administration’s solution is to implement IGAs, which are similar to a treaty. These IGAs allow for an agreement between the U.S. and foreign nation in which the foreign nation will, essentially, comply with FATCA as if it were its own law – and will agree to coordinate and exchange financial information on private individuals in accordance with FATCA.
Since these agreements imitate treaties, IGAs allow foreign nations to override their domestic laws to comply with U.S. requests. Or in more ominous instances, countries are lured into complying with FATCA by U.S. offers to exchange data from U.S. banks. That’s right: the U.S. government has agreed to spy on YOU (the U.S. customer) in exchange for the foreign banks willingness to spy on American citizens abroad – the old, “you show me yours, I’ll show you mine,” operation.
Generally, any agreement that resembles a treaty is constitutionally required to receive the advice and consent of the United States Senate. The definition of a treaty is “a formal agreement between two or more states in reference to peace, alliance, commerce, or other international relations.” But somehow, President Obama calls it by another name and these IGAs bypass the law of the land as “agreements,” rather than as formally ratified treaties.
This entire scheme is like a game of Jenga – remove the wrong block and the entire structure comes falling down. FATCA, the IGAs, and the tax treaties currently pending in the Senate are all an intricate part of this structure.
Former Senate aide and FATCA expert Jim Jatras explains how those tax treaties impact the IGA. In Accounting Today, he writes:
Because the IGAs designate tax treaty mechanisms for FATCA information “exchange,” Paul’s holdup of the bilateral treaties also impedes indiscriminate FATCA reporting. Conversely, if the treaties were amended to allow information transfer only under the probable cause standard, the higher constitutional standard would govern. That, not double tax relief, is why Treasury is so desperate to approve these treaties without amendment.
In other words, FATCA requires an IGA. The IGA is what allows other nations to cooperate with FATCA’s requirements. Still, it is the tax treaties that act as the final authority in permitting the IGAs to collect information; the IGAs lean on the tax treaties as their implicit right to do so.
Furthermore, Jatras concludes that the tax treaties would provide a “backdoor legal authority to issue regulations in the U.S.” to force domestic banks, credit unions, insurance companies, and mutual funds to provide financial information on resident customers to send to foreign governments in order to fulfill the “I’ll scratch your back if you scratch mine,” reciprocity agreements.
Get that? FATCA needs IGAs, IGAs need tax treaties. Phew.
Therefore, in this confusing, twisted scheme of enforcing the big data gathering machine that is FATCA, these tax treaties play an important role. That is why there is far more to this sleepy issue than just taxes.
There are two senators currently challenging this crazy law and these insane treaties: Senators Rand Paul (R-KY) and Mike Lee (R-UT). The narrative from the White House and Senate leadership is that these two senators are “blocking” these treaties from moving. But, in reality, Paul and Lee aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for.
But Senate Majority Leader Mitch McConnell and his Democratic counterparts simply want to give unanimous consent to these tax treaties. Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments. They simply want them to be expedited through the Senate without transparency.
At the end of the day, this is a discussion about bad treaties used to implement a terrible law. I applaud Senators Paul and Lee for standing on principle, and trying to insert language into the treaties that provide constitutional protections to all Americans. But perhaps more important is Paul and Lee’s challenge to the establishment. As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. They should not be pilloried and smeared for asking for it.
These treaties are dangerous to our personal liberties. Senator Paul and Senator Lee deserve the transparency and debate they’ve requested. We should all stand with Rand and Mike in fighting these terrible treaties. (For more from the author of “The Real Story Behind Rand Paul’s Challenge to Obama’s Insane Treaties” please click HERE)
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