I’m not a big fan of the Internal Revenue Service, but I try not to demonize the bureaucrats because politicians actually deserve most of the blame for America’s complex, unfair, and corrupt tax system. The IRS generally is in the unenviable position of simply trying to enforce very bad laws.
But sometimes the IRS runs amok and the agency deserves to be held in contempt by the American people
Let’s look at a grotesque example of IRS misbehavior. It deals with a seemingly arcane issue, but it has big implications for the US economy, the rule of law, and human rights.
On January 7, the tax-collection bureaucracy proposed a regulation that, if implemented, would force American financial institutions to put foreign tax law above US tax law. Banks would be required to report to the IRS any interest they pay to foreigners, but not so the US government can collect tax, but in order to let foreign governments tax this US-source income.
This isn’t the first time the IRS has tried to pull this stunt. At the very end of the Clinton years, the agency proposed a rule to do the same thing. But the bureaucrats were thwarted because of overwhelming opposition from Capitol Hill, the financial services industry, and public policy experts. There was near-unanimous agreement that it would be crazy to drive job-creating capital out of the US economy and there was also near-unanimous agreement that the IRS had no authority to impose a regulation that was completely inconsistent with the laws enacted by Congress.
But like a zombie, this IRS regulation has risen from the grave.
I’m not sure what is most upsetting about this proposed rule, but there are five serious flaws in the IRS’s back-door scheme to turn American banks into deputy tax collectors for foreign governments.
1. The IRS is flouting the law, using regulatory dictates to overturn laws enacted through the democratic process.
Ever since 1921, and most recently reconfirmed by legislation in 1976 and 1986, Congress specifically has chosen not to tax interest paid to non-resident foreigners. Lawmakers wanted to attract money to the U.S. economy.
Yet rogue IRS bureaucrats want to impose a regulation to overturn the outcome of the democratic process. Heck, if they really think they have that sort of power, why don’t they do us a favor and unilaterally junk the entire internal revenue code and give us a flat tax?
2. The IRS has failed to perform a cost-benefit analysis, as required by executive order 12866.
Issued by the Clinton Administration, this executive order requires that regulations be accompanied by “An assessment of the potential costs and benefits of the regulatory action” for any regulation that will, “Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”
Yet the IRS blithely asserts that this interest-reporting proposal is “not a significant regulatory action.” Amazing, we have trillions of dollars of foreign capital invested in our economy, perhaps $1 trillion of which is deposited in banks, and we know some of which definitely will be withdrawn if this regulation is implemented, but the bureaucrats unilaterally decided the regulation doesn’t require a cost-benefit analysis.
During a previous incarnation of this regulation, the IRS’s failure to comply with the rules led the Office of Advocacy at the Small Business Administration to denounce the tax-collection bureaucracy, stating that “…there is ample evidence that the impact of the regulation is significant and that a substantial number of small businesses will be impacted.”
3. The IRS is imposing a regulation that puts America’s economy at risk.
According to the Commerce Department, foreigners have invested more than $10 trillion in the U.S. economy.
And according to the Treasury Department, foreigners have more than $4 trillion in American banks and brokerage accounts.
We don’t know how much money will leave America if this regulation is implemented, but there are many financial centers – such as London, Hong Kong, Cayman, Singapore, Tokyo, Zurch, Luxembourg, Bermuda, and Panama – that would gladly welcome the additional investment if the IRS makes the American financial services sector less attractive.
4. The IRS is destabilizing America’s already shaky financial system.
Five years ago, when the banking industry was strong, the IRS regulation would have been bad news. Now, with many banks still weakened by the financial crisis, the regulation could be a death knell. Not only would it drive capital to banks in other nations, it also would impose a heavy regulatory burden.
How bad would it be? Commenting on an earlier version of the regulation, which only would have applied to deposits from 15 countries, the Chairman of the Federal Deposit Insurance Corporation warned that, “[a] shift of even a modest portion of these [nonresident alien] funds out of the U.S. banking system would certainly be termed a significant economic impact.” He also noted that potentially $1 trillion of deposits might be involved. And a study from the Mercatus Center at George Mason University estimated that $87 billion would leave the American economy. And remember, that estimate was based on a regulation that would have applied to just 15 nations, not the entire world.
So what happens if more banks fail? I guess the bureaucrats at the IRS would probably just shrug their shoulders and suggest another bailout.
