Tax Lawyer's Blog

Jeffrey Goldfarb of CNNMoney.com writes that there is growing international criticism of America’s insistence that foreign governments help it enforce its policy of taxing U.S. citizens’ worldwide income:

President Barack Obama wants the world to forget about his predecessor’s unilateral approach in international affairs. But imperialistic U.S. tendencies haven’t slowed in at least one important area: taxation.

The U.S. is already unusual in taxing its citizens on their worldwide income, even if they live or work elsewhere. Tax treaties and complex rules help reduce the cash burden — the same income is not supposed to be taxed in two countries — but compliance is often a nightmare.

Now the government is trying to increase tax revenue from its globe-trotting citizenry. Recent proposals would tax more instruments, including equity swaps. The U.S. government is also trying hard to get more from U.S.-based global companies — while Japan and the U.K. are going in the opposite direction.

Goldfarb says that recent international criticism may signal the beginning of a global backlash against American tax policy:

The U.S. claims the moral high ground on taxes. But to some foreigners, the combination of a crusade against foreign tax havens and the insistence that overseas companies help with American tax collection shows “breathtaking moral duplicity”. Those were the words used by Wegelin & Co., a Swiss private bank, as it bid adieu to its U.S. customers.

Not everyone would go that far. But Julius Baer, another Swiss bank, said it can live without U.S. clients and the UK’s Lloyds has started ditching some of its American customers. Brazil has included the U.S. states of Delaware and Wyoming as tax havens, because of their low costs and even lower disclosure requirements. Luxembourg’s prime minister has joined in, calling for the two to be put on the OECD tax blacklist.

As yet, these are isolated complaints. But if Obama keeps on his tax crusade — without attacking domestic abuses — he could face a damaging global backlash.

Given Obama’s pledge to reduce the deficit there is little chance that he will ease up on his pursuit of foreign tax havens. Consequently, if the President wishes to assuage his international interlocut0rs and deflect charges of an American double-standard, he must begin pursuing with equal vigor domestic tax havens.

This gives the President another reason to step-up IRS enforcement in order to close the tax gap. It also may help him avoid a politically suicidal middle-class tax hike.

Stay tuned.

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