Tag: tax competition

Per Dollar Spent, OECD Subsidies May Be the Most Destructively Wasteful Part of the Federal Budget

I’m not a fan of international bureaucracies.

I’ve criticized the United Nations for wanting global taxes. I’ve condemned the International Monetary Fund for promoting bigger government. I’ve even excoriated the largely unknown Basel Committee on Banking Supervision for misguided regulations that contributed to the financial crisis.

But the worse international bureaucracy, at least when measured on a per-dollar-spent basis, has to be the Paris-based Organization for Economic Cooperation and Development.

OECD Headquarters: Living the good life at US expense

American taxpayers finance nearly one-fourth of the OECD’s budget, at a cost of more than $100 million per year, and in exchange we get a never-ending stream of bad policy recommendations.

This Center for Freedom and Prosperity study has all the gory details. The OECD bureaucrats (who get tax-free salaries, by the way) endorsed Obamacare, supported the failed stimulus, and are big advocates of a value-added tax for America.

What’s especially frustrating is that the OECD initially was designed to be a relatively innocuous bureaucracy that focused on statistics. Indeed, it was even viewed as a free-market counterpart to the Soviet Bloc’s Council for Mutual Economic Assistance.

My, how things change.

Perhaps the most odious example of bad OECD policy is the campaign against tax competition. Beginning during the 1990s, the OECD has attacked low-tax jurisdiction for the supposed crime of having good tax laws that attract jobs and capital from high-tax nations such as France and Greece.

So why did the OECD launch this project to prop up Europe’s welfare states?  The answer can be found in an excellent new study from Professor Andrew Morriss at the University of Alabama Law School and Lotta Moberg, a Ph.D student in economics at George Mason University.

It’s a publication designed for academic journals, but it avoids jargon and gibberish, so a regular person can read and understand how the OECD has morphed from a harmless (though presumably still wasteful) bureaucracy into a force for global statism. Here are some of the key findings in the study.

[T]his transition was in part the result of entrepreneurship by a group of OECD staff, who spotted an opportunity to expand their mission, bringing with it a concomitant increase in resources and prestige. They accomplished this by providing a framework for interests within a group of high tax states to create a cartel that would channel competition in tax policy away from areas where those states had a competitive disadvantage and toward areas in which they had a competitive advantage. …These states then sought to restrict tax competition, which in turn required them to create a means of delegitimizing such competition and by preventing each other from defecting from the cartel by lowering tax rates unilaterally. …The French … realized that single-country financial controls were unworkable within a global financial system.

In other words, the bureaucrats at the OECD and governments from decrepit welfare states like France both saw a benefit in creating a tax cartel.

This “OPEC for politicians” is grossly contrary to good tax policy, international comity, and national sovereignty. But those factors didn’t matter.

Unfortunately, it’s quite likely that we will see further schemes from the OECD and other international bureaucracies. The politicians have learned that transnational cartels increase their power.

[T]he evolution of the OECD from a facilitator of economic competition to a cartel enforcer represents something new in international organization behavior. …The cartelization of tax policy is an important effort to hold off the impact of the forces unleashed by competition on a more level playing field, but it is certainly not the only one. …If the opportunity is provided, it may be better from a politician’s point of view to form a cartel on taxation as a protection. With a cartel, there are fewer constraints on domestic policy, improving the politicians’ welfare by increasing the degrees of freedom available to satisfy domestic constituents and win re-election.

This video has more information on why the OECD is contrary to the interests of American taxpayers.

Needless to say, it is outrageous that the politicians in Washington are sending more than $100 million to Paris every year to subsidize this bureaucracy. For all intents and purposes, we are being coerced into paying for a bunch of European bureaucrats so they can then advocate even bigger government in the United States.

And those bureaucrats get tax-free salaries while pushing for higher taxes for the rest of us!

Can anyone think of a more destructive item in the federal budget, at least when measured on a per-dollar-spent basis? I can’t. That’s why I’ve been fighting the OECD for years, even to the point that the bureaucrats threatened to put me in a Mexican jail for the “crime” of standing in the public lobby of a public hotel.

Are Tax Havens Moral or Immoral?

Being the world’s self-appointed defender of so-called tax havens has led to some rather bizarre episodes.

For instance, the bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.

On a more amusing note, my efforts to defend tax havens made me the beneficiary of grade inflation and I was listed as the 244th most important person in the world of global  finance — even higher than George Soros and Paul Krugman.

But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policymakers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.

Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.

And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.

Here’s a typical example. Paul Vallely has a column, entitled “There is no moral case for tax havens,” in the UK-based Independent.

To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.

There is a building in the Cayman Islands that is home to 12,000 corporations. It must be a very big building. Or a very big tax scam.

As I’ve already explained in a post about a certain senator from North Dakota, a company’s home is merely the place where it is chartered for legal purposes. A firm’s legal domicile has nothing to do with where it does business or where it is headquartered.

In other words, there is nothing nefarious about Ugland House, just as there is nothing wrong with the small building in Delaware that is home to more than 200,000 companies. President Obama, by the way, demagogued about Ugland House during the 2008 campaign.

Let’s see what else Vallely has to say:

Are there any legitimate reasons why anyone would want to have a secret bank account – and pay a premium to maintain their anonymity – or move their money to one of the pink dots on the map which are the final remnants of the British empire: the Caymans, Bermuda, the Turks and Caicos and the British Virgin Islands?

Actually, there are lots of people who have very compelling reasons to keep their money in havens, and only a tiny minority of them are escaping onerous tax burdens.What about:

  • Jews in North Africa and the Middle East?
  • Persecuted ethnic Chinese in Indonesia and the Philippines?
  • Political dissidents in places such as Russia and Venezuela?
  • Entrepreneurs in regimes such as Venezuela and Zimbabwe?
  • Families threatened by kidnapping failed states such as Mexico?
  • Homosexuals in homophobic regimes such as Iran?

As this video explains, there are billions of people around the world who are subject to state-sanctioned (or at least state-permitted) religious, ethnic, racial, political, sexual, and economic persecution. These people are especially likely to be targeted if they have any money, so the ability to invest their assets offshore and keep that information hidden from venal governments can, in some cases, be a life-or-death matter.

And let’s not forget the residents of failed states, where crime, expropriation, kidnapping, corruption, extortion, and economic mismanagement are ubiquitous. These people also need havens where they can safely and confidentially invest their money.

Vallely is apparently unaware of these practical, real-world concerns. Instead, he is content with sweeping proclamations:

The moral case against is clear enough. Tax havens epitomise unfairness, cheating and injustice.

But if he is against unfairness, cheating, and injustice, why does he want to empower the institution — government — that is the largest source of oppression in the world?

To be fair, Vallely does attempt to address the other side of the argument.

Apologists insist that tax havens protect individual liberty. They promote the accumulation of capital, fair competition between nations and better tax law elsewhere in the world. They also foster economic growth.

…Yet even if all that were true – and it is not – does it outweigh the ethical harm they do? The numbered bank accounts of tax havens are notoriously sanctuaries for the spoils of theft, fraud, bribery, terrorism, drug-dealing, illegal betting, money-laundering and plunder by Arab despots such as Gaddafi, Mubarak and Ben Ali, all of whom had Swiss accounts frozen.

He can’t resist trying to discredit the economic argument by resorting to more demagoguery, asserting that tax havens are shadowy regimes. Not surprisingly, Vallely offers no supporting data. Moreover, you won’t be surprised to learn that the real-world evidence directly contradicts what he wrote: the most comprehensive analysis of dirty money finds 28 problem jurisdictions, and only one could be considered a tax haven.

Last but not least, the author addresses the issue that really motivates the left: the potential loss of access to other people’s money, funds that they want the government to confiscate and redistribute.

Christian Aid reckons that tax dodging costs developing countries at least $160bn a year — far more than they receive in aid. The US research centre Integrity estimated that more than $1.2trn drained out of poor countries illicitly in 2008 alone. …Some say an attack on tax havens is an attack on wealth creation. It is no such thing. It is a demand for the good functioning of capitalism, balancing the demands of efficiency and of justice, and placing a value on social harmony.

There are several problems with this passage, including Vallely’s confusion of tax evasion with tax avoidance. But the key point is that the burden of government spending in most nations is now at record levels, undermining prosperity and reducing growth. Why add more fuel to the fire by giving politicians even more money to waste?

Consider some real-world evidence: The Wall Street Journal has an article on the Canton of Zug, Switzerland’s tax haven within a tax haven. This hopefully won’t surprise anyone, but low-tax policies have been very beneficial for Zug:

Developed nations from Japan to America are desperate for growth, but this tiny lake-filled Swiss canton is wrestling with a different problem: too much of it. Zug’s history of rock-bottom tax rates, for individuals and corporations alike, has brought it an A-list of multinational businesses. Luxury shops abound, government coffers are flush, and there are so many jobs that employers sometimes have a hard time finding people to fill them.

