A proposal was introduced this year by the U.S. Department of Treasury to require all banks located within the United States to report interest payments to nonresident alien depositors. These reports would be made to the Internal Revenue Service, which in turn would exchange the information with foreign governments for data about Americans in those countries.
This is the wrong proposal at the wrong time—and not just because it surfaced the same month that President Obama, in his most recent State of the Union address, called for a reduction in the regulatory barriers to growth and investment.
Our nation and its financial institutions benefit greatly from the deposits of foreigners, which help finance jobs and generate economic growth in local communities. Economic and academic sources indicate that a substantial portion of this capital would be withdrawn and moved to non-U.S. jurisdictions, or to non-bank institutions that are not affected by the regulation, if REG-146097-09 is adopted. Conservative estimates show that Florida alone would experience a loss of tens of billions of dollars—funds that are reinvested by banks in the state's economy through loans to businesses and individuals.
The IRS has failed to do a feasibility study on what financial impact this proposal would have. Nor has it studied how foreign governments would handle the privacy issues raised by such a reporting requirement.
It is precisely because of the confidentiality and security our country offers that so many nonresident aliens, or NRAs—especially those from countries with unstable governments or political environments where personal or financial security is a major concern—deposit their monies in U.S. financial institutions. In countries where corruption is commonplace, it is easy to envision the unauthorized sharing of NRA account information with kidnappers and the like.
A Treasury Department tax counsel recently informed me that sensitive customer information would be shared with an NRA's home country only if we have a tax information exchange treaty with that country. Two of the countries with which we have tax treaties are Mexico, by most accounts the No. 1 kidnapping country in the world, and Venezuela, a country under the dictatorship of Hugo Chavez. We are going to supply those governments with information about our customers? In exchange for information about ex-pat Americans who are more likely to keep their monies in the safety of an FDIC bank account here at home than in Central or South America?
It has been hard to gather from Administration officials what kind of timeline they have in mind for the adoption of REG-146097-09, but members of Congress from across the country and from both sides of the aisle have written to the President and Treasury Secretary asking that this proposal be withdrawn.
Since 1922, this country has welcomed foreign capital to its shores. 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. We estimate that Florida alone has $60 billion to $80 billion of NRA deposits in FDIC accounts, plus tens of billions more in investments and managed accounts, in some cases through customer relationships that go back for several generations.
Nearly a decade ago, a scaled-back version of the current regulatory proposal emerged but languished; it was never adopted. A 2004 study from the Mercatus Center at George Mason University estimated that the earlier proposal would have driven $88 billion from U.S. financial institutions.
The latest version of the proposed rule, with its wider scope and particularly unfortunate timing for the economy, would be all the more damaging.