December 3, 2002
The Honorable Paul O'Neill
Secretary of the Treasury
Department of Treasury
1500 Pennsylvania Avenue
Washington, DC 20220
Dear Secretary O'Neill,
We want to express our concerns about the Internal Revenue Service's proposed bank deposit interest reporting regulation (REG-133254-02). Based on a proposal that originally was put forth in the final days of the
previous Administration, this regulation would force banks to tell the IRS the amount of interest paid to non-resident aliens even though the information is not needed to enforce U.S. tax law.
troubled about the policy implications of this proposal, and we also have serious reservations about the IRS's potential misuse of the regulatory process. To address these concerns, we ask that the regulation be
withdrawn and subject to further review and analysis.
From a policy perspective, we are concerned that the regulation will undermine the competitiveness of U.S. financial institutions and drive capital out of
the American economy. This might be a worthwhile price to pay in the pursuit of good policy, but this regulation undermines the long-run tax reform goals that we all share. More specifically:
is inconsistent with good tax policy and will hinder the President's tax reform agenda. Good tax policy must encourage investment in capital markets—particularly American capital markets.
This regulation, by contrast, seeks to help foreign governments double-tax income that is earned inside America's national borders, thus discouraging foreign investors from investing in the U.S. market.
•The proposed rule will drive capital to other jurisdictions. American financial institutions have attracted about one trillion dollars from overseas, and a substantial share of that job-creating capital will
leave our economy if the Service compels U.S. banks to compromise the interests of their depositors. This means less money available for car loans, home mortgages, and small business expansion. A regulation of this
type is particularly damaging to a financial system recovering from an economic downturn.
We are equally concerned that the IRS has not followed proper procedures. In their zeal to pursue a proposal developed
at the behest of foreign governments, it appears that the Service is abusing the regulatory process by flouting legal and procedural requirements.
•Executive branch agencies and departments are supposed to
issue regulations that implement the laws enacted by Congress. But since the United States government does not tax bank deposit interest paid to nonresident aliens, there is no need to collect this information.
Indeed, the IRS even admits that the purpose of the proposed regulation is to help foreign governments tax U.S.-source income. It is not the purpose of the U.S. tax structure to promote the taxation interests
of foreign governments over investment in American markets and American businesses.
•On several occasions, the U.S. Congress has examined the tax treatment of indirect foreign investment in the American
economy. In every instance, the desire to attract capital has led lawmakers to decide not to tax bank deposit interest paid to nonresident aliens. Congress also has repeatedly decided not to require the reporting of
this income. The proposed IRS regulation, however, seeks to overturn this outcome of the democratic process.
•The IRS is ignoring laws requiring cost benefit analysis. By incorrectly declaring most of its
regulations either "interpretative" within the meaning of the Administrative Procedure Act or not "major" within the meaning of Executive Order 12866, the Internal Revenue Service has effectively
exempted itself from regulatory oversight. Yet many IRS regulations – particularly the proposed bank deposit interest reporting rule – impose a significant cost on the economy and should be subject to the regulatory
We have been very generous in response to IRS budget requests, but these additional resources were supposed to help the Service enforce U.S. tax law, not to promulgate regulations that
disregard the law and hinder the effort to reform the tax code. We believe that American homebuyers, small business owners, and families should have access to capital, and therefore request that this misguided
regulation be withdrawn for further review and analysis.
Akin, W. Todd
Otter, C.L. "Butch"
Forbes, J. Randy
Donald A. Manzullo
cc:Glenn Hubbard, Chairman of the Council of Economic Advisers
Larry Lindsey, Chairman of the National Economic Council