Here’s some more evidence of how better fiscal policy promotes prosperity. This is economic data, to be sure, but isn’t the choice between growth and stagnation also a moral issue?

Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get.

…[B]usinesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn’t belong) is 9.4%, Zug’s is 1.9%.

It turns out that Zug is growing so fast that lawmakers actually want to discourage more investment. What a nice problem to have.

Describing Zug’s development as “astonishing,” Matthias Michel, the head of the canton government, said, “We are too small for the success we have had.”

…Zug has largely stopped trying to lure more multinationals, according to Mr. Michel.

It’s worth pointing out that the residents of Zug are not some sort of anomaly. The rest of Switzerland is filled with people who recognize the value of limited government:

[T]he Swiss are mostly holding fast to their fiscal beliefs. Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.

Sadly, even though the world is filled with evidence that smaller government is good for prosperity (and even more evidence that big government is bad for growth), statism is not abating.

Indeed, the anti-tax haven campaign continues to gain steam. At a recent OECD meeting, high-tax nations (with the support of the Obama administration) put in place a bureaucratic monstrosity that is likely to become a world tax organization.

This global tax cartel will be akin to an OPEC for politicians, and the impact on taxpayers will be quite similar to the impact of the real OPEC on motorists.

If that’s a moral outcome, then I want to be amoral.

To conclude, here are two other videos on tax havens. This one looks at the economic issues:

And here’s a video debunking some of the usual attacks on low-tax jurisdictions:

When an American Company Redomiciles to the Cayman Islands, What Lesson Should We Learn?

Another American company has decided to expatriate for tax reasons. This process has been going on for decades, with companies giving up their U.S. charters (a form of business citizenship) and redomiciling in low-tax jurisdictions such as Bermuda, Ireland, Switzerland, Panama, Hong Kong, and the Cayman Islands.

The companies that choose to expatriate usually fit a certain profile (this applies to individuals as well). They earn a substantial share of their income in other countries and they are put at a competitive disadvantage because of America’s “worldwide” tax system.

More specifically, worldwide taxation requires firms to not only pay tax to foreign governments on their foreign-source income, but they are also supposed to pay additional tax on this income to the IRS — even though the money was not earned in America and even though their foreign-based competitors rarely are subject to this type of double taxation.

In this most recent example, an energy company with substantial operations in Asia moved its charter to the Cayman Islands, as reported by digitaljournal.com:

Greenfields Petroleum Corporation…, an independent exploration and production company with assets in Azerbaijan, is pleased to announce that the previously announced corporate redomestication … from Delaware to the Cayman Islands has been successfully completed.

Because it is a small firm, the move by GPC probably won’t attract much attention from the politicians. But “corporate expatriation” has generated considerable controversy in recent years when involving big companies such as Ingersoll-Rand, Transocean, and Stanley Works (now Stanley Black & Decker).

Statists argue that it is unpatriotic for companies to redomicile, and they changed the law last decade to make it more difficult for companies to escape the clutches of the IRS. In addition to blaming “Benedict Arnold” corporations, leftists also attack low-tax jurisdictions for “poaching” companies.

Libertarians and conservatives, by contrast, explain that expatriation is the result of an onerous tax system that imposes high tax rates and requires the double taxation of foreign-source income. Expatriation is the only logical approach if companies want a level playing field when competing in global markets.

I cover this issue (and also explain that the Obama administration is trying to make a bad system even worse) in the video below.

My recommendation, not surprisingly, is that politicians fix the tax code. Unfortunately, politicians prefer the blame-the-victim game, so they attack the companies instead of solving the underlying problem (and then they wonder why job creation is anemic).

With the Support of the Obama Administration, Paris-Based OECD Now Wants De Facto World Tax Organization as Part of Its Anti-Tax Competition Campaign

I’ve been battling the Organization for Economic Cooperation for years, ever since the Paris-based bureaucracy unveiled its “harmful tax competition” project in the late 1990s. Controlled by Europe’s high-tax welfare states, the OECD wants to prop up the fiscal systems of nations such as Greece and France by hindering the flow of jobs and capital to low-tax jurisdictions.

Guided by a radical theory know as Capital Export Neutrality, the OECD wants to impose global tax rules that would prevent taxpayers from ever having the ability to benefit from better tax law in other jurisdictions. This is why, for instance, the international bureaucrats are anxious to undermine national tax laws – such as America’s favorable treatment of bank deposits from overseas – that enable people to escape onerous tax regimes.

