After more than 30 years, comprehensive, pro-growth tax reform may finally be signed into law in 2017. This is an opportunity to cut taxes for American families and businesses across the board, enact an internationally competitive system for businesses, and drastically simplify the tax code.  It should also be an opportunity to repeal the Foreign Account Tax Compliance Act (FATCA).

FATCA was signed into law in 2010 with the goal of stopping tax evaders that were using offshore bank accounts. However, it was designed as a blunt instrument that targets any American with a bank account overseas. Most who are forced to comply are expatriate Americans who have, little if any U.S. presence. 

As a result, compliance costs far outstrip any effectiveness in curbing tax evasion. American citizens overseas have become locked out of financial institutions including banks, stockbrokers, hedge funds, and insurance. Often, it is easier for these businesses to deny US citizens service.

“FATCA is the Alternative Minimum Tax (AMT) for Americans overseas—an intrusive, complicated, painful and unfair tax regime designed to be massive overkill in hunting for coins between the cushions,” said Grover Norquist, President of Americans for Tax Reform. “We are finally abolishing AMT—after 48 years—in Trump’s tax reform package. We should put FATCA to sleep at the same time.”

Under FATCA, any overseas account held by U.S. citizens must be reported to the IRS. This means that millions of Americans must give up personal information and comply with burdensome IRS regulations and reporting requirements. The law requires financial institutions to collect and disclose this information. If they fail to do so, the IRS can impose a 30 percent withholding on an institution’s U.S. investments.

FATCA also requires American citizens to comply with tax filing forms if they have assets overseas meet or exceed $50,000. For overseas Americans, this means they must comply with the tax compliance laws in their country of residence in addition to IRS laws.

FATCA should be repealed as part of tax reform. In a letter to Congressional leaders, 23 conservative and free market groups urged Congress to repeal this burdensome law as tax reform efforts move forward.

However, this should be step one of reforming the taxation of overseas citizens. FATCA is merely a symptom of a larger problem.

Just as American businesses operating overseas are forced to comply with the outdated and burdensome worldwide system of taxation, Americans are forced to comply with a system of citizenship-based taxation.

This means that regardless of where a US citizen lives, they must comply with IRS rules and are double taxed on income – once when they earn it overseas and again because they are an American citizen. While repealing FATCA would ease the burden on citizens living abroad, a longer term solution should involve enacting residence-based taxation for Americans.

The current citizen-based system affects an estimated eight million Americans that live and work overseas. This system is nearly unique to America – every other country in the world with the exception of Eritrea has residence-based taxation.

In contrast, residence-based taxation subjects individuals to taxation based on location of residence without regard to citizenship. This would make tax compliance far simpler and should be part of any effort to simplify the code for individuals.

There is a clear need to reform this burdensome system and updated the way the tax code treats citizens living overseas. This can start with repealing FATCA, however it should not end until residence-based taxation is signed into law.