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CF&P E-Mail Update, March 11, 2003

Center for Freedom and Prosperity's E-mail Update

1) Washington Update

2) Congressional Opposition Grows to Proposed IRS Interest Reporting Rule

3) Quinlan: The IRS vs. Foreign Investment

4) Mitchell:  Testimony before Joint Economic Committee on the 2003 Economic Report of the President

5) Tax Harmonization Will Cripple Low-Tax Jurisdictions

6) Joel Mowbray:  Corporate Flight

7) Cato:  International Tax Competition Recommendations for the 108th Congress

8) Engen & Hassett: Does the U.S. Corporate Tax Have a Future?

9) UPI reports on Center's study of IRS Interest Reporting Rule

10) House Chairman Will Hold Hearings On Interest Reporting Issue

11) EU Savings Tax Directive Still Under Fire

12) David Burton: Towards a Global Tax Cartel

13) Richard Rahn:  The economic ruin of Europe

14) Veronique de Rugy: Tax Rates, Tax Revenue, High Taxes, and High Budget Deficits

15) CF&P Clips


1) Washington Update

We just completed a busy three weeks on Capitol Hill.  We met with more than four-dozen Congressional offices and we discussed several key issues: 1) the IRS's proposed interest reporting regulation, 2) the WTO/FSC/ETI problem with the EU, 3) the EU Savings Tax Directive, 4) corporate inversion and fiscal protectionism, and 5) the Bush economic growth package. We hope to see progress in the right direction on all these issues this year.

This week's update includes a paper I wrote on how the IRS is scaring away foreign investment, Dan Mitchell's critique of international tax harmonization schemes before Congress' Joint Economic Committee, and an eye-opening study that shows how tax harmonization policies will cripple small, low-tax jurisdictions.  Further material includes a revealing article in National Review Online on the corporate inversion fight, articles on the efforts to create a new EU Savings Tax Directive, and several articles by Cato's Veronique de Rugy on cutting taxes and economic growth and a primer on international tax competition that Cato included in a Handbook for Members of Congress.

Best regards, AQ


2) Congressional Opposition Grows to Proposed IRS Interest Reporting Rule

Congressman Spencer Bachus (AL), Chairman of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit, sent a strong letter to Treasury Secretary Snow urging permanent withdrawal of the IRS's nonresident alien interest reporting regulation. Mr. Bachus is the 14th Member of the House Financial Services Committee to object to the IRS regulation, joining, among others, Chairman Michael Oxley (OH) and two Democratic Members -- Melvin L. Watt (NC) & Gregory W. Meeks (NY).  In total, 38 House members and eight Senators have objected to the proposed rule, a remarkably large display of opposition.

Senators Sam Brownback (KS), Mike Crapo (ID), John Ensign (NV), James Inhofe (OK), and Gordon Smith (OR) also joined the opposition to the proposed rule increasing the total to eight U.S. Senators who have spoken out against the IRS's proposed interest reporting rule. (more on the IRS regulation later in the update)

Links to the new Congressional letters:

Financial Services Subcommittee on Financial Institutions and Consumer Credit Chairman Spencer Bachus

U.S. Senator Sam Brownback

U.S. Senator Mike Crapo

U.S. Senator John Ensign

U.S. Senator James M. Inhofe

U.S. Senator Gordon H. Smith

Link to all Congressional letters -- 8 Senators and 38 House Members:

The Center's Dedicated IRS Interest Reporting Regulation Web Page

News Clips:

March 6, 2003,, More Congressmen Attack IRS Interest-Reporting Proposals

February 21, 2003,, by Mike Godfrey, More US Senators Criticize IRS Interest-Reporting Rules


3) Quinlan:  The IRS vs. Foreign Investment

[Excerpt from NCPA Brief Analysis]

"Foreigners have invested more than $1 trillion in capital in the United States since 1984, when Congress and the Reagan administration established a policy of not taxing interest they earn on U.S. bank deposits. This influx of capital will be jeopardized if a proposed Internal Revenue Service rule is implemented. The regulation (133254-02) would require banks to report interest paid to nonresident aliens, although their deposits are not subject to U.S. taxes. This would harm America's economy and undermine the competitiveness of U.S. financial institutions. The price is high, especially given that the IRS does not have the authority to issue this rule . . .

