By Omer Niazi
Shutterstock Image
Economic freedom paves the way for free-market capitalism, and free-market capitalism is foundational to a strong democracy – but only if it is grounded in fairness, transparency, and accountability. When exploited, it calls into question the very foundation of democracy. Today, the core values sustaining a strong free-market system are steadily eroding due to the illicit actions of a small constituency who, instead of upholding the very system that empowers them, are leveraging it for their own ends – and with it, the trust in the fairness of a democratic system they are entrusted to uphold is eroding.
A fair and equitable tax system is the bedrock of a functioning democracy. In a democratic society, the obligation to pay taxes is a law that applies to all citizens equally, regardless of their wealth or status. However, the growing tax gap in the US standing at a staggering $688 billion annually reveals a troubling disparity in how these obligations are met. A large portion of this gap stems from oJshore tax evasion by wealthy individuals and corporations who hide their assets in secret foreign accounts to avoid paying their fair share. An estimated $4 trillion in U.S. wealth, primarily from the top 1%, is hidden overseas, with this minority evading 20% of their tax obligations, leading to hundreds of billions in lost revenue annually. In a system of governance heavily anchored in foundational principles of equality, such tax evasions creates the troubling perception – and often reality – of two sets of rules: one for the powerful and another for everyone else. If not addressed, this disparity could undermine the legitimacy of the democratic system of governance.
The 2010 enactment of the Foreign Account Tax Compliance Act (FATCA) was a landmark step towards addressing this disparity. FATCA has reportedly led to greater compliance and helped reduce the deposits by U.S. citizens in tax havens, with oJshore tax evasion dropping by approximately threefold over the past decade. Yet, gaps remain, and we need strong enforcement of FATCA as well as reform within it to narrow the disparity.
Legislative acts are only as strong as the commitment to enforcing them to achieve the intended outcome. FATCA is falling short of strong enforcement measures to quickly detect and penalize non-compliance. In a Senate testimony, the Financial Accountability and Corporate Transparency, or FACT Coalition, stressed the lack of adequate resources as the main challenge. Former IRS Commissioner Charles Rettig emphasized that insuJicient funding and reliance on manual processes are hindering eJective implementation and enforcement. This, in turn, has further delayed eJorts to detect non-compliance. A Treasury Inspector General report found that the IRS's delay in identifying non-filers resulted in $3.3 billion in missed fines.
Legislative acts must keep pace with factors driven by international developments and the evolving needs of the policy issues they aim to address. Currently, digital assets are not reportable by foreign financial institutions under FATCA. Expanding FATCA's scope to include
digital assets, coupled with improved international cooperation on tax reporting, will address emerging threats in international finance and ensure compliance with the standards it seeks to establish in legislation.
The United States has long been a staunch defender of a democratic system of governance on the world stage. The very principles that have shaped American identity on the global stage are now under threat at home. It is only fair that the fight to address this disparity should begin here, and policymakers in Washington are not only obligated but also responsible to the American people who entrusted them with the authority to enact policies and reforms aimed at promoting the principles of a democratic system of governance.
For Citation, use the following reference: Omer Niazi, "Offshore Tax Evasion is a Matter of Democracy" Council on International Law Order and Security, January 20, 2025.
Comments