Foreign Account Tax Compliance Act aims to close individual tax gap.

Last October, Sen. Max Baucus (D-Mont), Rep. Charles Rangel (D-N.Y.), Sen. John Kerry (D-Mass.) and Rep. Richard Neal (D-Mass.) took a big step toward closing the United States individual tax gap by introducing the Foreign Account Tax Compliance Act (FATCA).

FATCA creates new mechanisms for identifying Americans with foreign financial assets. It's a cumbersome process and one that the U.S. has been hard-pressed to implement effectively. The bill takes a different approach to an old problem.

Rather than targeting tax evaders, FATCA focuses on the foreign financial and nonfinancial entities that might hold the assets. Foreign entities must disclose their U.S. customers and interest holders to the IRS--they must even agree to face down bank secrecy rules or, failing that, to relinquish U.S. accounts altogether or face a 30-percent withholding tax on their own U.S. income. It's an unexpected twist on the "pay to play" concept: Offer up U.S. investor names or take your money elsewhere.

FATCA would also repeal current tax benefits for foreign-marketed bearer bonds. Congress shut down U.S.-marketed bearer bonds in the early 1980s by imposing stiff tax sanctions on U.S. issuers and holders. Foreign-marketed bearer bonds were excepted from sanction, but FATCA would end the reprieve. Among other things, interest would become subject to a 30-percent withholding tax, effectively eliminating foreign-marketed bearer bonds as a financing source for U.S. companies. The U.S. is urging other countries to follow suit, cutting off an easy avenue for U.S. tax evasion. The approach is not without risk, especially if countries perceive FATCA as an opportunity to attract capital to their own markets.

These specific proposals are expected to garner $3.1 billion in tax revenues over a 10-year period (together with other portions of the bill, $8.5 billion over 10 years). All things considered, that's a tiny number. Conversely, U.S. capital demand isn't expected to fall, and constricting the supply of available funding won't help. Even a "small" rise in U.S. cost of capital could quickly swamp the anticipated revenue gain.

On balance, does FATCA represent good tax policy? Absolutely. No one wants evasion to continue. It's much easier to deal with visible foreign entities than their invisible U.S. customers. The big question is whether corporate America will suffer collateral damage in the crusade against U.S. tax evasion, and whether government has another choice.

--Kimberly Tan Majure, member of the International Tax and Tax Controversy practice, groups at law firm Miller & Chevalier Chartered