The Real US Border Fence

Thu, Aug 12, 2010 - 12:00am

You probably haven’t heard of capital controls, but they are common around the world. These mechanisms can control the inflows of money into a country or money leaving the nation or both.

Why do countries impose capital controls? Governments may try to limit inflows if they believe their currencies or stock markets are appreciating too fast, or they may slow outflows because they fear crashes like the Asian Financial Crisis of 1997-8.

It may come as a surprise to many Americans, but the US already has some soft capital controls. Two years ago, an exit tax was quietly slipped into the Heroes Earnings Assistance and Relief Act of 2008 (also known as the HEART Act). As I discussed in my November 2008 newsletter, the US is the only nation that levies income tax on money earned abroad. Since Americans could escape this burden ten years after renouncing US citizenship, and foreign residents could always return home, Congress decided to close this “loophole.” Now long-term residents or citizens expatriating permanently will have pay to tax on all their assets as if they were sold that day.

However, the IRS (US tax authority) is notoriously capricious about the enforcement of the tax code. Decisions may depend on what country you move to, or what the opinion of the IRS agent is that day. When a subscriber moved back to Canada this year after living and working for decades in the US, he received 3 or 4 contradictory opinions on what to do with his retirement account.

On March 18 of this year, a more overt form of control was sneaked into the Hiring Incentives to Restore Employment Act, which cleverly shortens to HIRE. As of 2013, foreign banks will be required to withhold 30% of withdrawals from an American’s account, effectively turning bank employees into US tax agents. Privacy is totally gone, as financial institutions will be compelled to report detailed information about all American account holders. If foreign institutions don’t wish to comply, or can’t because of national law, they will be required to close the account. The exemptions to this rule are holding a combined overseas balance of less than US$50,000, or being an individual that the Secretary of the Treasury deems a low risk for tax evasion - a clause that is ripe for abuse. The law also makes foreign life insurance policies or annuities reportable for the 2010 tax year.

In reality, Americans found it very difficult to open non-US accounts before the HIRE Act. Multiple sources have informed me that it took months of regular prodding last year to open an account in Panama. The pressure on “tax havens” that I detailed in my May 2009 article, “The Truth About Tax Havens,” has led many banks to refuse to deal with US citizens even if they are residents of that country. At this point, only banks servicing a large percentage of American clients will be willing to tolerate the paperwork, and probably only if they have US subsidiaries.

The sudden imposition of capital controls is no accident. In October 2008’s “The Dollar Is Doomed,” I asserted that hyperinflation in America was inevitable. Rapid money printing debases the currency and robs small investors of their life savings. However, the trick doesn’t work if everyone moves to a strong currency. It makes sense that US government officials would quietly make it harder for the average citizen to diversify out of the dollar before it becomes worthless. At the same time, loopholes remain for the friends of government officials so they may protect their assets.

While the US may be one of the most egregious offenders in printing money, they are hardly alone. When nations like Greece attempt to cut their debt, anti-austerity riots rock Athens, and no sitting government wants that. It’s more politically popular to inflate the currency and scapegoat “tax cheats.”

Once the politicians run out of easy targets, I expect they will slander as unpatriotic anyone removing capital from their nation. Next, they will probably smear the “gold bugs” for daring to preserve their wealth. I predict capital controls will sweep the world in the next few years, as governments attempt to keep both their citizens and “greedy” foreigners from fleeing with their assets.

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