Home Money July 1st, 2014: Will Obama’s New Tax Law Destroy the US Economy?

July 1st, 2014: Will Obama’s New Tax Law Destroy the US Economy?

by Louis J. Wasser

Investing is largely about trying to predict the future —future markets, future politics, future booms and busts. That’s why it’s so important to keep up with politics; not just as an American citizen and voter, but as an investor.

Baltimore’s Stansberry & Associates has been providing conservative-minded investors with reliable intelligence since 1999. Recently, Stansberry posted a controversial video which has been widely discussed on conservative blogs. According to Stansberry, a bill signed into law by Barack Obama contains a provision that goes into effect this July 1st; and this provision will cause the collapse of the US dollar and a “near-complete shutdown of the American economy,” causing “the savings of millions [to be]wiped out,” leading to societal collapse and martial law.

Is it true? As with any future prediction, it depends on what you believe. Here are the facts about HR 2847, the Hiring Incentives to Restore Employment (HIRE) Act of 2010.

The Facts About HR 2847

HIRE was signed into law on March 18th, 2010. In the House, 211 Democrats voted for the bill, along with six Republicans. In the Senate, 55 Democrats and 14 Republicans voted to pass the measure. Democrats characterized HIRE as a “jobs bill,” which offers tax breaks and incentives to businesses that hire unemployed workers.

Stansberry’s warnings concern a specific provision of HIRE, the Foreign Account Tax Compliance Act (FATCA). This act attempts to go after wealthy Americans who fail to pay taxes on their foreign accounts and offshore assets. It specifically requires foreign banking and financial institutions to provide the US Internal Revenue Service with detailed information about the transactions of their American clients, at the institution’s own expense. In return, it promises the US will report on the American assets of foreigners to their governments.

The act requires global banks to share information on Americans’ financial transactions with the IRS.

The foreign companies impacted by the act include banks, stock brokers, hedge funds, pension funds, insurance companies, and trusts. Starting July 1st, FATCA requires these firms to provide annual reports to the IRS with the name and address of each US client, as well as the largest account balance in the year, and total debits and credits of any account owned by a US person. The act also requires disclosure that a US citizen has an ownership stake in a foreign firm; and creates a new stack of IRS paperwork for US persons with more than $50,000 socked away overseas.

If an institution fails to comply, the US will impose a 30% withholding tax on all its transactions concerning US securities, including the proceeds of sale of securities.

Basically, the act requires global banks to share information on Americans’ financial transactions with the IRS, just as governments currently share information about crimes, terrorism, health issues, and other types of data.

Just How Bad Is It?

So what are the concerns about FATCA? Will it mean the end of the world?

First the positives. In 2008, a Senate report that found that tax haven banks were helping wealthy Americans evade $100 billion per year in income taxes . “Tax havens are engaged in economic warfare against the United States, and the honest, hardworking American taxpayer is losing,” according to Senator Carl Levin (D-MI). “The iron ring of secrecy around tax haven banks and their deceptive banking practices enable[s] and encourage[s] tax cheats to hide assets from the United States. Congress needs to enact strong penalties on tax haven banks that help US taxpayers avoid paying taxes to Uncle Sam.”

It’s true that the government needs to act to prevent tax avoidance by those Americans who can afford to shuffle their assets overseas. If the taxes we charge on those with foreign assets are too high, then we need to lower those tax rates. But we can’t just let people on Wall Street hide their money, and only pay the taxes they feel like paying — especially when people on Main Street don’t have that option.

Criticism of FATCA abounds, however. Republican lawmakers warned that the costs of implementing the scheme will far outstrip the lost tax revenue recovered; some estimates claim it will generate costs 100 times the revenue. More importantly, the act is unsurprisingly not popular with foreign banks and financial firms, who don’t like being forced to expend the money, time, and resources to follow the onerous regulations of the US government.

Republicans are concerned that international banks will just divest themselves of all US assets, and refuse to do business with Americans living or working abroad. Already, US expatriates are complaining about fallout from the new law, claiming they have been turned down for bank accounts and loans. Some are promising to renounce their US citizenships.

Could the US Dollar Collapse on July 1st?

From this analysis, it seems FATCA really only inconveniences foreign bankers and Americans living abroad. What does Stansberry mean when they warn of the collapse of the US dollar?

Here’s where we get into speculation. The question is, how extreme will the response of foreign banks and governments be when FATCA goes into effect in 55 days? Some thinkers, including the folks at Stansberry, are concerned there will be wide-scale and catastrophic disinvestment from the United States.

There is more than $21 trillion USD in foreign capital invested in American assets and markets, with $10 trillion of that in stocks. But groups like the Japanese Bankers Association, the European Banking Federation, and the Institute of International Bankers have warned that some of their largest members may decide to completely ditch US assets and markets in response to FATCA. The Luxembourg Bankers’ Association is advising members to completely divest from the US market.

While large firms consider divestiture, medium-sized and small firms may have no choice but to divest, unable to meet the compliance costs of FATCA. While America is a popular place to invest money, there are plenty of other options, especially with China set to become the world’s leading economy in just a few years.

How would massive foreign divestiture affect the US economy and the US dollar? It’s hard to say. Stansberry thinks the effect will be apocalyptic, considering America’s colossal trade deficit and our reliance on foreign investments and loans.

What Can You Do to Protect Yourself?

On a long enough timeline, the doomsayers will always be correct. But is FATCA the mistake that will permanently tank the dollar? It’s up to the individual investor to decide. July 1st is a fait accompli; Tea Party Republicans in the House failed to block the bill, and the new rules are going to happen, no matter what.

What can you do to protect yourself? Another economic collapse, the dollar losing its value, the dollar losing its status as the world’s reserve currency — these disasters have been on the horizon for some time, even before HR 2847 was signed; and if FATCA doesn’t lead to TEOTWAWKI, something else may. Americans need to protect their assets from government interference, market instability, and inflation; and that means ditching paper-based assets, and investing in tangible assets such as precious metals or real estate.

“Now would be the ideal time to invest in precious metals, as they provide an important hedge against market instability of all kinds,” Trevor Gerszt, CEO and Founder of Goldco Direct, a leading provider of precious metals, told RedTea News. “If the worst happens with FATCA, or even just a milder hit to the economy, gold and silver will protect the value of your investment assets.”

Now’s the time to decide how seriously you take the threat of FATCA, and what you intend to do about it. Fifty-five days doesn’t give a lot of time to act.

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