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Obama Burdens the Banks

The costliest regulation you’ve never heard of.

Jan 23, 2012, Vol. 17, No. 18 • By IKE BRANNON and SAM BATKINS
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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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