Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).
What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.
So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?
The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.
Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.
Both Senators from Texas also have announced their opposition, and the entire Florida congressional delegation came out against the IRS’s regulatory overreach.
And now we have two more important voices against the IRS’s rogue regulation.
The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.
If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital. I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose. Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad. …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements. These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages. Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.
But criticism is not limited to Capitol Hill. The Center for Freedom and Prosperity has spearheaded opposition from think tanks, taxpayer organizations, and public policy groups.
And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.
Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.
This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.
Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.