Dump the IRS Nonresident Alien Regulation

In the waning days of the Clinton Administration, the IRS proposed a regulation to force American banks to report the interest paid to all nonresident aliens. This proposal was bad policy for a number of reasons. It would drive capital from U.S. banks. It would undermine tax reform. And it represented a flagrant abuse of the regulatory process. This proposal drew heated opposition from both industry and the public policy community. More than 99 percent of the submissions during the public comment period were hostile, and 100 percent of the testimony at the public hearing was negative. Numerous members of Congress weighed in against the proposed regulation, and CFP mounted a strong lobbying campaign against the IRS scheme. About 18 months after the regulation was first proposed, this effort bore fruit. The IRS was forced to withdraw the regulation.

But in a duplicitous move, the IRS almost immediately re-issued the regulation after some cosmetic changes. Even worse, it appeared that certain segments of the financial services industry were tricked by the IRS bait-and-switch routine and planned to remain neutral, weakening the pro-tax competition coalition. Notwithstanding the odds, the Center for Freedom and Prosperity re-launched its battle against the regulation. Once again, the proposal attracted overwhelming opposition. In a mirror-image of the first fight, more than 99 percent of the public comments were against the regulation and the public testimony was unanimously negative to the IRS scheme as well. Many members of Congress also announced opposition to the new proposal.

There was considerable fear that the IRS would try to finalize the regulation before the end of the year (in part to give back-door support to the EU since the regulation could be misinterpreted as an "equivalent measure" and thus a sign of U.S. support for the Savings Tax Directive). Fortunately, this did not happen. But this may only be a short-term victory. The Treasury Department is actively pushing the proposal – even though it puts the interests of foreign tax collectors above U.S. law and before the interests of the American economy. The Coalition for Tax Competition will continue to fight hard to block the regulation, and opponents also believe that a legal challenge will be successful if the proposal is finalized.

2003 Prognosis: The President's new economic team probably will decide this issue. If the decision goes the wrong way, expect a legal challenge since the regulation contravenes existing law and the IRS also failed to obey regulatory procedures such as preparation of a cost-benefit analysis.

1) The Proposed Regulation

The proposed regulation (REG-133254-02) would require U.S. banks to report to the IRS the amount of bank deposit interest paid to foreign depositors, even though the IRS admits that this information is not needed to enforce U.S. tax law and is being requested solely for the benefit of foreign governments.

The proposed regulation is based on a similar regulation (REG-126100-00) proposed during the final days of the Clinton Administration. The only significant difference is that the original Clinton regulation required reporting on all foreign depositors, whereas the latest proposal targets residents of 15 major nations.

IRS New Proposed Regulation:
http://www.treasury.gov/press/releases/reports/po33011.pdf

CFP Continues Campaign Against Illegal IRS Regulation

The IRS's new regulation is old garbage in a new wrapper. The only difference between the new regulation and the original regulation is that the new regulation targets 15 specific countries. But even this difference is meaningless since the IRS is already hinting that the rest of the world's countries will be added to the list within two or three years. CFP was a leader in killing the Clinton regulation and we will work just as hard over the next few months to knock-off its mutant sibling.

We are determined to win, especially since the EU bureaucrats will try to mischaracterize the IRS regulation as a sign of support for the Savings Tax Directive (by claiming it is an "equivalent measure"). The EU is making this claim, even though Kenneth Dam, Deputy U.S. Treasury Secretary, sent a letter July 31 to the European Union and stated: "There is no linkage with the EU Savings Directive and our actions should not be considered to anticipate the outcome of the technical discussions regarding the proposed EU Savings Directive that we agreed in May should continue. Indeed, any suggestion that our action here anticipates eventual support for the proposed EU Savings Directive could adversely affect the technical-level discussions."

While we think it is good that Mr. Dam made these comments and denied linkage, we notice that the Treasury Department bureaucrats who drafted the letter made it appear that the United States was still considering the Savings Tax Directive. Yet as the Strategic Memo mentioned above explains, the White House already has rejected the ill-advised proposal. This is why the Center's continuing work is so important.

Why is the Regulation Wrong for America -- Coalition Press Release

Coalition for Tax Competition Press Release on Why the Proposed IRS Regulation is Bad for America
http://www.freedomandprosperity.org/press/p08-05-02/p08-05-02.shtml

EXCERPTS:

Andrew Quinlan:

According to Andrew Quinlan, President of the Center for Freedom and Prosperity, "This proposed regulation will drive capital out of America and hurt U.S. financial markets. This 'new' regulation is based on the same misguided policies the Clinton Administration tried to sneak through during its last few days. Unfortunately, the IRS apparently puts the interests of foreign tax collectors above the interests of the American people, but we are confident that the Bush Administration will withdraw this 'Clinton-Lite' regulation at the first possible moment since it clearly undermines the President's economic growth agenda." Mr. Quinlan added, "The Coalition for Tax Competition will encourage taxpayers to make their voices heard during the public comment period. We expect this grassroots opposition, combined with testimony against the proposal, will help torpedo this tax harmonization scheme."

