Contact Information:

Center for
Freedom and Prosperity
 P.O. Box 10882
Alexandria, Virginia

The Heritage Foundation

February 28, 2003

The Honorable John Snow
Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue
Washington, DC 20220

Dear John:

Congratulations again on your appointment and confirmation! The President has a very positive agenda, and it is vitally important for him to have a Treasury Secretary who shares his belief in limited government, tax reform, and individual freedom. My colleagues and I at The Heritage Foundation are excited with the opportunity to work closely with you to make America's tax code more competitive.

The main purpose of this letter, however, is to seek the permanent and immediate withdrawal of a Clinton-era regulation (REG-133254-02) that would undermine existing law by compelling banks to report the interest they pay to nonresident aliens. This regulation should have been withdrawn two years ago. The Office of Tax Policy, however, has inexplicably decided to battle on behalf of the proposed regulation.

I think you will agree that the proposed regulation is bad policy for a number of reasons:

l) it violates congressional intent, clearly expressed several times over the last 80 years, to attract funds to America's financial system; 2) it would drive capital out of the U.S.banking system, thus explaining why both the American Bankers Association and the Federal Deposit Insurance Corporation oppose the regulation; and 3) it is based on the assumptions that income that is saved should be subject to double-taxation and that other countries should be able to tax income earned in America -- policies clearly contrary to the principles we both endorsed during our service on the National Commission for Economic Growth and Tax Reform.

It is difficult to estimate the economic damage that this regulation might cause - in part because the IRS failed to perform a required cost-benefit analysis. Any loss of capital will undermine the competitiveness of U.S. banks, and I fear the outflow will be significant. In the first quarter of 2001, for instance, $40 billion of time deposits (annualized basis) fled the country,presumably a reaction to the January 17, 2001 announcement of the original Clinton version of the regulation.
It would be self-defeating to implement an IRS rule that undermines the pro-growth impact of the President's tax plan. I know that you and the Bush Administration want to attract jobs and capital to the U.S. economy not drive them away, which is why I implore you to permanently withdraw the proposed regulation.

As you review this issue, I also urge you to seek counsel from all divisions of your Department,and from our experts here.


Edwin J. Feulner, Ph.D.

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