March 18, 2004
The Honorable John Snow
U.S. Department of the Treasury
1500 Pennsylvania Avenue NW
Washington, D.C. 20220
Dear Secretary Snow:
We are writing to express our strong objection to the Internal Revenue Service’s (IRS) Regulation (REG-133254-02) that, if implemented, would have a very harmful effect on our economy and cause much-needed capital to leave the United States. The latest version of this proposed rule would compel U.S. banks to report the deposit interest they pay to selected nonresident aliens. This is bad economic policy, bad regulatory policy, and bad tax policy. Originally proposed by the Clinton administration, this policy does nothing to aid in job creation or economic growth, and is a direct threat to America’s long-term economic interests.
Congress decided long ago that taxing foreign-owned capital deposited in U.S. banks was bad policy. Instead, lawmakers allowed foreigners to bring their money here, tax-free. As a result, American financial institutions have about $2.3 trillion in foreign funds. These funds work their way through the economy as loans for cars, homes, and business expansion eventually creating jobs and enhancing economic growth.
This new rule fortunately would apply only to a portion of this capital, but it nonetheless is bad economic policy since it will discourage and more than likely reverse the flow of capital to America. Indeed, more than $40 billion on an annualized basis was withdrawn from foreign-owned U.S. savings accounts in the first quarter of 2001, in large part because the regulation was first announced on January 17 of that year. We don’t know how much capital will leave if the regulation is implemented. Suffice to say that any loss of funds is going to hurt our capital markets and make it harder for consumers and businesses to access credit. The regulation also will undermine the safety and soundness of our banking sector, a point that already has been raised by the Chairman of the Federal Deposit Insurance Corporation.
The IRS initiative also is bad regulatory policy. For more than 80 years, Congress has made a deliberate effort to create policy and approve laws to attract capital to the U.S. economy. It is rather disturbing, therefore, to see the IRS attempt to overturn the democratic process with bureaucratic edict.
Last but not least, the regulation is bad tax policy. As you well know, the president is trying to slowly but surely reform our tax code by eliminating different forms of double-taxation. The IRS is undermining this effort by seeking to help foreign governments double-tax the interest paid to nonresident aliens who have invested in the U.S. economy.
We hope you will quickly withdraw this misguided regulation. The IRS should not be allowed to overturn the law, especially when the result will hurt America’s economy.
J. Gresham Barrett
cc: Vice President Richard Cheney
CEA Chairman Greg Mankiw
NEC Chairman Steve Friedman