Cato’s Dan Mitchell shines a light on a new effort at the IRS to increase revenue, starting by reporting interest payments on foreign capital deposited and invested in the US with an eye towards later taxation [see update II below]. Congress passed a specific rule blocking that kind of taxation, but short-term thinking in the administration and at the IRS has the agency looking for any revenue it can find. The problem, as Mitchell points out for the Center for Freedom and Prosperity, is that the long-term effects would be disastrous for the American economy and could create a collapse in an industry we just finished bailing out:
We spent hundreds of billions of dollars in capital infusions for the banking and financial services industries in the wake of the 2008 collapse, narrowly averting a systemic calamity in the American monetary system. Even if this was a good policy in the long term — which it isn’t, for reasons Mitchell explains rather clearly here — this is hardly the moment for the US to encourage foreign investors to look for friendlier shores. Not all of the $10 trillion of foreign capital invested in the US would get withdrawn, but a significant amount of it certainly would disappear. That kind of flight would make 2008’s crisis look like a mild day-trading loss in comparison, and it would bring any hope of economic recovery to a quick and painful halt. If the capital exits quickly enough, it could start bank runs and utter ruin.
Who’s bright idea is this, anyway? And who is pushing the IRS to defy clear Congressional intent and changing American tax policy?
Update: Commenters are calling this a new “Smoot-Hawley”, which is particularly apt.
Update II: A tax attorney corrects me in part on this by noting that the IRS wants to require reporting the income, not taxing it, which Congress would have to authorize. I’ve changed the lead to reflect the important distinction, but it’s still a big problem. The IRS would only want the reporting in order to argue for the taxation, ie, “Look how much revenue we’re letting slip through our fingers!” Investors react to signals like this, and the application of the tax itself might be a moot point once the reporting requirement was in place. I still should have been more accurate.