"The proposed IRS regulation . . . is inconsistent with President Bush's tax reform agenda.  And it will hurt the U.S. economy by reducing the capital available for workers, consumers, homeowners and entrepreneurs.

 "The rule would become effective following its final publication in the Federal Register. Instead, it should be withdrawn by the Treasury Department." Link to full brief below:

March 5, 2003, National Center for Policy Analysis: Brief Analysis No. 431, by Andrew F. Quinlan, The IRS vs. Foreign Investment


4) Mitchell: Testimony before Joint Economic Committee on the 2003 Economic Report of the President

The Heritage Foundation's Dan Mitchell criticized international tax harmonization schemes when he testified recently to the Joint Economic Committee. Much of Mitchell's testimony focused on the Bush Administration's tax reform agenda, but he also took the opportunity to explain how tax harmonization policies such as information exchange would hinder the efficient use of capital. Tax harmonization also would enable governments to impose oppressive tax rates, further harming global economic performance.

February 26, 2003, Daniel Mitchell, Testimony before Joint Economic Committee on the 2003 Economic Report of the President


5) Tax Harmonization Will Cripple Low-Tax Jurisdictions

It comes with a hefty price tag, but some experts have calculated that offshore sectors will be devastated if OECD and EU tax harmonization schemes are successful. Policy makers in low-tax jurisdictions may want to avail themselves of this information to understand why it would be economic suicide to acquiesce to Paris and Brussels. Link to article on report and a link to the report below:

March 5, 2003,, by Amanda Banks, Report Warns Over Impact Of Savings Tax Directive On Offshore Centres

February 19, 2003, Datamonitor, Opportunities in onshore/offshore asset shifts ummary.asp?pid=BFFS0199

Additional articles:

March 9, 2003, Reuters, By Jim Loney, Blacklists Hurt Caribbean Financial Sector


6) Joel Mowbray: Corporate Flight

The anti-business left continues to demagogue against corporate inversions, even though they protect the interests of workers and shareholders. Some congressional leaders are trying to appease these ideologues while simultaneously seeking to fix the problems in the tax code that make inversions necessary.

[Excerpt from Mowbray's column from National Review Online]

". . . Though inversions have taken a hit in the press, they actually provide an economic benefit one that helps American companies and workers. Corporations that invert often do so to keep pace with their non-American brethren, which often enjoy much lower corporate tax rates. The United States, in fact, has the fourth-highest corporate tax rates in the world and will be second highest once Belgium and Italy have completed their planned business-tax cuts. Besides having a high corporate income-tax rate 35 percent the U.S. does something few other countries do: It taxes corporations on their entire worldwide income, not just on income earned within the United States.

"The U.S. does attempt to provide tax credits to companies for taxes paid overseas, but even companies that can take full advantage of these credits often face tax bills several times larger than their foreign-based competitors." Link to full article:

March 7, 2003, National Review Online, by Joel Mowbray, Corporate Flight: House Republicans try to preempt Dems on "inversion" issue.

Additional News Clips:

March 10, 2003,, by Leroy Baker, BIBA Seeks To Restore Bermuda's Business Reputation

March 6. 2003, Bloomberg, By Ryan J. Donmoyer, Republicans Abandon Tax Bill Benefiting Nabors, Noble

March 6. 2003, BBC News, Tyco votes to stay offshore

February 28. 2003, The Royal Gazette, By Tim McLaughlin, Come home to America SS&ArtNo=102280027&Ref=AR


7) Cato: International Tax Competition Recommendations for the 108th Congress

In a thorough report, the Cato Institute lays out a pro-competition agenda. Congress should:  1) protect American fiscal sovereignty from foreign tax harmonization initiatives; 2) require the withdrawal of the proposed IRS regulation that would mandate the reporting of foreign investors' interest earned in the United States; 3) oppose anti-competitive legislation that would restrict companies from reincorporating abroad; and 4) pursue fundamental tax reform, including substantially cutting the high federal corporate income tax rate and adopting a territorial tax system. Link to full article below:

February 2003, Cato Institute, by Veronique de Rugy, Cato Handbook for Congress -- Policy Recommendations for the 108th Congress: International Tax Competition


8) Engen & Hassett: Does the U.S. Corporate Tax Have a Future?

