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CFP Attacks IRS Rules On Non-Resident Deposit Interest

by Mike Godfrey,, New York

21 December 2001

The Washington-based Centre for Freedom and Prosperity Foundation is one of 26 US free-market organisations to attack the IRS over rules permitting US financial institutions to report bank deposit interest payments to foreign governments by writing to Office of Management and Budget Director Mitchell E. Daniels, Jr. asking him to review Clinton-era regulations.

The signers of the letter say that by "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."

"Today, we ask Director Daniels to please take this opportunity to halt this flagrant abuse of the regulatory process," said Andrew Quinlan, President of the CFP Foundation. "The IRS should not be above the law. For years the IRS has shoved onerous regulations down the throats of the American people. If there was ever a regulation put forward that needed to be reviewed and killed by the OMB, it would be this one." added Quinlan.

Dan Mitchell, Heritage Foundation Senior Fellow, said, "The IRS's proposed regulation, issued during the final days of the Clinton administration, seeks to overturn existing law and puts the interests of European politicians ahead of the interests of American families, workers, and businesses. Unless the Treasury Department wants to sabotage President Bush, this regulation should be withdrawn immediately."

Veronique de Rugy, Cato Institute policy analyst added, "This misguided initiative would have a terrible effect on US economic performance. Most foreign investors are attracted to America because of low taxes and financial privacy. If the IRS information exchange regulation is approved a substantial portion of this money will flee to competing institutions in other jurisdictions. At a minimum, it would drive several hundred $billion out of the country. Paradoxically, the resulting damage from this capital flight would far exceed the benefits from the president's tax cut. The Bush administration must understand that the United States' interests are not the same as high tax European nations' interests."

'The need to subject the IRS to the rule-of-law,' says the letter,' is particularly important because of a regulation proposed on January 17, 2001, in the waning days of the Clinton Administration. Regulation 126100-00, which would require the reporting of bank deposit interest paid to nonresident aliens, is a flagrant abuse of the regulatory process. If approved, it would impose significant damage on the U.S. economy by driving capital overseas. Our specific concerns include:

  • The proposed regulation flouts statutory language and congressional intent. On several occasions, lawmakers have visited the issue of how to treat the interest income earned by nonresident aliens. In every case, the
    desire to attract capital to the American economy led legislators to decide not to tax the income and not to require that the income be reported to foreign tax authorities.
  • The proposed regulation is not required to administer U.S. law. Interest income paid to nonresident aliens is not subject to tax. Other regulations and forms already ensure that citizens and/or resident aliens are not able
    to falsely claim nonresident alien status to benefit from this preferential tax status.
  • The proposed regulation is not required by tax treaties. The IRS openly admits that it wants to collect this data in order to provide the information to nations that have signed tax treaties with America. Tax treaties, however, only require the exchanging of information that is collected for purposes of domestic law enforcement. There is no obligation to impose additional regulatory burdens solely for the purpose of enforcing other nation's laws.
  • The proposed regulation would impose significant damage on the U.S. economy, but the IRS failed to perform any economic analysis or conduct any cost/benefit analysis. According to the universally negative public comment and testimony of the financial services industry, individual nonresident aliens have about $1 trillion deposited in U.S. financial institutions. Yet if this regulation is approved, a substantial portion of this money will
    flee to competing institutions in other jurisdictions.

'The Internal Revenue Service should not be above the law. The Office of Management and Budget has been given the responsibility to oversee regulations to ensure that the economy is not unduly harmed. The proposed regulation discussed above presents an ideal opportunity to restore necessary balance and oversight to the IRS.

'But this is not just a management issue. The proposed regulation has important budget implications. The likely withdrawal of several hundred billion dollars from the U.S. economy would have a deleterious impact on many financial institutions. Borrowers also would suffer. Families seeking mortgages, consumers seeking car loans, and businesses seeking money to create jobs and expand operations all would be adversely affected. This means less economic growth, which will reduce tax revenues and create additional demand for government programs.'

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