Released last January, three days before President Clinton left
office, the proposed regulation would require American banks to
report any interest income they pay to foreigners with U.S.
accounts. The IRS says it will pass this information to foreign tax
collectors. It has yet to explain why U.S. banks should help other
governments tax income earned in America -- or why such a rule
should be put into effect now.
Indeed, the regulation makes so little sense and has drawn such
universal ire that it's easy to see why the Clinton administration
waited until the last minute to introduce it.
More than 99 percent of the people who sent letters or e-mails
to the IRS during the public-comment period condemned it. Every
single speaker at a public hearing held last spring opposed it.
More recently, representatives of more than three dozen major think
tanks sent a letter to lawmakers denouncing the regulation and
urging its withdrawal (available online at
They realize something the IRS seems to have overlooked: that
the regulation would damage the economy. Foreigners have nearly $1
trillion deposited in U.S. banks. These funds help families get
mortgages, consumers get car loans and businesses get money to
create jobs. Yet the IRS regulation could drive as much as
two-thirds of that money from the U.S. economy. Foreign investors
worried about excessive taxation and corruption in their home
countries will shift their funds to places such as Switzerland,
Hong Kong and the Cayman Islands if the IRS implements this
Moreover, the proposed rule is a flagrant abuse of the
regulatory process. Government agencies are supposed to issue
regulations that help enforce the laws enacted by Congress. This
IRS regulation, however, seeks to overturn existing law. On several
occasions, lawmakers have debated how best to treat foreign-owned
bank deposits. In each case, they decided against taxing foreign
investment and against requiring that interest income be reported
to foreign governments. But the IRS apparently has decided we need
to help foreign tax collectors more than we need to preserve jobs
and growth in America.
The proposed regulation also undermines U.S. sovereignty.
Foreign governments shouldn't be allowed to tax interest paid to
bank accounts in America or to impose any of their laws on U.S.
soil. Governments can tax money earned inside their borders if they
wish, but no foreign government should be able to tax money earned
The potential damage this regulation could cause renders the
so-called stimulus debate completely absurd. Republicans and
Democrats have spent weeks fighting over how to arrange the
proverbial deck chairs on the Titanic, yet hardly anyone pays
attention when the IRS tries to steer the economy into an
Fortunately, the regulation hasn't been implemented. But this
simply means the strong opposition of banks and free-market think
tanks has temporarily stalemated the IRS. Treasury Secretary Paul
O'Neill should have rescinded the proposed regulation as soon as he
took office, but for some reason, he hasn't. Neither he nor
President Bush are obliged to implement the anti-growth proposals
they inherited from their predecessors, and no one can explain the
It's time for a little leadership here. Secretary O'Neill needs to kill this regulation outright -- and if he's reluctant, President Bush should simply tell him to do it. Believe me, you couldn't devise a simpler "stimulus" plan.
Daniel J. Mitchell is the McKenna senior fellow in political economy at The Heritage Foundation, a public policy research institute.
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