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December 19, 2001

Mitchell E. Daniels, Jr.
Director
Office of Management and Budget
Old Executive Office Building
725 17^th Street, NW
Washington, DC 20503

Dear Mr. Daniels,

 By 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. This is bad economic policy and bad regulatory policy. Many IRS regulations impose a significant cost on the economy and should be subject to the regulatory review process. We, the undersigned, strongly encourage the Office of Management and Budget to take this long-overdue step.

 The need to subject the IRS to the rule-of-law is particularly important because of a regulation proposed on January 17, 2001, in the waning days of the Clinton Administration. Regulation 126100-00, which would require the reporting of bank deposit interest paid to nonresident aliens, is a flagrant abuse of the regulatory process. If approved, it would impose significant damage on the U.S. economy by driving capital overseas. Our specific concerns include:

The proposed regulation flouts statutory language and congressional intent. On several occasions, lawmakers have visited the issue of how to treat the interest income earned by nonresident aliens. In every case, the desire to attract capital to the American economy led legislators to decide not to tax the income and not to require that the income be reported to foreign tax authorities.

• The proposed regulation is not required to administer U.S. law. Interest income paid to nonresident aliens is not subject to tax. Other regulations and forms already ensure that citizens and/or resident aliens are not able to falsely claim nonresident alien status to benefit from this preferential tax status.
   
• The proposed regulation is not required by tax treaties. The IRS openly admits that it wants to collect this data in order to provide the information to nations that have signed tax treaties with America. Tax treaties, however, only require the exchanging of information that is collected for purposes of domestic law enforcement. There is no obligation to impose additional regulatory burdens solely for the purpose of enforcing other nation's laws.
   
• The proposed regulation would impose significant damage on the U.S. economy, but the IRS failed to perform any economic analysis or conduct any cost/benefit analysis. According to the universally negative public comment and testimony of the financial services industry, individual nonresident aliens have about $1 trillion deposited in U.S. financial institutions. Yet if this regulation is approved, a substantial portion of this money will flee to competing institutions in other jurisdictions.

 The Internal Revenue Service should not be above the law. The Office of Management and Budget has been given the responsibility to oversee regulations to ensure that the economy is not unduly harmed. The proposed regulation discussed above presents an ideal opportunity to restore necessary balance and oversight to the IRS.

 But this is not just a management issue. The proposed regulation has important budget implications. The likely withdrawal of several hundred billion dollars from the U.S. economy would have a deleterious impact on many financial institutions. Borrowers also would suffer. Families seeking mortgages, consumers seeking car loans, and businesses seeking money to create jobs and expand operations all would be adversely affected. This means less economic growth, which will reduce tax revenues and create additional demand for government programs.

 Thank you for your attention to this important issue. The undersigned individuals stand ready to work with you to help advance sound economic policy.

Sincerely,

Andrew F. Quinlan, Center for Freedom and Prosperity Foundation

Daniel Mitchell, The Heritage Foundation

Veronique de Rugy, Cato Institute

Paul Beckner, Citizens for a Sound Economy

David Burton, The Prosperity Institute

Steve Dasbach, Libertarian Party

Stephen J. Entin, Institute for Research on the Economics of Taxation

Tom Giovanetti, Institute for Policy Innovation

John Goodman, National Center for Policy Analysis

Kevin Hassett, American Enterprise Institute

Lawrence Hunter, Empower America

J. Bradley Jansen, Free Congress Foundation

Charles W. Jarvis, United Seniors Association

Gordon S. Jones, Association of Concerned Taxpayers

David Keene, The American Conservative Union

Karen Kerrigan, Small Business Survival Committee

James Landrith, The Multiracial Activist

Jim Martin, 60 Plus Association

Steve Moore, The Club for Growth

Grover Norquist, Americans for Tax Reform

Duane Parde, American Legislative Exchange Council

John A. Pugsley, The Sovereign Society Ltd

Richard Rahn, The Discovery Institute

Terrence Scanlon, Capital Research Center

Tom Schatz, Council for Citizens Against Government Waste

Eric Schlecht, National Taxpayer Union

Solveig Singleton, Competitive Enterprise Institute

Lew Uhler, National Tax Limitation Committee

Christopher Whalen, The Whalen Consulting Group

* Organizational affiliations are included for identification purposes only.

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