Daniel Mitchell:

Daniel Mitchell, Senior Fellow at the Heritage Foundation, stated, "This proposed regulation is a gross abuse of the regulatory process, which is probably only to be expected since the agency is still headed by a Clinton-appointed Commissioner. The IRS is supposed to enforce legislation enacted by Congress, yet the agency is trying to use bureaucratic edicts to overturn existing law." Mitchell also noted that, "The IRS also failed to conduct legally required cost-benefit analysis, further demonstrating the agency's disregard for the law."

Veronique de Rugy:

The Cato Institute's Veronique de Rugy urged Treasury Secretary Paul O'Neill to gain control of the bureaucracy at Treasury, commenting that, "While Paul O'Neill is racking up frequent flyer miles, a Clinton-appointed IRS Commissioner is issuing regulations that would require automatic sharing of confidential financial information with foreign governments – even though this is contrary to the Treasury Secretary's public statements. In fact, the Secretary is on record saying that private financial information should only be shared with other governments in response to specific requests with proper safeguards and upon demonstration of probable cause." Ms. de Rugy said, "This failure to defend U.S. interests is particularly frustrating since Europe's welfare states are using the World Trade Organization and the European Union to undermine America's competitive advantage in the global economy."

Grover Norquist:

If implemented, critics fear the regulation would hinder pro-growth tax reform. Grover Norquist, President of Americans for Tax Reform, explained that, "All proposals to fix the tax code, such as the flat tax, are based on common-sense principles such as taxing income only one time and taxing only income inside our borders. The IRS regulation is a slap in the face for those who support tax reform since it would help foreign governments double-tax income that is earned in America."

Eric V. Schlecht:

The proposed regulation is based on a similar regulation proposed during the final days of the Clinton Administration. The only significant difference is that the original Clinton regulation required reporting on all foreign depositors, whereas the latest proposal targets residents of 15 major nations. Eric V. Schlecht, Director of Congressional Relations for the National Taxpayers Union, explained, "This modification is virtually meaningless since it is widely understood that the IRS will add all other nations, particularly those from Latin America, to the list within a few years if this misguided regulation is finalized. "

Richard Rahn:

Richard Rahn, Senior Fellow at the Discovery Institute, urged the President's economic team to get more involved. According to Rahn, "Bureaucrats at Treasury and the IRS are ideologically motivated to pursue tax policy that will undermine President Bush. Without strong supervision from the White House, these bureaucrats will implement policies that weaken America."

###

Recent Congressional Letters in Opposition to IRS Regulation

Senators

Wayne Allard

George Allen

Robert Bennett (1 ) (2 )

Sam Brownback

Jim Bunning

Conrad Burns

Mike Crapo

Elizabeth Dole

John Ensign

Michael Enzi

Chuck Hagel

Orrin Hatch

James Inhofe

Zell Miller

Don Nickles

Rick Santorum

Gordon Smith

John Sununu

Members of the House of Representatives

Robert Aderholt

C

Todd Akin

I A C G

Spencer Bachus

I

Richard Baker

E

J. Gresham Barrett

G

Roscoe Bartlett

G

Bob Beauprez

D

Judy Biggert

C

Rob Bishop

D

Roy Blunt

H

Allen Boyd

E

Michael Burgess

D E

Dan Burton

A C E

Chris Cannon

A B C G

Eric Cantor

I H

John Carter

D E

Chris Chocola

D G

Tom Cole

D

Michael "Mac" Collins

F

Phil Crane

I A C E F G

John Culberson

G

Randy "Duke" Cunningham

E

Jim Davis

A C

Nathan Deal

G

Tom DeLay

H

Jim DeMint

A C E G

Lincoln Diaz-Balart

A C E

Jennifer Dunn

F

Philip English

F

Tom Feeney

D

Mark Foley

I A B C E F G

Randy Forbes

A C E

Vito Fossella

J

Trent Franks

D

Scott Garrett

E G

Mark Green

G

Katherine Harris

D

Melissa Hart

C

J.D. Hayworth

A C

Jeb Hensarling

D

Wally Herger

F

Peter Hoekstra

C E

Darlene Hooley

J

John Hostettler

C

Steve Israel

J

Ernest Istook

I

Walter Jones

E G

Sue Kelly

J

Mark Kennedy

G

Jack Kingston

I C E

Mark Kirk

C

Ron Lewis

F

Frank Lucas

E

Don Manzullo

I1 I2 A C

Jim Matheson

J

Gregory Meeks

B C

Gary Miller

G

Jeff Miller

C G

Dennis Moore

J

Tim Murphy

D

Sue Myrick

G

Bob Ney

A B C

Charlie Norwood

I

Butch Otter

A B C G

Michael Oxley

I

Ron Paul

I A B C E G

Stevan Pearce

D

Mike Pence

C

Joseph Pitts

A B C G

Jon Porter

D E

Deborah Pryce

H

Jim Ramstad

F

Rick Renzi

E

Tom Reynolds

G

Ileana Ros-Lehtinen

A B C

Mike Ross

J

Edward Royce

C

Paul Ryan

I

James Saxton

E

Pete Sessions

I B C E G

John Shadegg

C G

Clay Shaw

I

Christopher Shays

E

Cliff Stearns

C E

John Sullivan

G