The Heritage Foundation
214 Massachusetts Avenue, NE
Washington, DC 20002-4999

September 10, 2002

The Honorable Paul O'Neill
Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue
Washington, DC 20220

Dear Secretary O'Neill,

Tax competition is a liberalizing force in the world economy. The mobility of resources -particularly capital - encourages politicians to lower tax rates and implement pro-growth tax reforms. This is why market-oriented organizations such as The Heritage Foundation are ardent opponents of tax harmonization initiatives like the OECD "harmful tax competition" initiative and the EU "savings tax directive." Simply stated, the United States has little to gain and much to lose if international bureaucracies impose automatic information-sharing requirements on jurisdictions that benefit from global capital flows.

I am hoping you can explain the U.S. position on two international tax issues. First, it has been reported that our government will not participate in the EU "savings tax directive." If true, this certainly would be good news. America should not join a cartel that is designed to double-tax capital income on an extra-territorial basis. Such a scheme is completely inconsistent with fundamental tax reform, a goal that you and I both share. Can you please let me know if the Administration has decided to reject this multilateral tax harmonization proposal?

The second issue involves the IRS's recent re-release of a Clinton-era regulation that would require American financial institutions to report deposit interest paid to nonresident aliens. This proposal contradicts existing law and therefore makes a mockery of Administration efforts to reign in regulatory excess. The information the IRS is seeking is not needed to enforce U.S. law, and the IRS also failed to perform the legally required cost-benefit analysis - something that would be most helpful since the regulation surely will drive capital out of the American economy. I hope you will sock withdrawal of this regulation, In any event, I am most in crested in your thoughts on this issue.

I look forward to your response on these two issues.

Edwin J. Feulner Ph.D.
President

[Handwritten note _ Paul: Can we persuade you to come to Heritage and talk about these issues? Hope so _ Ed]

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