Center for Freedom and Prosperity
For Immediate Release
Thursday, April 15, 2004
Independent Study Says IRS Regulation Will
Drive $87 Billion Out of U.S. Banks and Raise
Interest Rates; Report also Confirms that
Agency Abused Regulatory Process
April 15, 2004 (Washington, DC) – The Internal Revenue Services' (IRA) proposed interest reporting regulation (REG-133254-02) will cause significant and
measurable damage to the U.S. economy. This is the finding of a study on the economic consequences of the proposed IRS rule completed by Dr. Jay Cochran of
George Mason University's Mercatus Center. The 15-page report, entitled "An Economic Analysis
of the Proposed IRS Rules Governing the Reporting of Deposit Interest Paid to Nonresident Aliens," estimates that more than $87 billion of capital will be withdrawn from US financial
institutions if the regulation is finalized. The study also warns that interest rates will rise and that the regulation will have an adverse effect on investment and the value of the dollar.
Andrew F. Quinlan, President of the Center for Freedom and Prosperity, welcomed the
report, stating, "The Mercatus study demonstrates that the IRS interest reporting regulation could have a severe impact on the US economy. This analysis highlights the reasons why the misguided regulation should be
House of Representatives Small Business Committee Chairman Congressman Don Manzullo, an
outspoken critic of the proposed rule, said, "Capital is the life-blood of small business, which is why I strongly oppose the IRS interest-reporting regulation. The Mercatus study provides additional evidence that
this Clinton-era scheme will cause capital flight if it is ever implemented. As Chairman of the Small Business Committee, I once again call on the IRS to withdraw this burdensome regulation."
Other experts also lauded the Mercatus study. Daniel Mitchell of the Heritage Foundation noted, "Dr. Cochran's study should be the final nail in the coffin for the IRS's ideological scheme. I cannot imagine that the White House will allow this misguided proposal to move forward." Veronique de Rugy of the American Enterprise Institute commented, "American banks lost more than $40 billion on an annualized basis in the first quarter of 2001 after the regulation was first announced. The Mercatus report indicates that the regulation will cause even more damage if it is ever finalized."
The IRS interest-reporting regulation initially was proposed during the final days of the Clinton Administration, and was cosmetically modified and reintroduced in July 2002. The rule has
generated an extraordinary level of opposition, with 100 lawmakers, including 18 Senators and
82 Congressmen from 39 states, two federal agencies (FDIC and Office of Advocacy of the SBA), every major financial industry association, and 40 Public Policy organizations denouncing the proposal.
Link to the study:
Selected Findings from the Study:
- The proposed rule will generate substantial, negative economic consequences of more than $100 million annually, and thus clearly qualifies as a significant regulatory action as defined by
Executive Order 12866.
- Potential to trigger a deposit outflow from U.S. depositories of more than $87 billion, as NRA depositors withdraw funds from the U.S. to secure alternatives better aligned with their privacy,
financial, and other preferences.
- Targeted depositors are more likely to move funds to non-U.S. and non-European depositories.
- A reduction in the U.S. deposit base is likely to lead to increases in U.S. interest rates.
- It is also possible that NRA depositors from countries not directly affected by the rule may also withdraw funds from the U.S. in anticipation of a wider application of the rule to other
countries in the future.
Link to the study:
CF&P's Dedicated IRS Interest Reporting Regulation Web Page:
Complete List of Opposition to Proposed IRS Rule:
For additional comments:
Andrew Quinlan can be reached at 202-285-0244, firstname.lastname@example.org
Dan Mitchell can be reached at 202-608-6224, email@example.com
Veronique de Rugy can be reached at 202-862-5800, firstname.lastname@example.org
Center for Freedom and Prosperity Foundation
P.O. Box 10882
Alexandria, Virginia 22310