5. The IRS is endangering the lives of foreigners who deposit funds in America because of persecution, discrimination, abuse, crime, and instability in their home countries.
If you’re from Mexico you don’t want to put money in local banks or declare it to the tax authorities. Corruption is rampant and that information might be sold to criminal gangs who then kidnap one of your children. If you’re from Venezuela, you have the same desire to have your money in the United States, but perhaps you’re more worried about persecution or expropriation by a brutal dictatorship.
There are people all over the world who have good reasons to protect their private financial information. Yet this regulation would put them and their families at risk. The only silver lining is that these people presumably will move their money to other nations. Good for them, bad for America.
Let’s wrap this up. Under current law, America is a safe haven for international investors. This is good news for foreigners, and good news for the American economy. That’s why it is so outrageous that the IRS, unilaterally and without legal justification, is trying to reverse 90 years of law for no other reason than to help foreign governments.
By the way, you can add your two cents by clicking on this link which will take you to the public comment page for this regulation. Don’t be bashful.
One last point. The Obama Administration says this regulation is part of a global effort to improve tax compliance. But unless Congress changes the law, the IRS is not responsible for helping foreign tax collectors squeeze more money out foreign taxpayers. Moreover, the White House has been grossly misleading about U.S. compliance issues (as this video illustrates), so their assertions lack credibility.
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[…] why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable […]
[…] why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable […]
[…] Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law. […]
[…] The IRS is seeking to abuse its regulatory power to overturn existing law. […]
[…] Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law. […]
[…] Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law. […]
[…] Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law. […]
[…] Mitchell explains: Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax …. Specifically, they would be required to report any interest they pay to accounts held by […]
[…] an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax …. Specifically, they would be required to report any interest they pay to accounts held by […]
[…] an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax …. Specifically, they would be required to report any interest they pay to accounts held by […]
[…] an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax …. Specifically, they would be required to report any interest they pay to accounts held by […]
[…] an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax …. Specifically, they would be required to report any interest they pay to accounts held by […]
This was one of the most interesting topics I ever read about.It was a great read,considering that I learned a lot of new things.
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[…] IRS certainly deserves lots of condemnation for its rogue actions, including a $200 fine for a taxpayer who supposedly underpaid his tax bill by 4 […]
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If you’re against this, then push for a repeal of FATCA, the US’ attempt to strong-arm foreign banks into extremely expensive reporting about US citizens’ accounts. The US can’t have it both ways.
If you don’t want US banks to have to report, then FATCA must go…straight to the trash heap.
[…] The IRS wants to spend money and limit our privacy in order to help foreign governments collect more tax money from Americans. […]
[…] we should give the President credit for chutzpah. Less than one month ago, his Administration proposes an IRS interest-reporting regulation that, in a best-case scenario, will drive tens of billions of dollars out of the U.S. economy. That […]
[…] we should give the President credit for chutzpah. Less than one month ago, his Administration proposes an IRS interest-reporting regulation that, in a best-case scenario, will drive tens of billions of dollars out of the U.S. economy. That […]
[…] we should give the President credit for chutzpah. Less than one month ago, his Administration proposes an IRS interest-reporting regulation that, in a best-case scenario, will drive tens of billions of dollars out of the U.S. economy. That […]
Yes, sir, of course. Thank you for asking.
I am organizing a list of blogs at sago.com. All your articles get linked back to your site. May I include your blog?
Robert
“The IRS generally is in the unenviable position of simply trying to enforce very bad laws.”
NO SALE.
This argument was put in its place at Nuremberg. And don’t try to claim that this is a false equivocation. Principles are principles, and you know it.
Under provisions of the Banking Reform Act, the IRS will have full access to your banking information anytime it wants without the bothersome necessity of a warrant. They are therefore likely willing to trade in banking information with other countries.
Don’t I remember reading that the IRS will directly withdraw our Obamacare insurance payments from our bank accounts, and that Healthcare Reform required the hiring of thousands of additional IRS agents?
This is an outcome of the last two G20 meetings and is being primarily driven by France and Germany. They are attempting to close down what they perceive as tax havens and this is one of the tools all member nations agreed to implement.
Non members such as Switzerland are being threatened with unified G20 financial sanctions if they don’t comply. This was always going to run into a brick wall in places like the US and it’s interesting to see the attempted bureaucratic end run getting stymied so quickly.
