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17 US Congressmen Write To Treasury About Bank Reporting Rules

by Mike Godfrey, Tax-News.com, New York

19 December 2002


The Bureau of National Affairs reported last week that seventeen members of Congress headed by Rep. Bob Ney (R-Ohio) recently added their voices to growing pressure on the Bush administration to withdraw proposed rules that would require US banks to report interest paid on accounts held by nonresident aliens from 16 countries.

"We are troubled by the policy implications of this proposal, and we also have serious reservations about IRS's potential misuse of the regulatory process," said the seventeen in their letter to the Treasury Department. Signatories included House Small Business Committee Chairman Donald Manzullo (R-Ill.).

The rules were originally proposed under the Clinton administration, when they would have applied to many countries, but were met with a storm of protest, and were dropped when Al Gore lost the presidential election to George W Bush. The new proposal would apply to accounts opened by nationals of most member states of the European Union, plus Australia, New Zealand, and Canada, which is already subject to similar requirements.

Many leading figures in the US have objected to the proposed rules, for a variety of reasons; but almost all point to the disincentive effect on investment of helping foreign governments to collect tax on income earned in the US. At a recent Treasury Department hearing on the proposals, many organisations spoke against them.

The re-issue of the rules at a time when the US administration has publicly expressed its unwillingness to be associated with the EU's own information sharing plans contained in its Savings Tax Directive is thought to represent an attempt by left-wing staffers in the Treasury to hijack the policy agenda and support the Europeans.

No senior administration figures have spoken publicly on the Treasury's proposals, other than Russell Orban, assistant chief counsel for the Small Business
Administration, who said at the hearing that the rules are likely to be a substantial burden to smaller banks and should be subject to the federal Regulatory Flexibility Act.

Here is the text of the Congressmen's letter:

December 3, 2002

The Honorable Paul O'Neill
Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue
Washington, DC 20220

Dear Secretary O'Neill,

We want to express our concerns about the Internal Revenue Service's proposed bank deposit interest reporting regulation (REG-133254-02). Based on a proposal that originally was put forth in the final days of the previous Administration, this regulation would force banks to tell the IRS the amount of interest paid to non-resident aliens even though the information is not needed to enforce U.S. tax law.

We are troubled about the policy implications of this proposal, and we also have serious reservations about the IRS's potential misuse of the regulatory process. To address these concerns, we ask that the regulation be withdrawn and subject to further review and analysis.

From a policy perspective, we are concerned that the regulation will undermine the competitiveness of U.S. financial institutions and drive capital out of the American economy. This might be a worthwhile price to pay in the pursuit of good policy, but this regulation undermines the long-run tax reform goals that we all share. More specifically:

  • The regulation is inconsistent with good tax policy and will hinder the President's tax reform agenda There is widespread recognition that good tax policy should be territorial and that the tax code should impose a similar burden on income that is consumed and income that is saved and invested. Good tax policy must encourage investment in capital markets-particularly American capital markets. This regulation, by contrast, seeks to help foreign governments double-tax income that is earned inside America's national borders, thus discouraging foreign investors from investing in the U.S. market.
  • The proposed rule will drive capital to other jurisdictions. American financial institutions have attracted about one trillion dollars from overseas, and a substantial share of that job-creating capital will leave our economy if the Service compels U.S. banks to compromise the interests of their depositors. This means less money available for car loans, home mortgages, and small business expansion It is particularly foolish to impose this kind of regulation when the economy is sluggish and financial markets are weak. A regulation of this type is particularly damaging to a financial system recovering from an economic downturn.

We are equally concerned that the IRS has not followed proper procedures. In their ideological zeal to pursue a proposal developed by the prior Administration at the behest of foreign governments, it appears that the Service is abusing the regulatory process by flouting legal and procedural requirements.

  • Executive branch agencies and departments are supposed to issue regulations that implement the laws enacted by Congress. But since the United States government does not tax bank deposit interest paid to nonresident aliens, there is no need to collect this information. Indeed, the IRS even admits that the purpose of the proposed regulation is to help foreign governments tax U.S.-source income. It is not the purpose of the U.S. tax structure to promote the taxation interests of foreign governments over investment in American markets and American businesses.
  • On several occasions, the U.S. Congress has examined the tax treatment of indirect foreign investment in the American economy. In every instance, the desire to attract capital has led lawmakers to decide not to tax bank deposit interest paid to nonresident aliens. Congress also has repeatedly decided not to require the reporting of this income. The proposed IRS regulation, however, seeks to overturn this outcome of the democratic process.
  • The IRS is ignoring laws requiring cost benefit analysis. By incorrectly declaring most of its regulations either "interpretative" within the meaning of the Administrative Procedure Act or not "major" within the meaning of Executive Order 12866, the Internal Revenue Service has effectively exempted itself from regulatory oversight. Yet many IRS regulations - particularly the proposed bank deposit interest reporting rule - impose a significant cost on the economy and should be subject to the regulatory review process.

We have been very generous in response to IRS budget requests, but these additional resources were supposed to help the Service enforce U.S. tax law, not to promulgate regulations that disregard the law and hinder the effort to reform the tax code. We will closely review next year's budget request if the Service insists on implementing a regulation that will drive money out of America We believe that American homebuyers, small business owners, and families should have access to capital, and therefore request that this misguided regulation be withdrawn for further review and analysis.

Sincerely,

Ney, Bob
Davis, Jim
DeMint, Jim
Akin, W. Todd
Crane, Phil
Foley, Mark
Paul, Ron
Cannon, Chris
Pitts, Joseph
Hayworth, J.D.
Wilson, Joe
Diaz-Balart, Lincoln
Burton, Dan
Ros-Lehtinen, Ileana
Otter, C.L. "Butch"
Forbes, J. Randy
Donald A. Manzullo

cc: Glenn Hubbard, Chairman of the Council of Economic Advisers
Larry Lindsey, Chairman of the National Economic Council


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