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IRS Archive

Friday

2

December 2011

0

COMMENTS

Government Policy, Not Laziness, Responsible for Scaring Away Foreign Investors

Written by , Posted in Taxes

President Obama recently told a group of CEO’s that America had “been a little bit lazy” about “selling America and trying to attract new businesses into America.” Is this the case, or has the quality of the product simply declined? America’s descent in the Heritage Index of Economic Freedom would certainly tend to suggest that it’s the latter. The reality is that laziness is not to blame for any increasing unattractiveness to foreign investors; government policy is.

There are two looming policies, in particular, that are threatening foreign investment in the US. One of those is the Foreign Account Tax Compliance Act (FATCA), passed in 2010 in an effort to raise revenue for the HIRE Act through greater tax enforcement. The other is an IRS proposed regulation which would require reporting of interest payment information on foreign depositor accounts, despite the fact that the US has no use for the information. Both policies are misguided, counterproductive, and will drive investment out of the US.

FATCA is designed to compel foreign financial institutions to become deputy tax collectors for the IRS. By 2014, these institutions will be expected to have implemented expensive new data collection and reporting systems, and those that have not complied will face a 30% withholding tax on US source payments to the institution. As if those costs aren’t enough, FATCA also conflicts with local privacy laws in many countries, placing FFIs in an impossible position. Already, institutions are deciding that it makes more sense to simply drop their US clients and disinvest in US markets than to continue jumping through IRS hoops. The result is billions in lost foreign investment, and there is only more to come.

As I recently co-wrote in a piece with Dan Mitchell:

The FATCA legislation is the product of a misguided school of thought within the US political class which believes that there are vast sums of unpaid taxes which the IRS would be able to collect if only the rest of the world would stop hiding it from them.

…The rationale behind FATCA is simple in its destructiveness. Even though the US has a very high compliance rate for tax laws compared to the rest of the world, US politicians decided that more enforcement was needed to get more money to fund more spending and bigger budgets in Washington. Throwing aside any semblance of cost-benefit analysis, they then decided to spare no expense to capture every last dollar of potential tax revenue. Unfortunately, FATCA was not a wise approach. Ordinary Americans will suffer from the ensuing damage to the economy. Foreign financial institutions will endure higher regulatory burdens and compliance costs. And the FATCA law creates a powerful disincentive for foreign investment in the US. FATCA thus has the net impact of potentially reducing both economic prosperity and government tax revenues.

The other policy disaster on the horizon is a regulation proposed by the IRS which would require domestic banks to collect information and report on the interest payments made to foreign depositor accounts. The IRS would then share this information with foreign regimes. They assure us that sharing would only take place with countries that have tax treaties with the US, but that list is not only capable of changing at any time, but already includes the dictatorship in Venezuela, and crime and corruption plagued Mexico. What’s more, these payments are not taxable under the US tax code – a policy which Congress has explicitly chosen in order to foster foreign investment in the US – and so the rule serves no direct domestic interest.

recent Congressional hearing I attended on the issue covered a variety of arguments against the regulation. Members were concerned about the human rights implications for foreign depositors, particularly from Latin America, who face kidnapping and extortion threats back home, but most importantly the capital flight this concern would cause should the rule pass. Years ago, the Mercatus Center did a study estimating $88 billion in lost foreign investment. That was on a rule more limited in scope, so today’s proposal would be even more destructive.

The tax bureaucrats seem intent on plowing forward, even as Congress is mobilizing against the IRS on the issue (bills to prevent the rule from being implemented have been introduced in both the House and Senate – thanks to the leadership of Florida Rep. Bill Posey and Sen. Rubio, as well as Texas Senators Hutchison and Cornyn – and have a combined 28 co-sponsors). The IRS’s objective quite likely is to please foreign tax collectors who are complaining loudly about the burdens we are demanding their institutions take on with regard to FATCA.

President Obama thinks we have been lazy in selling America. But his administration has been anything but lazy in making America a harder sell to foreign investors. Rather than compound the mistake of FATCA with another one, while simultaneously driving out much needed foreign investment, we should revisit the initial legislation and look instead at making the tax code less complex and more economically competitive. Then we should tell the IRS that their job is only to enforce US tax laws, not to take it upon themselves to decide that America’s interests are outweighed by the tax information demands of the likes of Hugo Chavez.

Cross-posted at Big Government.

Tuesday

12

July 2011

1

COMMENTS

IRS Thugs Salivate Over Fan Who Caught Home Run Ball from Derek Jeter's 3,000th Hit

Written by , Posted in Big Government, Taxes

Imagine you’re a big-time Yankees fan (difficult, I know, but pretend you didn’t kill yourself over it), and not only do you witness Derek Jeter’s historic home-run to mark the 3,000th hit of his career, but you even caught the ball! Being the good fan that you are, you gave it to Jeter with no expectations. The Yankees then returned your generosity with season tickets and autographed memorabilia.

