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CF&P Press Release,  April 26, 2004

Center for Freedom and Prosperity

For Immediate Release
Monday, April 26, 2004
202-285-0244
www.freedomandprosperity.org

House Leadership Urges Permanent Withdrawal of "Misguided, Clinton-Era Regulation"

DeLay, Blunt, Pryce, and Cantor say proposed
regulation is harmful to current economic recovery
and undermines tax reform agenda.

April 26, 2004 (Washington, DC) House Majority Leader Tom DeLay, Majority Whip Roy Blunt, Republican Conference Chairman Deborah Pryce and Chief Deputy Majority Whip Eric Cantor urged Treasury Secretary John Snow "to permanently withdraw" the Internal Revenue Service's interest reporting regulation (REG 133254-02). The leadership members explain that the "misguided, Clinon-era regulation" is "burdensome and unnecessary but also potentially harmful to the current economic recovery and future efforts at tax reform."

Andrew F. Quinlan, president of the Center for Freedom and Prosperity, stated, "We hope Secretary Snow and the others at Treasury take this opposition seriously.  President Bush's biggest supporters in Congress want this Clinton-era regulation to die a well-deserved death."

The IRS interest-reporting regulation was first proposed three days before President Clinton left office in January 2001. It would require banks to report interest paid to nonresident aliens, even though the interest on such deposits is not subject to U.S. taxes. Many believe that this would harm America's economy and undermine the competitiveness of U.S. financial institutions.

Dan Mitchell of the Heritage Foundation praised the Majority Leader for spearheading the effort, noting, "Congressman DeLay is fighting to defend America's economic interests, and also working to make sure that unelected bureaucrats are not allowed to overturn existing laws designed to attract capital to the US economy."

Though initially proposed during the final days of the Clinton Administration, the IRS interest-reporting regulation was cosmetically modified and reintroduced in July 2002. The rule has generated an extraordinary level of opposition, with 103 lawmakers, including 18 senators and 85 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 (see below for more comments on the Leadership letter from these public policy groups).

Text of the full letter can be found at the end of this release and at the following web link:
http://www.freedomandprosperity.org/ltr/delay-irs/delay-irs.shtml

PDF copy of letter:
http://www.freedomandprosperity.org/ltr/delay-irs/delay-irs.pdf

A few excerpts from the leadership letter:

Burdensome and unnecessary

"The IRS estimates that this regulation would force affected U.S. depository institution to spend 500 man-hours annually on compliance.  Industry estimates are even higher. Yet, because interest income earned on non-resident alien deposits has always been and continues to be exempt from U.S. taxation, it is not readily apparent what enforcement or tax collection objective is served by requiring this income to be reported to the IRS."

Harmful to Current Economic Recovery

"As you are well aware, the decision not to tax non-resident alien deposits has been a conscious one over the past 80 years. On every occasion that Congress has examined this issue, it has decided that the benefits from attracting capital to the U.S. exceed the revenue that would result from taxing that income. Certainly, the benefits of attracting capital to the U.S. also exceed any benefit that would result from "exchanging" this information with other nations. Now is certainly not the time to risk significant capital flight."

Future Efforts at Tax Reform

"Finally, the proposed regulation is contrary to fundamental reform of our tax system. We are currently considering several changes to our corporate income tax system that will create a more territorial system, in which income can be taxed only by the government of the country in which it is earned. By exchanging information about non-resident alien deposits with other countries so that they may impose a tax on this income, the IRS would be moving in exactly the opposite direction from fundamental tax reform."

 

Comments from several Coalition for Tax Competition members:

Veronique de Rugy, Resident Fellow, American Enterprise Institute

    "The Clinton-era IRS regulation is a direct threat to America's economy. The US has benefited immensely from international capital flows. Forcing US banks to act as deputy tax collectors for foreign governments would have an adverse impact on economic growth and competitiveness. The regulation should have been withdrawn three years ago, Hopefully the leadership letter will trigger this overdue action."

Grover Norquest, President, Americans for Tax Reform

    "Americans for Tax Reform joins House Majority Leader Tom DeLay in calling for the withdrawal of the proposed IRS regulation REG-133254-02. The proposed regulation undermines the competitiveness of United States' banks and will only benefit foreign governments, like France and Germany, in their efforts to tax income earned inside the U.S. The proposed regulation is bad tax policy, bad regulatory policy, and bad economic policy. Americans for Tax Reform joins with Majority Leader DeLay and other House Leaders in asking Secretary Snow to repeal the regulation and protect and defend America's economic interests."

Lawrence A. Hunter, Chief Economist, Empower America

    "I applaud the House leaders for their opposition to this devastating regulation.  This proposed IRS rule is clearly contrary to America's national interests. Residents of other nations view the United States as a safe haven for their savings. This investment in America helps fund job creation and economic growth, benefiting U.S. workers and entrepreneurs. But if this regulation is implemented, a substantial portion of this liquid capital will flee the United States."

Paul J. Gessing, Director of Government Affairs, National Taxpayers Union

    "International tax competition is the single most important check on governments and international bureaucracies like the UN in their never-ending efforts to raise taxes and increase control over people and capital as they participate in the global economy. The proposed IRS regulation is a misguided attempt to greatly expand control over international investment -- one that will drive $87 billion out of U.S. banks, thus harming America's economy and its worldwide competitiveness on taxes."

