Washington Institute Publishes Study Rubbishing IRS Interest-Reporting Plans

Tax-News.com, Washington

13 February 2003

The Washington-based Center for Freedom and Prosperity Foundation last Monday released a study using information from the Congressional Record, the Joint Committee on Taxation and the Ways & Means Committee dating back to 1921 to illustrate how the Internal Revenue Service is undermining the rule-of-law by pursuing a regulation that would require U.S. financial institutions to report bank deposit interest paid to certain nonresident aliens.

Andrew Quinlan, President of the Center for Freedom and Prosperity, remarked, "This new study demonstrates that there is no legal basis for the proposed IRS regulation on reporting nonresident bank deposit
interest." Quinlan added, "More than 50 Senators and Congressman are on record against the proposed rule, and they are joined by the Federal Deposit Insurance Corporation (FDIC), the Small Business Administration, the American Bankers Association and the Conference on State Bank Supervisors."

The report, entitled "Who Writes the Law: Congress or the IRS?," is written by Heritage Foundation tax expert Daniel J. Mitchell. Link to study: http://www.freedomandprosperity.org/Papers/irsreg/irsreg.shtml

Opposition to the IRS regulation largely has revolved around economic issues, particularly the likely damage to financial markets caused by capital flight. This is a very legitimate concern, but that debate overshadows another important issue: Is the IRS overstepping its authority and abusing the regulatory process by proposing a regulation that is fundamentally inconsistent with the law? The answer is yes, Mitchell writes: "Congress clearly wanted to attract capital to the U.S. economy when it chose not to tax bank deposit interest paid to nonresident aliens. Helping other nations tax that income - which is the explicit goal of the IRS regulation - unambiguously would thwart this goal and therefore undermine congressional intent. To help protect the rule-of-law, the regulation should be withdrawn."

According to the author, "The IRS can recommend changes in the law, but they have no right to unilaterally change government policy." Mitchell also said, "The IRS is putting ideology above the law. This regulation is a gross abuse of the rule-making process. It is not surprising that the Clinton Administration, with its cavalier attitude toward justice, first proposed this initiative. What is a surprise, by contrast, is that the Bush Treasury Department has refused to withdraw the regulation. Hopefully the new Treasury Secretary, John Snow, will be less susceptible to manipulation than his predecessor."

Veronique de Rugy of the Cato Institute added, "This regulation is a bad idea because it will cause capital to flee the U.S. economy. Federal Reserve data, for instance, show that more than $40 billion was taken out of savings accounts in the first quarter of 2001 after the Clinton Administration first unveiled the proposed regulation. One can only imagine what will happen if the regulation is actually implemented." Ms. de Rugy added, "The fact that this regulation also flouts existing law adds insult to injury."

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