Two scholars from the American Enterprise Institute show that tax competition promotes lower tax rates and therefore boosts economic growth.


Charged as we are with gazing into a crystal ball, the forward-looking thesis of this article is that pressure for fundamental corporate tax reform in the U.S. is emerging with or without the assistance of economists. Indeed, the interaction between corporate taxation and international competitiveness has become so striking in the "casual" data that a fierce international tax competition is raging. For example, it does not take a rocket scientist to recognize that between 1991 and 2000, Ireland, which has a corporate tax rate on profits from manufacturing activities of only 10 percent, posted an average growth rate of real GDP that was almost three times the average of other countries in the European Union (EU). While the U.S. has avoided engaging in this corporate tax competition over the past decade, the positive experience of those countries that have cut corporate taxes and negative experience of those that have not will likely have a significant impact on the U.S. tax policy debate in the coming years. Put differently, while the high tax on corporate income makes little sense from an optimal tax perspective, it makes even less sense from the perspective of international competitiveness. Link to full report below (go to page 15):

[Source: Article by Eric Engen and Kevin A. Hassett, "Does the U.S. Corporate Tax Have a Future?", from Tax Analysts: Tax Notes 1972-2002: 30 years in review, Page 15-27;]


9) UPI reports on Center's study of IRS Interest Reporting Rule

[UPI Excerpt]

Whose rules...

The Center for Freedom and Prosperity Foundation, a free-market group, has just released a study it says illustrates how the U.S. Internal Revenue Service is undermining the rule of law. By pursuing a regulation that would require American financial institutions to report bank deposit interest paid to certain non-resident aliens, the center's Andrew Quinlan says, the IRS "is overstepping its authority and abusing the regulatory process by proposing a regulation that is fundamentally inconsistent with the law."

"Who Writes the Law: Congress or the IRS?" was written by economist Dan Mitchell, a fellow of the conservative Heritage Foundation think tank, using information from the Congressional Record, the Joint Committee on Taxation and the House Ways & Means Committee going back as far as 1921 to reach its conclusion.

The study can be found on the Web at  Link to full article below:

February 12, 2003, United Press International, Whose rules... (5th item)

February 13, 2003,, Washington Institute Publishes Study Rubbishing IRS Interest-Reporting Plans

Link to CF&P Foundation Study "Who Writes the Law: Congress or the IRS?":

Additional News Clips on the Proposed IRS Regulation:

March 3, 2003, Insight on the News, By Jamie Dettmer, Proposed Regulation Ignites Power Struggle

Winter 2003, Offshore Finance U.S.A., by Veronique de Rugy, Misguided Initiative: A new US Treasury regulation could drive billions of dollars out of the US economy


10) House Chairman Will Hold Hearings On Interest Reporting Issue


It looks as though the unremitting efforts being made in the US by opponents of the IRS's proposed bank interest reporting rules are finally beginning to pay off. Last week, Senate Budget Committee Chairman and Senate Finance Committee Member, Senator Don Nickles of Oklahoma, asked new Treasury Secretary John Snow during his confirmation hearing to take a hard look at the regulation and report back to the Committee. And now US House of Representatives Small Business Committee Chairman Donald Manzullo (Rep - Ill) says he plans to hold hearings on the issue. Link to full article below:

February 7, 2003,, by Mike Godfrey, House Chairman Will Hold Hearings On Interest Reporting Issue


11) EU Savings Tax Directive Still Under Fire STEP Appeals to the OECD for the Promised Level Playing Field

[Excerpt from March 10, story]

At the end of last week, with the controversial European Union Savings Tax Directive was due to be finalised in Brussels at a meeting of the Council of Economics and Finance Ministers, STEP (the Society of Tax and Estates Professionals), the body representing trust and estate lawyers, accountants and bankers, appealed to the OECD for the promised level playing field on tax information exchange. Without a level playing field, says STEP, legitimate business, as well as tax cheats, will simply migrate to those jurisdictions excused from compliance with the new standards.