Bolstered by support from the Obama Administration, the OECD now is taking its campaign to the next level. At its Global Tax Forum in Bermuda, which ends later today, the bureaucrats unveiled a new scheme that effectively would result in the creation of something akin to a World Tax Organization.

The vehicle for this effort is a Multilateral Convention on Mutual Administrative Assistance in Tax Matters. This may sound dry and technical, but the OECD wants all nations to participate in this pact, which has existed for a couple of decades but was radically expanded last year to give high-tax governments sweeping new powers to impose bad tax law on income generated in low-tax jurisdictions.

But the real smoking gun is that the OECD has put itself in charge of the “co-ordinating body” that will have enormous powers to interpret the agreement, modify the pact, and resolve disputes – thus giving itself the ability to serve as judge, jury, and executioner.

This is a profoundly dangerous development with all sorts of very troubling implications. Since I’m in Bermuda trying to destabilize this effort, I don’t have time for extensive analysis, but here’s a press release from the Center for Freedom and Prosperity and here are some of my immediate concerns.

  1. Higher tax burdens. If high-tax governments succeed is imposing this Multilateral Convention (insert “World Tax Organization” whenever you see that term), tax competition will be undermined and politicians will respond by increasing tax burdens. This is why nations such as France have been pushing this scheme, of course, and why left-wing academics have long dreamed of this type of arrangement.
  2. Risk to human rights. Amazingly, the Multilateral Convention is open to repressive regimes, which then would have access to all sorts of sensitive and confidential taxpayer information. Already, the thuggish dictatorship of Azerbaijan has signed up, as well as the unstable nation of Moldova and the corrupt government of Mexico. The implications are grim, including the sale of private data to criminal gangs, the loss of sensitive information to hackers, and the direct misuse of American tax returns.
  3. Loss of sovereignty. For all intents and purposes, the Multilateral Convention outlaws certain pro-growth tax policies and discourages others. Equally worrisome, it creates a system allowing foreign tax collectors to cross borders. The Obama Administration has specifically acquiesced to this provision, so perhaps we will soon see corrupt Mexican tax authorities harassing businesses and individuals on American soil.
  4. Outlawing tax avoidance. The OECD historically has tried to portray its efforts as a fight against tax evasion, but the Multilateral Convention explicitly talks about “combating tax avoidance.” This should not be a surprise since the Capital Export Neutrality ideology is based on the notion that taxpayers should have zero ability to lower their tax burdens. This means we can fully expect an assault on all forms of tax planning, with American companies almost sure to be among the first to be in the OECD’s crosshairs.

The final insult to injury is that American taxpayers are the biggest funders of the OECD, providing nearly one-fourth of the bureaucracy’s bloated budget. So our tax dollars are being used by OECD bureaucrats (who receive tax-free salaries!) to dream up new ways of increasing our tax burdens. In case you need any additional reasons to despise this bureaucracy, here’s a video detailing its anti-free market activities.

 

And since I’m recycling some videos, here’s one explaining why tax competition is so important.

Are U.S. Corporate Taxes Low?

In a new column, Bruce Bartlett argues that U.S. corporate taxes are the lowest in the OECD, and therefore there is no need to reduce them. As usual, Bruce frames the debate as between sensible center-left economists like himself vs. crackpot Republicans. Yet on this issue, the great majority of serious tax scholars agree that a corporate tax rate cut is long overdue. Indeed, there is such broad agreement among experts that even the Obama White House is considering a corporate rate cut.

Bruce offers only weak and deceptive data in support of his views:

One would not know from the Republican document that corporate taxes are expected to raise just 1.3 percent of GDP in revenue this year, about a third of what it was in the 1950s.

This statistic does not show what Bruce pretends it shows. Corporate income taxes are paid by a subset of businesses called “C” corporations. But the share of total U.S. business income reported by C corporations has plunged in recent decades with the rise in other business structures, particularly LLCs and S corporations.

In a 2007 article in Tax Notes, PwC economist Peter Merrill showed that the share of total U.S. business income reported by C corporations fell from 71 percent in 1987 to just 49 percent by 2004. C corporations are less important business structures than they used to be, so it is to be expected that corporate taxes as a share of GDP has fallen.

