International Tax Collector?

Should the Internal Revenue Service become a tax collector for other nations?
 
    That question is generated by a proposed IRS regulation that would require U.S. banks to report to the IRS interest "paid to nonresident alien individuals that are residents of certain specific countries." The purpose of such a regulation is rather bewildering, that is, unless one considers efforts under way in both the European Union and United Nations to achieve international tax harmonization.
 
    What is tax harmonization? Essentially, it's an effort by high-tax countries to limit the competitive advantages of low-tax countries. By finding out what income is earned by residents outside its borders, a nation can attempt to tax those earnings. This way, a government can grab more money to spend, while also wiping out significant advantages of investing capital in low-tax nations.
 
    The proposed IRS regulation directly aligns with such efforts. If implemented, this rule would not only prove to be a mighty blow to individual liberty, but also to businesses of all types and sizes in this nation that are seeking capital to start up or expand their enterprises. Foreign depositors and investors -- and their precious capital -- would be chased away.
 
    Fortunately, various members of Congress recognize the economic abuse that would be perpetrated if the IRS rule were to go into effect. For example, the Center for Freedom and Prosperity recently noted that more than 35 members of the House and 17 Senators have declared their objections on this matter.
 
    In a March 11 letter to U.S. Treasury Secretary John Snow, nine U.S. Senators on the Senate Banking Committee -- Robert Bennett (R-UT), Wayne Allard (R-CO), Michael Enzi (R-WY), Rick Santorum (R-PA), John Sununu (R-NH), Elizabeth Dole (R-NC), Chuck Hagel (R-NE), Jim Bunning (R-KY), and Zell Miller (D-GA) -- wrote: "This new proposal is not needed to enforce any U.S. tax law, and we are concerned that it will put our financial markets at a competitive disadvantage and harm our economy by driving much needed capital elsewhere."
 
    The Senators make an additional, critical point: "It is important to note that Congress has examined the tax treatment of indirect foreign investment in our domestic economy on several occasions. On each occasion, it was determined that the substantial benefits from attracting capital to the U.S. far exceeded either any revenue that would be derived from taxing that income in the U.S. or requiring it to be reported so that foreign governments could tax it. For this reason, Congress has repeatedly rejected proposals to tax or report the income."
 
    Indeed, it is worth noting that, according to U.S. Department of Commerce data, foreign-owned assets in the U.S. carried a market value of $9.2 trillion in 2001, including more than $2 trillion in U.S. banks. It obviously is economically unwise to put a chunk of this capital at risk due to a misguided IRS regulation.
 
    In essence, the IRS is overstepping its bounds in order to implement a policy that would hurt the U.S. economy. LetŐs hope the rest of Congress and the White House step in to put a stop to this dangerous regulatory escapade.
 
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Raymond J. Keating is chief economist for the Small Business Survival Committee, and co-author of U.S. by the Numbers: Figuring What's Left, Right, and Wrong with America State by State (Capital Books, 2000)