In fact, ECOFIN was due to sign off on a major tax package which has been in negotiation for five years, of which the Savings Tax rules are just a part. The two other components are the Code of Conduct for business taxation, and the Commission's March 1998 proposal for a Council Directive to eliminate withholding taxes on payments of interest and royalties made between associated companies of different Member States.

Taxation Commissioner Frits Bolkestein was due to report to the Council on the discussions that have taken place with Switzerland, Liechtenstein, Monaco, Andorra and San Marino since the Council meeting on 18th February which agreed a 'variable geometry' solution to the savings tax impasse, with some EU member states allowed to impose a withholding tax on savings returns while the majority of countries apply an information-sharing regime. Link to full story below:

March 10, 2003,, by Ulrika Lomas, ECOFIN Met On Friday To Finalise The EU Tax Package

Additional EU Clips:

March 11, 2003,, by Ulrika Lomas, Italy Scuppers EU Savings Tax Deal

March 6, 2003, EU Business, by Jitendra Joshi, EU grapples with new obstacles to savings tax deal =%25o%20%25B%20%25Y

February 28, 2003,, by Jason Gorringe, Allan Bell Agrees Savings Tax Directive 'A Fudge'

February 24, 2003, The Lawyer Group,  by Brendan Malkin, Channel Islands demand EU fair play

February 27, 2003, Edinburgh Evening News, EU clampdown 'to cost tax evaders millions

February 24, 2003,, by Amanda Banks, Jersey Urged To Consider Wider Context Of Savings Tax Discussions

February 11, 2003,, by Amanda Banks, BVI Banker Expresses Concern Over Impact Of EU Savings Tax Initiative

February 10, 2003,, Panama Tells OECD There Is No Level Playing Field

February 5, 2003, Swissinfo, by Robert Brookes, Bankers Association warns EU over banking secrecy

February 5, 2003,, by Jason Gorringe, EU Threatens Corporation Tax, Says London Lawyer

January 22, 2003,, The Power To Destroy: EU cracks down on tax evaders; New agreement spells end of money shelters


12) David Burton: Towards a Global Tax Cartel


The true agenda of many advocates of greater financial information exchange has more to do with tax competition than criminal law enforcement or national security.

Since the September 11 terrorist attacks on the United States, there has been a renewed focus on obtaining information about the global financial activities of terrorists and criminals. The needs of law enforcement officials to combat serious crimes, prevent terrorism and protect national security are of the highest concern, but many OECD governments appear to be exploiting the political climate post-September 11 to promote information exchange policies that have more to do with limiting tax competition than enhancing international efforts to apprehend terrorists and criminals.

Well before the September 11 attacks, the OECD and the UN had launched major initiatives designed to abolish financial privacy and limit tax competition by blacklisting low-tax jurisdictions or so-called tax havens (the OECD Harmful Tax Competition project) and enabling the UN to share financial information among UN members through the proposed United Nations International Tax Organisation (UNITO).

Both initiatives are not only anti-competitive, but also constitute a gross violation of individuals' privacy. Moreover, they foreshadow a process of centralisation similar to that of the European Union, exacting a steep price in terms of reduced economic freedom and limits on national sovereignty.  Link to full article below:

Summer 2002-03, Policy (The Centre for Independent Studies), David R. Burton, Towards a Global Tax Cartel


13) Richard Rahn:  The economic ruin of Europe


Assume the villain in a new James Bond movie has the goal of the economic destruction of Europe. How would he do it?

First some background. In the 1960s and 1970s, Europe boasted brisk economic growth. From 1965 to 1974, government spending in Western Europe averaged 37 percent of the gross domestic product (GDP), and economic growth averaged 4.3 percent yearly.