It will be interesting to see how France and Germany respond when the US backs out. Should embolden the Swiss no end as the whole thing is a toothless tiger without the Americans.
[…] The IRS Run Amok I’m not a big fan of the Internal Revenue Service, but I try not to demonize the bureaucrats because politicians […] […]
As noted above the IRS is doing this to get foreign governments to dsclose to the IRS American bank accounts overseas.
The treasury is not that oblivious to the effect of this policy but rather as a first stop towards capital controls in this country so American’s don’t pull their money out of the country. And with the idiot ideas and policies of this adminisitration anyone with money who hasn’t put money overseas is a fool.
The US is by far, the world’s largest tax haven. Why we would want to screw up that free cash flow is a mystery to me. I only want this haven status extended to US Persons as well.
A tax on income permits government to destroy financial privacy. If we taxed retail sales (like the Fair Tax proposal), then it wouldn’t matter where US citizens kept their money, nor how much they had. Clearly the present tax system is just as much about justifying snooping and exerting control as it is about raising revenue.
[…] From Dan Mitchell: “The IRS […]
[…] Mitchell has written up a nice little summary titled “The IRS Run Amok” that will give you a brief overview of the […]
You can think of all the reasons in the world why the IRS’s behaviour on the interest-reporting issue is destructive, but they don’t matter. The sole issue is that of whether they have the authority to make the banks do their bidding without the authorization of congress.
neither are the drug gangs who are entrepreneurially trying to make their illegal extortions earn money in the aboveground economy
Seriously, wouldn’t that be taxable as business income?
As for the many thousands who pursue drug money (runners, couriers, street-side vendors), wouldn’t those people be taxable as self-employed?
http://www.irs.gov/businesses/small/international/article/0,,id=97324,00.html
If you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to U.S. income tax, regardless of where you reside.
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I think we are the only country that does this. Taxed first overseas and then taxed again in the U.S. The U.S. tax code is an economic Berlin Wall intended to keep Americans, or at least their incomes, from leaving the country.
Hmmm… I think you are missing the larger picture here. I don’t disagree that the IRS should not do this, but the real reason is this. Most of the tax treaties are based on reciprocity. So, what the IRS is looking to do is to leverage this into a way to get foreign banks to report information on US citizens, so they can make sure they collect the taxes due. Without these regs, it ain’t gonna happen. Unless we report on foreign citizens then the foreign countries have no reason to force their banks to report on US citizens, i.e. unless it’s reciprocal, no dice. The IRS is being disingenuous if they aren’t being upfront about this. I presume if they were, the objections would be all the greater.
I wonder if this is just fecklessness-as-usual by the administration, or if some politicians and/or senior bureaucrats are being paid off–and by who.
Dear Mr. Mitchell: Point 5 cuts both ways. If the persecuted Venezualan’s American interest earnings aren’t reported, neither are the drug gangs who are entrepreneurially trying to make their illegal extortions earn money in the aboveground economy.
As for point 1, I think it misses fire. Do you mean that if good old Timmy the Tax Cheat knew what the IRS bureaucrats, his subordinates, were doing, he’d stop their shenanigans at once? It is true, the thought of Timmy trying to order the IRS Commissioner to do something, even while the Commish thumbs through Timmy’s tax returns saying “Mighty interesting returns you got here, Timmy my boy,” is worth a snicker, in this case, the IRS bureaucrats and Timmy’s interests are running in the same direction: more power. This is a common phenomenon in The One’s gang, e.g. the Enviornmental Protection Agency’s declaration that we can regulate carbon dioxide emissions as a pollutant. Law? What do we care for law?
The rest of your points are correct. This notion should be heaved overboard at once. Will the House be able to stop it, especially since the Supreme Court has said the legislative veto is unconstitional? Stay tuned.
Sincerely yours,
Gregory Koster
You really need to get a copy of Income Tax: Shattering the Myths from http://incometaxtruth.com
It details what the law says, what the courts have written, and what Congress has said about the proper application of the Subtitle A Income Tax in America. What has happened and is happening in America vs. what the law says are two entirely different worlds.
Why is the White House encouraging the IRS to help DESTROY the US Economy? This is simply outrageous and must be stopped by Congress NOW.
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