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The Hill

April 10, 2002

IRS should not play the global whistleblower

By Rep. Dave Weldon

The Internal Revenue Service (IRS) might be getting a new job. Along with ensuring Americans pay their taxes on time and don't cheat on the difficult forms, the IRS could soon be "taxed" with adding a new item to its job description.

If a little-known Clinton-Bush IRS regulation is allowed to be implemented, the IRS could become a global "whistle-blower" at the expense of the American economy - driving as much as one trillion dollars out of our economy. U.S. bank failures, widespread unemployment and economic depression could well become part of the new landscape.

How is this possible, you ask? Simple. Three days before President Clinton left office, the Treasury Department proposed an IRS regulation that would mandate that financial institutions across the country report to the government the amount of interest income paid to non-resident foreigners with deposits in America. Why, you ask, especially since interest on foreign-owned accounts is tax exempt? The regulation is not designed to help our government collect any taxes. Instead, the IRS and its friends in the administration are putting the U.S. economy at risk so they can help foreign governments collect their tax.

That's right. Some administration officials claim that by doing this we can achieve better "harmonization" of tax policy with our trading partners. But tax harmonization only makes sense for high-tax countries, like France, which are suffering from capital loss. Compared to European welfare states, the United States is a low-tax nation. We attract capital from around the world because we do not tax interest earned on nonresident alien deposits in U.S. banks.

But our ability to attract foreign capital will be devastated if this regulation goes into effect. People can easily take their money. Florida banks are already reporting the loss of some of their overseas clients. They are taking their cash out of the United States and depositing it in Switzerland and Panama. Once lost, it is unlikely these deposits will return.

Officials, like Treasury Department Assistant Secretary Mark Weinberger, admit that we will suffer from capital flight, but argue that this damage will be offset since other nations somehow will feel obliged to report on any Americans investing in their countries. This assumption has some serious flaws and the treasury has never done a cost-benefit analysis of this claim.

Capital leaving the United States deprives our private sector of the funds needed to create jobs and generate wealth. In simple terms, this means less money for loans to start small businesses, build schools and homes, and keep our economy moving in the right direction.

Given our precarious economic state, it is inconceivable that Treasury Secretary Paul O'Neill and the Bush administration would even consider a regulation to drive capital out of the United States, let alone give the IRS such an expanded global role. As many as 120,000 jobs could be lost in the first year alone in Florida as a result of this regulation, according to a recent study by The Washington Economics Group. This is a prescription for economic disaster.

For more than 80 years our government has had a policy that encourages foreign nationals to deposit their capital here, and for obvious reasons. This money has played a vital role in stimulating our economy and creating jobs. These bank deposits are usually taken in and then loaned out to fund real estate development, small business expansions and other productive enterprises in many communities across the United States.

The money loaned to these businesses is often paid to construction firms, or used for the purchase of new equipment and to pay salaries. The money then flows through our economy, creating prosperity in its wake.

For more than a year, this rule has hung out there like the sword of Damocles ready to swoop. It's time for O'Neill and the White House to do the right thing and kill this harmful regulation for the good of our economy and our country. Besides, the IRS already has more than it can handle.

Rep. Weldon, a Republican from Florida, is a member of the Financial Services Committee.

 

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