[Link to Signed PDF Copy]
February 24, 2003
The Honorable John W. Snow
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Snow,
As you may know, the Internal Revenue Service has proposed a highly contentious regulation that, if implemented, would divert foreign capital from the U.S. economy.
Entitled "Guidance on Reporting of Deposit Interest Paid to Non-Resident Aliens," this rule (REG-133254-02) would profoundly change U.S. tax and economic policy by requiring all U.S. financial institutions to report interest paid to non-resident aliens. It would do so in order to make financial information routinely available to foreign tax collectors. In other words, the rule requires U.S. banks to assist foreign tax collectors tax interest on deposits made in the U.S.
The Federal Deposit Insurance Corporation, the Conference on State Bank Supervisors and the American Bankers Association and others have all expressed grave concerns that the rule will drive capital from the
U.S. and threaten the soundness and security of the U.S. banking system.
The US intentionally does not tax bank deposit interest, capital gains or portfolio interest paid to foreigners precisely because it has instituted a policy of attracting foreign investment. This proposal would reverse that policy by bureaucratic fiat and drive foreign capital from our shores.
How much capital flight would occur is unknown. Despite the serious concern, the Treasury has not conducted the required cost-benefit analysis.
Former senior Treasury official Stephen J. Entin testified at the IRS hearing that private foreign investment here is $8 trillion, of which more than $1 trillion is in the U.S. banking system. Entin testified that the rule may entail a flight from the dollar, which would either force the Federal Reserve to raise interest rates to protect the currency, or result in a falling dollar and higher prices for imports and import-competing products. Every witness at the recent administrative hearing on the rule opposed the rule, including the U.S. Small Business Administration and many other groups who unanimously voiced strong concern that the Internal Revenue Service has skirted fundamental procedural requirements.
Weakening the U.S. economy, and providing foreign governments with financial information on U.S. investors, will stymie, not promote, anti-terrorism efforts.
Moreover, experts opine the rule will ensure that deposits are diverted from the U.S., where it is monitored and subject to seizure, to Hong Kong and elsewhere, where they cannot be monitored.
I request that
you review this misguided regulation and I urge you to officially – and permanently – withdraw the proposed rule.
Member of Congress
Cc: Vice President Richard Cheney
CEA Chairman Glenn Hubbard
NEC Chairman Steve Friedman
OMB Director Mitch Daniels
White House Deputy Chief of Staff Josh Bolten