Another way to see the relative decline in C corporations is to look at the ratio of C corporation revenues to GDP. In 1980, for example, C corporation revenues were more than two times larger than GDP ($6.1 trillion to $2.8 billion), but by 2008 C corporation revenues were only about 1.5 times larger than GDP ($22 trillion to $14 trillion). (Revenues from the IRS corporate report for those two years).

Bruce’s centerpiece is a table showing that U.S. corporate taxes as a share of GDP were 1.8 percent in 2008, a lower share than in other OECD countries. But the rise in LLCs and S corporations in the United States makes this table almost useless in furthering Bruce’s argument. C corporations may simply represent a smaller share of the overall economy in the United States than in other countries. To make his point, Bruce would need to show that taxes as a share of corporate profits are lower in the United States than elsewhere.

If taxes are low historically and in comparison with our global competitors, how are Republicans able to maintain that taxes are excessively high? They do so by ignoring the effective tax rate and concentrating solely on the statutory tax rate.

The effective tax rate Bruce refers to is the average effective rate, which is the rate he calculates in the faulty manner of taxes as a share of GDP. However, marginal effective rates are generally considered to be more important for international competitiveness. When Toyota is considering expanding its North American production at one of its U.S. or Canadian locations, it will look at the marginal effective tax rate in the two countries. And when it comes to marginal effective corporate tax rates, the United States has one of the highest rates in the world, according to a Cato study by tax scholars Jack Mintz and Duanjie Chen.

The economic importance of statutory tax rates is blown far out of proportion by Republicans looking for ways to make taxes look high when they are quite low.

Actually, statutory corporate tax rates are extremely important in the modern global economy because of the high mobility of corporate profits. In general, marginal effective tax rates drive real investment flows, but statutory corporate rates drive cross-border movements of reported income. Politicians frequently express their outrage at corporations pushing their profits offshore through transfer pricing and other techniques, but they could fix the problem anytime they wanted by slashing the uniquely high U.S. statutory corporate rate.   

This brings us back again to Bruce’s statistic that U.S. corporate taxes as a share of GDP are low at just 1.8 percent. Another reason that figure is low is that the high U.S. statutory rate is pushing reported income offshore through avoidance and evasion. If we cut the statutory corporate rate, the apparent low burden that Bruce points to would increase. This chart shows the inverse relationship between statutory corporate taxes and corporate taxes as a share of GDP.

By the way, if the importance of statutory corporate rates were “blown far out of proportion” as Bruce says, then why has every other advanced economy put so much effort into reducing its statutory rate over the last two decades? The answer is that liberal, centrist, and conservative governments around the world have understood that a country imposing a high statutory corporate rate shoots itself in the foot in today’s competitive world economy.

To sum up:

  • The U.S. has a low average effective corporate rate when measured incorrectly as a share of GDP, as Bruce does. The low rate results from the relative decline in C corporation business activity, the high U.S. statutory rate driving profits offshore, and the high U.S. marginal effective rate suppressing real investment.
  • The U.S. has one of the highest statutory corporate tax rates in the world. The high statutory rate drives reported income offshore, and it is also an important component of the marginal effective tax rate faced by companies.
  • The U.S. has one of the highest marginal effective corporate tax rates in the world according to some calculations, which likely reduces U.S. capital investment substantially. After all, “corporate taxes are the most harmful type of tax for economic growth,” according to the OECD.

 For more, see Global Tax Revolution.

New Paper Explains Why Low-Tax Jurisdictions Should Resist OECD Attacks against Tax Competition and Fiscal Sovereignty

One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.

I’ve previously explained why the OECD is a problematic institution - especially since American taxpayers are forced to squander about $100 million per year to support the parasitic bureaucracy.

For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.

Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.

The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.

To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.

 

And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.

Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.

Senator Rubio, Representative Posey, and other Lawmakers Fighting to Stop Rogue IRS Proposal that Would Drive Investment from U.S. Economy

There hasn’t been much good economic news in recent years, but one bright spot for the economy is that the United States is a haven for foreign investors and this has helped attract more than $10 trillion to American capital markets according to Commerce Department data.

These funds are hugely important for the health of the U.S. financial sector and are a critical source of funds for new job creation and other forms of investment.

This is a credit to the competitiveness of American banks and other financial institutions, but we also should give credit to politicians. For more than 90 years, Congress has approved and maintained laws to attract investment from overseas. As a general rule, foreigners are not taxed on interest they earn in America. Moreover, by not requiring it to be reported to the IRS, lawmakers on Capitol Hill have effectively blocked foreign governments from taxing this U.S.-source income.

