In an effort to catch tax evaders, the Biden administration is proposing requiring banks to report individual account transaction flows above $600 to the Internal Revenue Service (IRS). A related proposal would increase this threshold to $10,000. Banks are a critical component of the economy that, thanks in no small part to the federal government via FDIC insurance, provide people a trusted place to protect their wealth from loss, theft or damage. The administration’s proposal seeks to exploit this status and is a significant intrusion of consumer privacy.
It’s also cumbersome, unlikely to achieve whatever legitimate goal the administration may have, and even a threat to the public’s respect for the rule of law — something that may further erode what market discipline exists in banking. In other words, it’s a bad idea.
The threat to privacy is the most objectionable consequence of this proposal. Current Supreme Court precedent may not provide a constitutional privacy protection for this type of financial exchange, but the breadth of intrusion into the citizenry’s personal accounts is excessive and unwise. The administration estimates the provision would help raise about $500 billion in tax revenue over the next 10 years. While it is unclear where this number comes from or how accurate it is, it is not enough to justify a huge diminution in practical privacy.
The proposal’s supporters argue that banks already provide significant information to the federal government. While this is true, it is more an indictment of the status quo than a justification for compounding the error.
The “Suspicious Activity Reports” (SARs) that banks are obligated to provide to the federal government give a view into the limited benefit and extensive burden the new proposal would put upon the banking industry. For example, a 2016 Heritage Foundation report found that compliance with anti-money laundering rules costs at least $7 million per conviction. It’s entirely possible that the new proposal could involve costs in multiples of this amount, and that it would make preventing tax evasion through its massive search method a money-losing proposition.
Such a rule would also likely limit people’s access to banks. According to the FDIC, almost half of unbanked households cite an inability to maintain a minimum account balance as a reason, with an additional 34 percent citing bank fees being too high. Increasing compliance costs for banks will likely lead them to increase minimum balance requirements and fees to keep accounts economically viable, which could in turn force more people outside the banking system.
If implemented, the proposal will also undermine the public’s trust in both banks and the government. People do not want banks handing over their personal data to a government that is simply looking for whatever it can find. The FDIC reports that about 36 percent of the unbanked cite a lack of trust in banks as a reason they lack bank accounts. This proposal will only increase that number.
As a result, law-abiding citizens will try to avoid the intrusion by seeking means of payment outside the banking system. While there is nothing per se wrong with people choosing alternatives to banks, if the choice is driven by a lack of trust and concern for privacy, it is a warning sign. Ironically, the wealthiest Americans, who are the nominal target of this proposal, will be the most able to avoid it through tax shelters, offshore accounts or other means — leaving the government with little gained.
Finally, those who care about the increasingly tight relationship between banks and the government should oppose this proposal because it risks tying the two together to an even greater degree. By further turning banks into agents of revenue collection, they will be treated less as private businesses that are responsible for their own mistakes and more like public instrumentalities, if not utilities, where failure is an impediment to public policy.
To their credit, the banking trade groups have so far generally opposed the proposal. But if it were to go through, we should expect these groups to cite the critical role banks play in preventing tax fraud as a reason why they need to be bailed out from future trouble. They wouldn’t be doing their job if they didn’t.
Legitimate revenue raising and law enforcement are important objectives. But like everything else, those interests must be balanced against other interests, such as privacy, access and public trust. The proposal to use banks as IRS agents, reporting on mundane transactions without any suspicion of illegal activity, fails this test, and should be abandoned.
Thomas Hoenig is a distinguished senior fellow with the Mercatus Center at George Mason University, a former vice chairman with the Federal Deposit Insurance Corporation (FDIC) and a former president and CEO of the Federal Reserve Bank of Kansas City. Brian Knight is the director of innovation and governance and a senior research fellow with the Mercatus Center.