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CAMPUS TO CLIENTS

The evidence generally indicates that firms are more likely to alter
their financial reporting to attain tax objectives when book-tax
linkages are stronger, and this leads to a book income that is less
informative for capital market participants.

In addition, increased book-tax linkages could remain below the tax savings observed, in that U.S. citizens avoid
could tempt Congress to play a stronger from the use of offshore accounts, the FATCA requirements in a variety
role in financial reporting standard set- resulting in continued evasion through of ways, including renouncing their
ting because of the tax effects. Whether such accounts. citizenship and investing in assets not
or not one agrees with Hanlon’s conclu- The actual amount of hidden off- subject to FATCA. These are important
sions, her discussion of the pertinent shore assets held by U.S. investors is considerations for policymakers mov-
issues does an excellent job of better unobservable. To measure the effects ing forward with third-party report-
educating the reader about them. of FATCA, the study uses “round- ing regimes.
tripping” behavior, in which assets
‘Transparency and Tax hidden in foreign accounts are invested ‘SALTy Citizens: Which State
Evasion: Evidence From back in the United States. Specifically, and Local Taxes Contribute to
the Foreign Account Tax foreign portfolio investment by indi- State-to-State Migration?’
Compliance Act (FATCA)’ vidual investors into the United States Although there are many reasons for
The Foreign Account Tax Compliance from tax havens, relative to other coun- people to relocate across state lines,
Act (FATCA) was enacted in 2010 (as tries, measures the inbound investment it is an open question whether, how
part of the Hiring Incentives to Restore part of the “round trip.” The amount of much, and which type of taxes affect
Employment Act, P.L. 111-147) to limit inbound equity investment to the Unit- individuals’ decisions on which state
U.S. individuals’ ability to evade U.S. tax ed States from tax havens declined by to reside in. In their 2021 article in
through the use of offshore accounts. $7.8 billion to $15.3 billion in the years The Journal of the American Taxation
The act requires automatic informa- following FATCA, consistent with U.S. Association (Vol. 43, Issue 1), Amy M.
tion transfers to the IRS about foreign investors’ moving financial assets out of Hageman, Sean W.G. Robb, and Jason
account and cross-border payments by tax havens following the rule change. M. Schwebke study the impact of taxes
foreign financial institutions (FFIs). To avoid FATCA, U.S. citizens on location decisions by specifically
Prior to FATCA, FFIs were subject to may renounce their citizenship. The investigating which state and local
self-reporting requirements under the authors observed a large increase in taxes are most associated with state-
qualified intermediary program estab- expatriations following FATCA. In- to-state movement of individuals.
lished in 2001. The IRS estimated that vestments in alternative investments Several studies have considered the
$458 billion of annual offshore income that are not subject to FATCA appear relationship between taxes and state
was unreported in the years leading up to have increased following FATCA, migration, with mixed results and lim-
to the passage of FATCA (IRS, “The specifically, European collective in- ited sample composition. For example,
Tax Gap — Tax Gap Estimates for Tax vestment vehicles, real estate, and art. one study (Young and Varner, “Mil-
Years 2008–2010”). Taken together, these results show lionaire Migration and State Taxation
In their 2020 article in The Journal U.S. individuals’ behavior regarding of Top Incomes: Evidence From a
of Accounting Research (Vol. 58, Issue investment location and allocation de- Natural Experiment,” 64 National
1), Lisa DeSimone, Rebecca Lester, cisions changed in response to FATCA. Tax Journal 255 (2011)) found little
and Kevin Markle examine how U.S. The study highlights an intended evidence that taxes have any effect
individuals responded to the passage of consequence of FATCA, specifically, on the change in migration patterns
FATCA. The shift from self-reporting the reduction of the use of offshore ac- for millionaires within New Jersey.
under the prior rules to automatic counts in tax havens to avoid U.S. tax. However, another study (Cebula,
third-party reporting increased the While this is considered progress, the “Migration and the Tiebout-Tullock
perceived and actual risk of detection, use of offshore accounts for tax evasion Hypothesis Revisited,” 68 American
which should reduce the level of tax remains. As with many tax rules, un- Journal of Economics and Sociology 541
evasion. However, the costs of evasion intended consequences have also been (2009)) concludes that people tend to

54 November 2022 The Tax Adviser