There are a number of pricey regulations that have received attention of late: net neutrality, new ozone standards, countless regulations stemming from the passage of the Dodd-Frank bill. These rules typically garner a mention in the Wall Street Journal, a formal Office of Information and Regulatory Affairs (OIRA) review, and, in some cases, a lengthy Regulatory Impact Analysis.

However, the costliest proposed regulation to come down the pike in some time has nearly escaped detection. Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy.

The notion that banks should report the interest paid on accounts held by nonresident aliens is not a new one: The Bush administration proposed this rule in 2002 for residents of 15 European nations in order to help our allies deter tax fraud, and with the hope that they might do the same for us. Foreigners have never paid U.S. taxes on interest earned in U.S. banks and would continue being exempt under the proposed rule; the sole requirement would be that banks report the interest paid to these account-holders to the IRS.

The Treasury estimates that the costs to comply with the regulation would be minimal, with banks needing no more than 15 minutes to comply, summing to a grand total (when multiplied by the roughly 8,000 banks and other depository institutions affected) of 2,000 hours of employee time, or somewhere just south of $100,000 per annum. The de minimis projected cost means that the regulation is not subject to the detailed cost-benefit analysis required for regulations costing more than $100 million.

If a few hours of filling out paperwork were the only cost incurred, then the lack of attention would be appropriate. But a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons.

For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. Second, the United States still offers at least a semifunctional financial market: Bank deposits are federally insured, inflation rates have been low and stable for decades, and there’s a reasonable expectation (though far from a guarantee) of avoiding a financial crisis on these shores.

As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance.

The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight.

The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.

The losses would be felt especially in Miami and Los Angeles, where deposits from Latin America are concentrated. The Florida Office of Financial Regulation surveyed 16 banks chartered in that state and found that an average of 41 percent of their deposits were from nonresident aliens, with one bank reporting the number at 92 percent. Our fractional-reserve banking system means that one dollar of deposits supports multiples of that in loans; a withdrawal of $200-300 billion in deposits would diminish lending in the ballpark of $1.5 to $2 trillion.

Economists across the political spectrum have agitated for a change to our antiquated international tax system, which keeps an estimated $1.5 trillion in corporate profits parked in banks overseas rather than invested in the United States, arguing that such a change would provide a potent stimulus to the financial sector and the larger economy. Requiring the reporting of nonresident interest income to the IRS would undo most of the -anticipated benefits of any such change to international tax laws.

Not surprisingly, mandatory reporting of nonresident alien interest has a disproportionate impact on banks in states with large immigrant populations, and the Florida and Texas congressional delegations are apoplectic over the administration’s proposal. Senator Marco Rubio of Florida—joined by his Democratic counterpart, Bill Nelson, and 18 other senators—introduced legislation (S. 1506) that would rescind the regulation. In the House of Representatives, every member of the Florida delegation, including Democratic National Committee chair Debbie Wasserman Schultz, opposes the administration proposal.

The lack of discernible benefits has left the administration with few supporters of this regulation. The left-wing Citizens for Tax Justice provides the most full-throated response, claiming in congressional testimony that the regulation would help to root out tax evaders and “[bring] much-needed revenue into the Treasury.” It cites no data or research to that effect, however.

Since the administration shows no signs of pulling back on this regulation, it leaves its opponents looking to the courts and Congress for relief. Neither is promising. Successful challenges to regulation outside a courtroom are rare, and Congress has successfully employed the Congressional Review Act, Congress’s only tool to rescind regulations, just once since its inception.

But the administration has proven susceptible to political pressure aimed at halting onerous regulations. The Department of Labor’s proposed regulation to redefine (and expand) fiduciary standards created a financial industry uproar about compliance costs and a host of unintended (and unacknowledged) consequences. This resulted in the administration withdrawing the rule for further study so as to lessen its potential employment impacts.

The Department of Education’s “gainful employment” rule targeting for-profit colleges also experienced significant political and outside pressure that resulted in a drastic scaling back of the rule’s impact, saving thousands of jobs.

And the administration very publicly rebuked EPA’s attempt to lower the threshold for ozone standards, with outside protests prompting the only formal “Return Letter” from OIRA administrator Cass Sunstein.

On its face the reporting requirement for nonresident alien interest seems trivial, at least according to the administration. In fact, it would create a significant drag on the economy at a time when we can least afford it. Lending will shrink, bank industry profits will fall by billions, and a number of banks may fail as a result.

Perhaps political prudence will convince an administration now in reelection mode what sound policy analysis should have made clear to it previously: The proposed regulation is simply indefensible.

Sam Batkins is director of regulatory policy and Ike Brannon is director of economic policy at the American Action Forum.

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