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Center for
Freedom and Prosperity
 P.O. Box 10882
Alexandria, Virginia
22310-9998
202-285-0244

Competitive Enterprise Institute

September 26, 2003

The Honorable John W. Snow
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220

Dear Secretary Snow:

I write to underscore CEI's strong opposition to the Internal Revenue Service's proposal to require U.S. banks to report interest on deposits earned by non-resident aliens (REG133254-02). The proposal would have a devastating impact on foreign investment in the United States. This is a point we discussed in our meeting in your offices.

I understand that this proposal is opposed by Treasury and the IRS. However, the fact that the proposal has not yet been finally and formally withdrawn has been used by the OECD to argue that the United States actually favors such reporting requirements. I believe it is important to clarify the U.S. position. One reason is that the OECD is expected to meet with a number of low-tax jurisdictions in Ottawa in October. Thus, I urge that you make clear to the U.S. representative to OECD's Fiscal Affairs Committee (an official form the Treasury Department) to clarify U.S. opposition to this rule. As you know, this rule is inconsistent with President Bush's support for low-tax pro-growth economic policies, and support for healthy tax competition, of which the United States is a major beneficiary.

Strong economic policy arguments support the final withdrawal of the rule. There is an obvious link between tax treatment of foreign investors in the United States and their willingness to invest here. President Reagan's tax cuts in 1981 mused increased capital inflows during the 1980s by increasing the after-tax profitability of U.S. investments. U.S. businesses deployed the increased capital available to them to buy more efficient equipment, raising productivity. Workers became better off as wages and benefits rose. Recognizing this, U.S. legislators have maintained tax policies that favor foreign investors. The proposed IRS rules would result in the withdrawal of foreign investment from the United States, reducing the capital available for economic growth.

It is perhaps understandable that IRS policymakers feel sympathy for their EU colleagues, who must chase capital around the world that has fled theft exorbitant tax regimes. But it is vitally important that tax policy be good public policy, not merely that it make the enforcement tasks easier. The correct first response to tax evasion for high-tax EU nations is to lower taxes. Tax compliance is highest in low-tax countries such as Switzerland, New Zealand, and Ireland. Lower taxes are likely to result in higher revenues for the high-tax EU nations due to increased growth. In 1997, Switzerland raised the same amount of tax money per capita as Sweden, even though the Swedish tax rate, at 61.5 percent, is double that of Switzerland. And reducing tax rates in Ireland changed the government's deficit, at15 percent of GDP in 1980, to a surplus by 1998.

The EU nations' own policies have caused the problems they are now experiencing with tax compliance, and it is not the responsibility of the United States to bear the cost of correcting the problem. I urge you to formally withdraw the IRS role and clarify the U.S. position for the benefit of the OECD.

Sincerely,

Fred L. Smith Jr.
President

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