In a Miami Herald op-ed last week, Sen. Marco Rubio of Florida included the National Taxpayers Union in a growing list of supporters for S. 1506 , a bill to prevent the Secretary of the Treasury from forcing financial institutions to report interest on deposits paid to “nonresident aliens.” You can read NTU’s letter of support from last August here.
For those not hip to the international banking scene, this might not seem like a big deal. But the sudden exodus of upwards of $87 billion from U.S. banks when nonresident alien customers move their money to more secure countries would be severe shock to the already fragile banking sector. With U.S. personal savings rates still in the cellar, thanks in part to interest rates so low they can barely be perceived by the naked eye, deposits from outside the States provide some much needed liquidity in the credit market for small businesses, personal loans, and other job-creating endeavors.
When U.S. savings are being eroded by inflation and very little return, it does warrant the question why would anyone else send their money here? Despite the economic upheaval of the past several years, U.S. banks are still considered extremely stable. Plus, at least before the advent of this new regulation, U.S. banks offered privacy and security for people where unstable governments and political environments threatened their finances. CEI’s Ian Murray writes in The American Spectator:
The IRS doesn't tax foreigners' interest on U.S. deposits, but this new reporting rule would actually be worse than if it did. Conservative estimates of a previous version of the rule, which affected just 15 countries, found that it will suck at least $87 billion out of the economy. This is because foreigners often invest in the U.S. because their money is protected from their home government. Consider that as much as one third of all bank deposits in Florida are owned by foreigners, which might be surprising until you look immediately south, to Cuba, Venezuela, and beyond. Many Florida banks could go under if this rule goes ahead.
To sum up, credit contracts as money leaves the U.S., citizens living under despot rule are subject to greater personal risks, and banks could go under. Simply complying with this new burdensome regulation will add a not-insignificant cost to the business of banking. All told, the Mercatus Center estimated that an even less all encompassing IRS rule could lead to a negative impact of over $100 million annually. Taken together, it’s hard to see the upside of this new rule. And neither can the IRS. That’s because no cost-benefit analysis was completed before enacting this rule. Murray goes on:
These costs are also a problem for the IRS. Executive Order 12866 requires that any regulation with "an annual effect on the economy of $100 million or more" to be subject to a cost-benefit analysis. Yet the IRS hasn't performed any such analysis for its proposed rule. It is easy to see why. The costs, as we have already seen, are likely to be huge. The benefits? They amount to some goodwill from the few legitimate foreign governments that take an interest in offshore holdings of their citizens (most, like the United Kingdom, do not), and a lot of goodwill from dictators who will use this information to monitor and punish dissidents.
With U.S. banks standing at the very threshold of a fragile recovery, this isn’t the time to impose big government regulations and drive money out of our economy. That money still comes to U.S. banks is a mark of confidence not just in our economy, but also in the dollar. We shouldn’t be snubbing that largess.