Now read this:

The Verizon salesman from Highland Mills, N.Y., gave the ball back to Jeter, whom he called an “icon,” and the Yankees lavished a slew of prizes, including luxury box seats for every remaining home game this season and post-season and some signed memorabilia, upon him.

Now the IRS wants a piece. The prizes Lopez received are estimated to be worth more than $32,000 — and, like game show contestants, Lopez may have to pay taxes on the gifts and prizes because the IRS considers them income.

Some estimate the IRS will put Lopez on the hook for anywhere between $5,000 and $13,000, reports the Daily News.

Too bad you didn’t imagine living in something other than a tyrannical state with a thuggish government, where good deeds might manage to go unpunished. Next time be more specific.

Wednesday

6

April 2011

0

COMMENTS

Why is the IRS Putting Foreign Tax Collectors Ahead of U.S. Interests?

Written by , Posted in Taxes

It’s easy to complain about the IRS, but more often than not the bureaucrats are simply carrying out the bad policies imposed by Congress. There certainly are some egregious cases of IRS abuse, but it’s typically the fault of lawmakers for enacting bad law.

But such is not the case with a regulation currently under consideration which would require that American banks put foreign tax law above U.S. tax law. The regulation deals with the obscure issue of reporting requirements for bank deposit interest paid to foreigners, but the economic impact would be significant. Worst of all, the IRS is seeking to overturn existing law. In some ways, this is the tax equivalent of the EPA’s notorious power grab scheme to impose cap-and-trade with regulatory edicts.

A bit of background. On January 7th, the IRS proposed this regulation (REG-146097-09) to force American financial institutions to report any interest payed to foreigners. Typically, U.S. tax authorities only require information used for U.S. tax purposes. And since Congress wants to attract this investment to the American economy, the law has clearly stated for 90 years that foreigners won’t get taxed, leaving no need to collect any information about this income. But now, as part of global efforts to undermine tax competition and usurp fiscal sovereignty, the IRS is unilaterally asserting the right to demand this information. Only it’s not to enforce American law, but in order to hand the information over to foreign governments so that they can tax this U.S.-source income.

There is good reason why investors would want to protect their personal information.

In many places corruption runs rampant. If you know that any information acquired by your government may be sold to criminal gangs who look to kidnap children of business owners, then financial privacy also becomes a matter of human rights, or even life and death. Or if you live in Venezuela, you need to protect your assets from a thuggish dictator who might expropriate them on a whim. If foreign investors can no longer count on the U.S. as an attractive destination for their investment, one which protects their human rights, they will look elsewhere.

If the IRS is allowed to implement the regulation, it will undoubtedly harm the US economy. Foreigners have more than $4 trillion invested in American financial institutions, according to the Treasury Department, and all told there is more than $10 trillion invested in the U.S. economy by foreigners. Much of this investment capital would leave American shores if the IRS gets its way. A study by the Mercatus Center on a previous version of the proposal, which was more narrowly targeted and applied to just 15 countries, found that $87 billion would leave the US economy. That figure would likely be much higher today.

Despite the likely economic impact of the regulation, the IRS amazingly concluded that it was not a “significant regulatory action,” and thus did not conduct a cost-benefit analysis as required by Executive Order 12866. The order quite clearly defines a “significant regulatory action” as one having “an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.” With trillions in foreign investment at stake, the IRS would have us believe that this regulation does not have an annual impact of $100 million or more, or would not “adversely affect in a material way the economy.” This disregard of legal requirements is something to expect from a banana republic, but it’s becoming disturbingly common as government gets more power in America.

Not only is the IRS dishonestly ducking Executive Order 12866, it is also blatantly flouting the expressed will of Congress. The last time the IRS tried to impose this reporting requirement, over 100 members of Congress voiced their objection, and it was eventually allowed to die without implementation. This time around, and lead by Congressman Posey, the entire bi-partisan Florida delegation in the House has already objected. Many more are expected to do so in the near future. Senator Marco Rubio, for instance, has just recently joined his Florida colleagues to condemn the regulation, noting that it “violates the long-standing intent of Congress not to require the reporting of interest earned by nonresident aliens,” and would “put our financial system at a fundamental competitive disadvantage.” Every time that Congress has addressed this issue, it has specifically chosen to keep America an attractive destination for foreign investment by not taxing interest paid to non-resident foreigners.

It is not too late to speak up. The deadline for public comments on the proposed regulation is the end of the day April 7th. If you think that the IRS should respect the will of Congress and not place the interests of foreign tax bureaucrats above the US economy, you can give your two cents to the IRS here.
Cross-posted at Big Government.