Hello everyone, I will be (one of) your new bloggers here at BBL. I have a particular interest in tax law and economics so I found the following article interesting.
According to Bloomberg, Wegelin & Co., Switzerland's oldest bank, is requiring customers to dump their U.S. assets or close their accounts. As you might have guessed, Wegelin's decision has to do with the recent battle between UBS and the IRS. Essentially, Wegelin believes it will be less onerous to require its customers to dump their U.S. assets rather than comply with the ever increasing reporting requirements demanded by the I.R.S.
While the I.R.S. has a legitimate interest in collecting tax owed to it from U.S. citizens and certain foreign persons holding U.S. based assets, its efforts may cause more foreign banks to follow in the footsteps of Wegelin. And that my friends, is a bad thing.
Offshore financial institutions hold approximately $7 Trillion in assets. If these institutions start insisting their clients dump a certain asset class, the supply of that asset will increase and its price will tend to decline (assuming, like all economists, we ignore many of the realities of the universe). Thus, if offshore institutions start dumping lots of U.S. assets (likely a healthy chunk of that $7 Trillion dollars), U.S. asset prices will begin to decline.
Normally, it is not such a big deal that U.S. assets are getting cheaper. However, we are currently in the midst of a financial crisis that was precipitated in large part by the fall of asset prices. It is difficult for U.S. financial institutions to raise sufficient capital and "get healthy" unless the value of their assets begins to increase. Dumping large quantities of U.S. assets onto the market will make any financial recovery just a bit more difficult.
Should the IRS continue to pursue its crack down on tax-shelters? It depends. Does the short term gain of more (badly needed) revenue outweigh the potential cost of propping up more financial institutions in the future? The I.R.S. and our current administration certainly seem to think so!
According to Bloomberg, Wegelin & Co., Switzerland's oldest bank, is requiring customers to dump their U.S. assets or close their accounts. As you might have guessed, Wegelin's decision has to do with the recent battle between UBS and the IRS. Essentially, Wegelin believes it will be less onerous to require its customers to dump their U.S. assets rather than comply with the ever increasing reporting requirements demanded by the I.R.S.
While the I.R.S. has a legitimate interest in collecting tax owed to it from U.S. citizens and certain foreign persons holding U.S. based assets, its efforts may cause more foreign banks to follow in the footsteps of Wegelin. And that my friends, is a bad thing.
Offshore financial institutions hold approximately $7 Trillion in assets. If these institutions start insisting their clients dump a certain asset class, the supply of that asset will increase and its price will tend to decline (assuming, like all economists, we ignore many of the realities of the universe). Thus, if offshore institutions start dumping lots of U.S. assets (likely a healthy chunk of that $7 Trillion dollars), U.S. asset prices will begin to decline.
Normally, it is not such a big deal that U.S. assets are getting cheaper. However, we are currently in the midst of a financial crisis that was precipitated in large part by the fall of asset prices. It is difficult for U.S. financial institutions to raise sufficient capital and "get healthy" unless the value of their assets begins to increase. Dumping large quantities of U.S. assets onto the market will make any financial recovery just a bit more difficult.
Should the IRS continue to pursue its crack down on tax-shelters? It depends. Does the short term gain of more (badly needed) revenue outweigh the potential cost of propping up more financial institutions in the future? The I.R.S. and our current administration certainly seem to think so!
Sam interesting article. I am a little confused though on your assumptions because it seems like we are not operating in a closed universe. There must be other factors to consider, and with this enormous govt bailout, we can't afford to let offshore tax evadersbto go unchecked
ReplyDeleteI agree that we need more revenue. The real question is whether this extra revenue will offset any potential large scale damage from future bailouts. Probably an unanswerable question, but nonetheless, something to consider.
ReplyDeleteSam, what do you think of Obama's plan to increase rev in other respects? Are there alternative considerations that must be taken into account? I am just worried about the sheer size of the deficit and common sense tells me that this plan has to be paid for with taxes eventually
ReplyDeleteI honestly believe the solution to the U.S.'s budget and deficit woes lies in increased taxes or inflation down the road. We either raise money to pay the debt, or inflate the debt to the point where it becomes nominally cheap. Assuming we tax our way out of the problem, the question then becomes one of timing. Is the current crack down well timed given the stresses on the financial system? In other words, does the current increased revenue outweigh the present value of future costs of financial bailouts? I don't think there is a reasonable answer to this question, just things to consider in the policy world.
ReplyDeleteGreat start Sam. Thanks for sharing your thoughts.
ReplyDelete"due" = "do" in the 2nd paragraph. Come on, Sam, no rookie mistakes here! :)
ReplyDeleteWhy breaking balls 943? There's no erroR!?
ReplyDeletesam, I am curious as to whether UBS could be found criminally liable for refusing to turn over information on their clients' assets. My gut tells me yes, but I simply don't know enough about this subject to make a conclusive determination.
ReplyDelete12:48, I know the DOJ can get access to foreign entities easily. I don't see why UBS would be any different.
ReplyDelete