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Economic Reform on Edge

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Bank-backed House Lawmakers Try to Kill IRS Plan to Identify $1 Trillion in Foreign Accounts

August 2nd 2011

Economy - One Million Dollars

Two U.S. House members who collected large campaign donations from the financial industry are pushing legislation to block an Internal Revenue Service plan to discourage foreign tax evaders and money launderers from stashing money in U.S. banks.

Legislation sponsored by Democrat Gregory Meeks of New York and Republican Bill Posey of Florida would stop the IRS from requiring American banks to report interest paid to foreign citizens who live outside the United States and have deposits in U.S. banks. In announcing the legislation, Meeks and Posey echoed the arguments of American bankers who say the IRS proposal could chase foreign capital away from the United States.

“At a time when our economy is experiencing a nascent recovery, the last thing we want to do is discourage foreign investment in the United States,” Meeks said in a statement. “We must protect America’s reputation as the best place in the world to invest and do business.”

Sen. Carl Levin, a Michigan Democrat who has investigated offshore tax abuses, expressed concern that the legislation could undercut federal efforts to crack down on tax evasion and other financial misconduct.

As reported in May, the United States serves as a major tax haven for affluent Latin Americans and other foreigners who want to move money from their home countries. Under U.S. law, citizens and foreigners who have “permanent resident” status in the United States must report their bank deposits and pay the IRS taxes on the interest they earn.

But foreigners who don’t live in the United States don’t have to report their U.S. bank deposits to the IRS. The one exception is Canadians, whose government has an information-sharing deal with Washington.

“It’s a mystery to me why any member of Congress would try to protect the anonymity of foreign bank account holders, when U.S. and Canadian account holders already have to disclose their account information to the IRS,” Levin said. “Foreign account holders should be treated the same as—not better than—U.S. citizens.”

Because “non-resident aliens” don’t have to pay U.S. taxes on money they stash in U.S. banks, requiring banks to report interest paid to them would not bring in more money for the Treasury. Supporters of the rule say, though, that it could help the United States increase revenues in the long run by fostering better cooperation with other nations, which in turn would help the IRS catch more U.S. citizens who are hiding money overseas.

“The United States has battled other countries for years to get the names of U.S. taxpayers with hidden accounts at their banks. We can’t turn around now and defend the concealment of foreign citizens with hidden U.S. accounts,” Levin said.

Posey and Meeks’s bill is likely to get substantial support in the Republican-controlled House. Florida’s entire House delegation has written to Treasury Secretary Timothy Geithner decrying the IRS move, as have a variety of other House members.

How the bill would fare in the Democratic-led Senate is another question.

Both of Texas’s Republican senators—Kay Bailey Hutchison and John Cornyn—have asked Geithner to withdraw the rule. But the bill is strongly opposed by Levin, who wields influence on matters involving financial corruption and tax evasion due to his status as chair of the chamber’s Permanent Subcommittee on Investigations.

Banks give generously

The legislative push to block the IRS comes amid a flurry of moves in the House aimed at reversing financial regulations and anti-corruption measures approved after the 2008 financial crisis.

With so many issues in play, banks have spent heavily on lobbying and political contributions. During the 2010 election cycle, commercial banks invested more than $56 million in federal lobbying and more than $22 million in political action committee and individual contributions to federal candidates, committees and parties, according to the Center for Responsive Politics’ Open Secrets database.

Meeks was the House’s second largest recipient of political contributions from financial and credit companies, garnering at least $85,000 from them for his reelection campaign in 2010, according to Open Secrets. During the two-year cycle, he raised at least $576,000 from the so-called FIRE sector, made up of finance, insurance, and real estate interests. That represented more than half of the $1.1 million Meeks raised during the period, according to the database.

Posey received $251,000 from the FIRE sector during the 2010 cycle, nearly one-quarter of the roughly $1.1 million he raised. Among his top donors: American Bankers Association ($8,500), Fidelity Bank ($7,200) and Bank of America ($6,500).

Both Posey and Meeks are members of the House Financial Services Committee.

A third co-sponsor of new legislation, Republican Mario Diaz-Balart of Florida, received $71,000 from the FIRE sector during an election cycle in which he raised $739,000. Included in that was a $7,500 contribution from the American Bankers Association. Diaz-Balart is a member of the House Appropriations Committee.

Meeks and Diaz-Balart did not respond to requests for comment.

A spokesman for Posey, George Cecala, said the lawmaker wants to make sure that small banks, which he described as the “lifeblood” of many communities, aren’t harmed by stricter regulations.

One of the hardest hit

U.S. bankers argue that well-off Latin Americans frequently move their money to the United States because they’re afraid of political corruption, kidnappings, and other criminal behavior in their home countries.

“If you’re an investor from a country with massive human rights violations or a corrupt regime, chances are you want your personal bank account information held in confidence,” Posey said in a statement. “By imposing this new reporting requirement, those depositors will think twice about where they invest their money” and many will “invest elsewhere at a cost of billions of dollars to our economy.”

Posey’s spokesman Cecala said that Florida would be one of the “hardest hit states” if the IRS went ahead with its planned federal regulation requiring banks to provide the IRS information about foreign depositors. “For nearly a century, the U.S. has sought to encourage foreigners to put their money to work in America,” Cecala said. “Having their money in U.S. banks makes more capital available for Americans and lowers interest rates.”

It makes no sense for the IRS the put the reporting rule in place without doing a cost-benefit analysis to determine what its impact could be, Cecala added. Posey, Meeks, and 13 other members of Congress claimed in a May 16 letter to Geithner that the IRS plan would put “more than $10 trillion in passive foreign investment in the U.S. economy at risk.”

Rebecca Wilkins, an attorney for Citizens for Tax Justice, a Washington-based advocacy group, testified at an IRS hearing in May that the $10 trillion figure doesn’t accurately describe the volume of the bank accounts that would be affected by the reporting requirement. Less than $1 trillion of that amount, Wilkins asserted, is held in the names of individuals who would be subject to the reporting rule, adding that she believed “only those people who are evading taxes will move their money as a result of this regulation.”

Levin said that there’s little evidence that requiring disclosure of accounts held by foreign citizens would cause a wholesale flight of foreign cash out of U.S. banks.

“Most foreign account holders are honest and have nothing to fear from the IRS proposal. The few who are hiding assets from their governments don’t warrant our help in concealing their accounts,” he said.

Michael Hudson writes for iWatch News, a project of the Center for Public Integrity, from where this article is reprinted.


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