This is why it is so disappointing and frustrating that the Internal Revenue Service is creating grave risks for the American economy by pushing a regulation that would drive a significant slice of this foreign capital to other nations. More specifically, the IRS wants banks to report how much interest they pay foreign depositors so that this information can be forwarded to overseas tax authorities.

Yes, you read correctly. The IRS is seeking to abuse its regulatory power to overturn existing law.

Not surprisingly, many members of Congress are rather upset by this rogue behavior.

Senator Rubio, for instance, just sent a letter to President Obama, slamming the IRS and urging the withdrawal of the regulation.

At a time when unemployment remains high and economic growth is lagging, forcing banks to report interest paid to nonresident aliens would encourage the flight of capital overseas to jurisdictions without onerous reporting requirements, place unnecessary burdens on the American economy, put our financial system at a fundamental competitive disadvantage, and would restrict access to capital when our economy can least afford it. …I respectfully ask that Regulation 146097-09 be permanently withdrawn from consideration. This regulation would have a highly detrimental effect on our economy at a time when pro-growth measures are sorely needed.

And here’s what the entire Florida House delegation (including all Democrats) had to say in a separate letter organized by Congressman Posey.

America’s financial institutions benefit greatly from deposits of foreigners in U.S. banks. These deposits help finance jobs and generate economic growth… For more than 90 years, the United States has recognized the importance of foreign deposits and has refrained from taxing the interest earned by them or requiring their reporting. Unfortunately, a rule proposed by the Internal Revenue Service would overturn this practice and likely result in the flight of hundreds of billions of dollars from U.S. financial institutions. …According to the Commerce Department, foreigners have $10.6 trillion passively invested in the U.S. economy, including nearly “$3.6 trillion reported by U.S. banks and securities brokers.” In addition, a 2004 study from the Mercatus Center at George Mason University estimated that “a scaled back version of the rule would drive $88 billion from American financial institutions,” and this version of the regulation will be far more damaging.

Both Texas Senators also have registered their opposition. Senators Hutchison and Cornyn wrote to the Obama Administration earlier this month.

We are very concerned that this proposed regulation will bring serious harm to the Texas economy, should it go into effect. …Forgoing the taxation of deposit interest paid to certain global investors is a long-standing tax policy that helps attract capital investment to the United States. For generations, these investors have placed their funds in institutions in Texas and across the United States because of the safety of our banks. Another reason that many of these investors deposit funds in American institutions is the instability in their home countries. …With less capital, community banks will be able to extend less credit to working families and small businesses. Ultimately, working families and small businesses will bear the brunt of this ill-advised rule. Given the ongoing fragility of our nation’s economy, we must not pursue policies that will send away job-creating capital.We ask you to withdraw the IRS’s proposed REG-14609-09. The United States should continue to encourage deposits from global investors, as our nation and our economy are best served by this policy.

Their dismay shouldn’t be too surprising since their state would be especially disadvantaged. Here are key passages from a story in the Houston Chronicle.

Texas bankers fear Mexican nationals will yank their deposits if the institutions are required to report to the Internal Revenue Service the interest income non-U.S. residents earn. …such a requirement would drive billions of dollars in deposits to other countries from banks in Texas and other parts the country, hindering the economic recovery, bankers argue. About a trillion dollars in deposits from foreign nationals are in U.S. bank accounts, according to some estimates. …The issue is of particular concern to some banks in South Texas, where many Mexican nationals have moved deposits because they don’t feel their money is safe in institutions in Mexico. …”This proposal has caused a wave of panic in Mexico,” said Lindsay Martin, an estate-planning lawyer with Oppenheimer Blend Harrison + Tate in San Antonio. He has received in recent weeks more than a dozen calls from Mexican nationals and U.S.-based financial planners with questions on the rule. …Jabier Rodriguez, chief executive of Pharr-based Lone Star National Bank, said not one Mexican national he has spoken to backs the rule. “Several of them have said if it were to happen, then there’s no reason for us to have our money here anymore,” he said. Many Mexican nationals worry that the data could end up in the wrong hands, jeopardizing their safety. If people in Mexico and some South American nations find out they have a million dollars in an FDIC-insured account in the United States, “their families could be kidnapped,” added Alex Sanchez, president of the Florida Bankers Association.

For those who want more information about this critical issue, here’s a video explaining why the IRS’s unlawful regulation is very bad for the American economy.