The Cure Causes New Symptoms: Capital Control Effects of Tax Enforcement, Gold Regulation, and Retirement Reform
38 Pages Posted: 24 Jul 2011
Date Written: October 1, 2010
For the last five years, the United States government has devoted significant attention and resources to how U.S. taxpayers are investing their money with special focus on offshore investments, gold, and retirement savings. In 2006, Congress held hearings and issued a report on the offshore banking activities of U.S. taxpayers that led U.S. Senator Carl Levin to state that the “universe of offshore tax cheating has become so large that no one, not even the United States government, could go after all of it.” The hearings and report began a flurry of activity by the United States government intended to crack down on the use of offshore bank accounts by U.S. citizens. This included forcing a major Swiss bank to break Swiss law by breaching the confidentiality of its clients by providing information to U.S. authorities. In addition to cracking down on offshore tax cheats, Congress passed the Hiring Incentives to Restore Employment (HIRE) Act, which created a tougher regulatory environment for foreign financial institutions with bank or investment accounts for U.S. taxpayers. The HIRE Act regime may result in foreign banking institutions collecting taxes directly from their U.S. clients and remitting them to the U.S. Treasury. Increased attention, regulation, and high profile criminal prosecution activity provides a huge deterrent to U.S. taxpayers with investments outside the United States to maintain their foreign investments offshore. Increased pressure and regulation is also making offshore financial institutions question their business relationships with U.S. taxpayers and weigh the risk and rewards of continuing these relationships.
In addition to these offshore measures, in 2008, Congress broadened its focus on U.S. investors to include their domestic decisions as well. Congress enacted legislation which, in 2012, will require all businesses to issue an IRS Form 1099 to any individual or corporation from which they buy goods or services in excess of $600 in a tax year. This change implicates gold companies, which are thus required to report extensive information to the IRS for each sale of gold in excess of 0.43 ounces based on prices as of Decembe 1, 2010. In addition to the reporting requirement, Congress also recently passed legislation requiring gold companies to report if certain countries are the source of the gold they sell to U.S. citizens, whether onshore or offshore. Futher, the Dodd-Frank Act restricts U.S. gold dealers from contracting with clikely result in an increased cost of investing in gold, and thus U.tain countries that supply gold to the market. These regulatory regimes will likely reduce the number of gold dealers and significantly increase the compliance costs for remaining gold dealers. These increased compliance costs will be passed on to gold investors and generally make it more expensive for U.S. taxpayers to invest in gold. Consequently, the net result is that increased gold regulation will S. investors are more likely to avoid gold and seek alternative investments.
In 2008, Congress also began examining retirement investment vehicles. One proposal under consideration, the Guaranteed Retirement Account (“GRA”), calls for a “$600 refundable tax credit, which takes the place of tax breaks for 401(k)s and similar individual accounts” as a way of paying for a partially government-funded, broad-based, government-managed retirement account system. The Social Security Administration would administer the GRAs in addition to existing Social Security benefits. Without a tax incentive, 401(k) plans would likely cease to exist, making Social Security and GRAs the principal retirement investment vehicles for many Americans. However, Congressional borrowing from the Social Security Trust Fund for non-Social Security spending has resulted in a Treasury debt to the Trust Fund in excess of $2.6 billion. Implementation of GRAs would provide the federal government with an entirely new source of capital to raid to meet current spending needs. In essence, taxpayers would be nudged out of Section 401(k) plans and into a government-held and government-managed retirement system that the Treasury could borrow against.
While each of the policies discussed above individually has a direct, laudable public protection purpose, the cumulative effect of these activities makes it more likely that U.S. investors are discouraged from investing in non-preferred locations, like offshore; asset classes, like gold; and vehicles, like Section 401(k) plans. Instead, these policies direct U.S. investors to preferred domestic locations; preferred asset classes, like U.S. Treasury bonds; and preferred investment vehicles, like GRAs. These measures comprise a network of capital controls that use regulation, incentives, taxes, and the threat of civil and/or criminal penalties to incentivize taxpayers into directing their investments where the U.S. government has more disclosure, control, and access to the capital. It is impossible to know whether the current U.S. budget and debt crises are driving these actions. However, it is possible that these policies are driven by the government’s need of access to capital, particularly in light of the government’s willingness to step on the toes of sovereign governments and historic allies, such as Switzerland.
Regardless of whether this capital control effect is intended, these policies make investing offshore more burdensome, make investing in gold more expensive and propose a radical shift in capital flow from private retirement accounts into a government-controlled retirement system at a time when the U.S. government is running a huge deficit. This paper discusses the concepts of international and domestic capital control, the current actions of the government referenced above, and the capital control effect of these government actions.
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