Former Govt Official Jatras: Tax Act May Force Partial US Debt Default Friday, 18 Apr 2014 06:47 AM
By Dan Weil
The Foreign Account Tax Compliance Act (FATCA) may push the U.S. government to default on some of the interest payments for its debt, says James George Jatras, a former State Department official and U.S. Senate staffer who's now a media relations specialist.
FATCA is scheduled to begin July 1. "[It] supposedly is aimed at American tax cheats with money stashed abroad," Jatras writes in an opinion piece for Forbes.
"But instead of singling out suspected tax evaders, FATCA . . . requires all non-U.S. financial institutions . . . in every country in the world to report data on all specified U.S. accounts to the IRS."
But how can the U.S. government enforce that requirement?
"Simple: the threat of economic sanctions," Jatras argues. "Non-U.S. institutions deemed 'recalcitrant' would be subjected to 30 percent 'withholding' from U.S.-sourced payments, effectively shutting them out of America's financial market."
Payments to be withheld include "any payment of interest, dividends, [etc.] . . . if such payment is from sources within the United States," FATCA states.
"No exception is provided for interest payments on U.S. government securities," Jatras warns. And that means default.
"In the end, no one really knows how this will work, which is part of the problem. Foreign purchases of U.S. Treasury securities and the reliability of interest payments are essential to America's financial stability. Even a slight market change in U.S. borrowing costs could have a disastrous impact on the deficit and our economy."
If the United States ever did default on its debt, the outcome could be as bad as Lehman Brothers' failure in 2008, according to the Organization for Economic Cooperation and Development (OECD).
An outright default "would be likely to create large confusion and uncertainty in financial markets," the OECD said in a report last year. A default could "trigger a systemic flight to liquidity that could prove as catastrophic and costly as that in the day following the Lehman failure in 2008," the report states.
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Poster Comment:
Foreign Account Tax Compliance Act? What has this got to do with default of the U.S. debt?
I see that the IRS is targeting ALL foreign banks, and not just the accounts of those suspected of cheating on taxes. This seems to be overkill to me. ;)