Rand Paul's Stand Against Tax Treaties Is More Important Than You Think

IMGCAP(1)]President Barack Obama has now joined personally in renewed efforts to pressure Kentucky Senator Rand Paul to stop blocking the ratification of eight tax treaties pending before the U.S. Senate. Paul is sticking to his guns, and it’s important for Americans to understand why.

Of the eight treaties, seven of them are bilateral agreements with various countries to facilitate cooperation to avoid double taxation and to lower compliance costs. Regrettably, these agreements also unnecessarily change the standard for providing personal financial information to law enforcement agencies from probable cause of criminal behavior, such as fraud—which Paul correctly regards as the only constitutionally permissible standard under the Fourth Amendment—to what amounts to wholesale bulk collection on the pattern of the NSA’s violations of email and phone privacy.

This is Paul’s only concern with these seven bilateral treaties. A simple amendment could conform them to constitutional standards and they could move forward expeditiously.

However, that reasonable solution is not acceptable to Secretary Jack Lew’s Treasury Department. That’s because the Department also insists on using the treaties as a Trojan Horse for one of the most dangerous and dysfunctional laws enacted under the presidency of Barack Obama: the Foreign Account Tax Compliance Act, or FATCA. 

FATCA, which few Americans have ever heard of, was passed by a Democrat-controlled Congress in 2010, supposedly as a weapon against “fatcat” offshore tax evasion. Disdaining the constitutional path of investigating individuals who are suspected of wrongdoing and securing a warrant for accessing their private records, FATCA takes the NSA approach: to require all non-U.S. banks to hand over information on U.S. private persons (not corporations, by the way) absent any requirement of reasonable suspicion, due process, or a court order. If banks fail to do so, they face crippling sanctions that essentially shut them out of the American market. FATCA has led many foreign banks to deny services to Americans rather than deal with the burdens and crushing compliance costs, thus impeding U.S. business and export opportunities and risking economic harm.

To enforce FATCA, Treasury has concocted a series of so-called “intergovernmental agreements” with foreign governments to provide for “exchange” of private financial information. These IGAs are not authorized under FATCA or any other law, nor are they treaties submitted to the Senate for advice and consent under the U.S. Constitution. They are at best legally dubious. Nonetheless, in the IGAs with many countries Treasury has promised that the U.S. will report “reciprocal” information from American banks for foreign governments, something the Obama administration currently has no legal authority to do but repeatedly has requested from Congress.

Because the IGAs designate tax treaty mechanisms for FATCA information “exchange,” Paul’s holdup of the bilateral treaties also impedes indiscriminate FATCA reporting. Conversely, if the treaties were amended to allow information transfer only under the probable cause standard, the higher constitutional standard would govern. That, not double tax relief, is why Treasury is so desperate to approve these treaties without amendment.

That this is Treasury’s real agenda is further confirmed by the eighth treaty the senator is foiling, a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration.

Unlike the seven bilateral tax treaties, the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

Citing “tax evasion” is no more an excuse for trashing constitutional protections than invoking terrorism. Senator Paul insists that, no less than email and phone metadata, details of our financial affairs—among the most private of any individual’s possessions—must remain confidential. As Paul stated in his hold letter to Majority Leader Mitch McConnell, “An individual’s bank account is the epitome of who they are as a private citizen; a bank account reveals where someone is shopping, what foods they like, the medicines they’re taking, the doctors they’re visiting, and the places they’re traveling.”

Make no mistake: if today governments can disregard privacy because accounts happen to be held in another country, tomorrow they will do the same domestically under the misguided “third party doctrine” (which Paul has challenged in court with respect to cell phones).

For that reason, the senator is right to insist that the OECD Protocol is dead on arrival. The other seven tax treaties should proceed with one simple but essential fix.

It is noteworthy that in both this Congress and the previous one Paul has introduced legislation to repeal FATCA and also is a plaintiff in a lawsuit to challenge its constitutionality (recently dismissed on a rubber-stamp standing ruling, with an appeal expected). In 2014 and 2015 respectively, the Republican National Committee unanimously passed resolutions to repeal FATCA and stop GATCA. Early in 2017, Congress needs to send a FATCA repeal bill to President Donald Trump for his signature, finally getting rid of “the worst law most Americans have never heard of.”

James George Jatras is a former U.S. diplomat and U.S. Senate staffer. Now a Washington-based government and media relations specialist, he edits RepealFATCA.com. He is a Trump supporter.