IN THE depths of recession in 2010, a jobs-obsessed Congress passed the Hiring Incentives to Restore Employment Act. Bolted on to it was the arcane-sounding Foreign Account Tax Compliance Act. There was scant debate about FATCA, as it is more commonly known, because it was touted as a way to bring in money by curbing offshore tax evasion. In tough times, such “revenue-generators” are no-brainers.

Going after tax dodgers is understandable. But FATCA, which will take effect on July 1st, is overkill.

America is the only large economy to tax its citizens on everything they earn anywhere in the world. FATCA’s purpose is to ensure that not a centime or rouble that a “US person” has stashed away goes undetected by the IRS. In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS.

The costs of complying with FATCA are likely to dwarf the extra revenue it raises (see article). The law is also having unfortunate unintended consequences. The 7m Americans living abroad now wear a scarlet letter (presumably an “F”), thanks to FATCA. Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched.

Moreover, American citizens are not the only victims. The law’s definition of a “US person” includes green-card holders and anyone with a substantial connection to the country, whatever that means. Nobody knows—so yet more confusion, and yet more fees for lawyers and accountants.

Meanwhile, the drug dealers and sophisticated tax evaders who inspired all this will switch into non-financial assets, such as art and property, or hide behind shell companies and trusts. The latter would be easier to penetrate if reliable ownership information were collected, but often it is not—and America is one of the worst laggards (see Delaware, Nevada and all the other money-laundering paradises within its borders).

FATCA’s intrusiveness raises serious privacy issues. Other countries have reluctantly agreed to sign special side-agreements with America that allow their banks to comply without falling foul of domestic privacy laws. America will now have more information about its taxpayers’ foreign wealth than it gathers on their domestic holdings. This has caused surprisingly little fuss. Financial privacy doesn’t seem to resonate with the public in the same way as snooping into phone records.

Share and share alike

Most of these problems would melt away if America switched to the “territorial” system favoured by other advanced countries and taxed only those resident there, not all Americans everywhere. America should also embrace the OECD’s efforts, already backed by more than 50 countries, to create a truly multilateral system in which tax information on residents’ accounts and certain investments is shared annually. For that to work, America would need to hand over data similar to those which it demands from others—something it has hitherto appeared reluctant to do. The financial superpower looks ever more a regulatory bully, setting rules it ignores itself.