However, the European leftists gained power and increased government spending to an average of 47 percent of GDP by 1984, where it has remained, as compared to slightly more than 30 percent of GDP for the U.S. Not surprising, economic growth fell to an average annual rate of only 1.7 percent in Europe, while the U.S. enjoyed an average annual growth rate of 3.6 percent for 1984-2000. Also for the past 20 years, Europe has suffered an average unemployment rate more than 50 percent higher than the U.S.

During the 1950s, '60s, and '70s, the U.K. had a much lower rate of economic growth than Germany, France and Italy. By the time Margaret Thatcher took over in 1979 as prime minister, the U.K. was known as the "sick man of Europe." At that time, Britain had the most socialized economy in Europe and, as would be expected, the worst economic performance. Mrs. Thatcher undertook a massive program to privatize the economy and reduced taxes and spending. Link to full article below:

February 6, 2003, The Washington Times, by Richard Rahn, The economic ruin of Europe


14) Veronique de Rugy: Tax Rates, Tax Revenue, High Taxes, and High Budget Deficits

Two new Cato Tax & Budget Bulletins by Veronique de Rugy provide interesting historical context to the debate regarding individual income tax rate cuts.

Bulletin #13 examines detailed tax data for the 1920s to discern the impact of the Mellon tax rate cuts.

Bulletin #14 looks at the Hoover/FDR tax increases of the 1930s

March 6, 2003, Tech Central Station, By Veronique de Rugy, Cutting Edge


15) CF&P Clips

March 6, 2003, Bloomberg, By John F. Wasik, The IRS Is Still Watching You

March 10, 2003,, by Ulrika Lomas, EU Seeks To Firm Up Tax Co-operation Plans With Switzerland

March 10, 2003,, by Mary Swire, New Zealand Will Cut Tax To Attract Foreign Investors ssues_template.php/1155.htm

March 10, 2003,, by Ulrika Lomas, France Executes U-Turn Over Tax Cuts

February 21, 2003, Cato Institute, by Veronique de Rugy, Bush's Achilles' Heel

March 18, 2003, Insight on the News, By Jamie Dettmer, Must U.S. Banks Be Kept in Check?

February 27, 2003, BusinessWeek, By Jane Black, These Are Not Your Father's Wiretaps: Privacy advocates fear that the FBI's need to monitor Internet Age technologies, such as voice over IP, will give it far too sweeping powers

March 2, 2003, Gainesville Sun, By Cory Reiss, Treasury writing extensive money-laundering rules =NEWS02&ArtNo=203020347&Ref=AR&Profile=1001

February 26, 2003, BBC News, German economy at a standstill: Germany's economy stopped growing at the end of 2002, after showing only minimal expansion during the rest of the year.

February 26, 2003, Cato Institute, by Marian L. Tupy, The European Rift Goes Beyond Politics

February 25, 2003, Edinburgh Evening News, By Richard Laverick, Avoidance and evasion are very different routes

February 24, 2003, SwissInfo, Swiss set sights on the Big Apple

February 23, 2003, BBC News, India proposes foreign exchange tax

February 22, 2003, St. Petersburg Times, By Jeff Harrington, Terror Indictments: Case raises questions on money flow

February 14, 2003, Tech Central Station, By Veronique de Rugy, Bush's Devilish Deficits 3E

February 14, 2003,, by Amanda Banks, OECD Responds To 'Level Playing Field' Concerns

February 13, 2003, Associated Press, 14 Die in Violent Bolivian Tax Protests,2933,78463,00.html

February 12, 2003, The Washington Times, by Bruce Bartlett, Recipe for capital . . . with seasonings

February 11, 2003, National Review Online, By Veronique de Rugy, Bush's Achilles' Heel: Governement spending is out of control.

February 7, 2003, National Review Online, By Raymond J. Keating, New Mexico's Supply-Sider: An ex-Clintonista is talking tax cuts.

February 6, 2003,, by Lorys Charalambous, Cyprus Tax On Boats Will Empty Marinas, Say Owners

February 5, 2003,, by Jason Gorringe, EU Threatens Corporation Tax, Says London Lawyer

February 4, 2003,, US Institute Advises Bahamas To Resist EU/OECD Pressure

December 12, 2002, The Economist, The Needle In The Haystack

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
208-728-9639 (efax)


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