Tom Schatz, President, Council for Citizens Against Government Waste

    "The proposed Internal Revenue Service nonresident alien interest reporting regulation is an unnecessary expansion of bureaucracy and a classic example of government waste.  Taxpayers will be burdened by the cost to implement the regulation and its hindrance to fundamental tax reform."

Stephen J. Entin, President and Executive Director, Institute for Research on the Economics of Taxation (IRET)

    "The House leadership is right to call for the withdrawal of the proposed IRS interest information reporting requirement. The regulation is of benefit only to foreign, mainly European, tax officials, and would harm the United States by driving hundreds of billions of dollars of foreign capital out of the country. There is no good time to encourage a capital flight and depress investment in the United States, but to do so when we are trying to fund large budget and current account deficits is the height of folly."

Daniel Clifton, Executive Director, American Shareholders Association

    "American shareholders applaud Majority Leader Tom Delay and the House of Representatives leadership team for recognizing the negative economic effects of the proposed IRS interest reporting regulation. The letter further signifies growing opposition to the proposed rule and with the House leadership fully against the proposal it is time for Treasury to see the hand writing on the wall and withdraw the job killing regulation immediately."

Karen Kerrigan, Chairman, Small Business Survival Committee

    "SBSC commends Tom Delay and the entire House GOP leadership for stressing the importance of this issue to Treasury Secretary John Snow.  As they so plainly state in their letter, "now is certainly not the time to risk significant capital flight" from the U.S. From a small business perspective, I couldn't agree more.  I join the GOP leadership and ask Treasury Snow to take immediate action."

Terrence Scanlon, President, Capital Research Center

    "It's unwise to hurt the U.S. economy with bad IRS regulatory policy.  We should be attracting, not discouraging capital into U.S. banks and markets."

James L. Martin, President, 60 Plus Association

    The 60 Plus Association lauds the leadership of House Majority Leader Tom DeLay and have joined with him in support of a stronger American economy.  Driving capital out of the United States and away from our economy is wrong and of all the segments in society, senior citizens would suffer greatest. At a time when reforming and simplifying how we tax income, IRS regulation (REG-133254-02) seems ill timed and ill considered.

Additional Information:

CF&P's Dedicated IRS Interest Reporting Regulation Web Page:
http://www.freedomandprosperity.org/update/irsreg/irsreg.shtml

Complete List of Opposition to Proposed IRS Rule
http://www.freedomandprosperity.org/against-irsreg.pdf

Link to the George Mason University's Mercatus Center study on
the harmful effects of the proposed IRS rule:
http://www.mercatus.org/pdf/materials/635.pdf

 

Full text of Majority Leader Tom DeLay's letter:

April 22, 2004

The Honorable John Snow
Secretary of the Treasury
Department of the Treasury
Room 3419
1500 Pennsylvania Avenue
Washington, DC 20220

Dear Secretary Snow,

We are writing to express our concerns about a proposed Internal Revenue Service regulation (REG-133254-02) that would force U.S. depository institutions to report deposit interest payments made to certain nonresident aliens. Not only does this regulation seem burdensome and unnecessary but also potentially harmful to the current economic recovery and future efforts at tax reform.

The IRS estimates that this regulation would force affected U.S. depository institution to spend 500 man-hours annually on compliance.  Industry estimates are even higher. Yet, because interest income earned on non-resident alien deposits has always been and continues to be exempt from U.S. taxation, it is not readily apparent what enforcement or tax collection objective is served by requiring this income to be reported to the IRS.

As you are well aware, the decision not to tax non-resident alien deposits has been a conscious one over the past 80 years. On every occasion that Congress has examined this issue, it has decided that the benefits from attracting capital to the U.S. exceed the revenue that would result from taxing that income. Certainly, the benefits of attracting capital to the U.S. also exceed any benefit that would result from "exchanging" this information with other nations. Now is certainly not the time to risk significant capital flight.

Finally, the proposed regulation is contrary to fundamental reform of our tax system.  We are currently considering several changes to our corporate income tax system that will create a more territorial system, in which income can be taxed only by the government of the country in which it is earned. By exchanging information about non-resident alien deposits with other countries so that they may impose a tax on this income, the IRS would be moving in exactly the opposite direction from fundamental tax reform.

We thank you for your time on this matter and urge you to permanently withdraw this misguided, Clinton-era regulation.

Sincerely,

Tom DeLay
[Majority Leader]

Roy Blunt
[Majority Whip]

Deborah Pryce
[Republican Conference Chairman]

Eric Cantor
[Chief Deputy Majority Whip]

 

For additional comments:

Andrew Quinlan can be reached at 202-285-0244, quinlan@freedomandprosperity.org
Dan Mitchell can be reached at 202-608-6224,
dan.mitchell@heritage.org
Veronique de Rugy can be reached at 202-862-5800,
vderugy@aei.org

_____________________________________

Center for Freedom and Prosperity Foundation
P.O. Box 10882
Alexandria, Virginia 22310
Phone: 202-285-0244
www.freedomandprosperity.org
cf&p@freedomandprosperity.org

 

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