I’ve written several times about a proposed IRS regulation that would force American banks to put foreign law above U.S. law. I’ve repeatedly warned that the scheme, which would force financial institutions to report the deposit interest they pay to foreigners, is bad economic policy, bad regulatory policy, and bad banking policy.

My arguments have included:

• Explaining that this onerous regulatory scheme will result in capital fleeing to other nations, needlessly harming the financial sector and putting American banks at risk.
• Explaining why the proposal is a threat to human rights since many foreigners keep money in the United States because they live in nations with unstable and/or repressive governments.
• Explaining that the IRS action is a gross abuse of the regulatory process since an executive branch agency does not have the authority to overturn laws enacted as part of the democratic process.
• Explaining that this proposed regulation is just the beginning, and that proponents hope to issue follow-up rules that would cripple policies making America a haven for global capital.

But these points don’t seem to matter to the Obama Administration, which is ideologically committed to the anti-tax competition agenda of Europe’s welfare states. This is why the White House supports all sorts of destructive policies, including not only this misguided regulation, but also the creation of something akin to a world tax organization that will have power to block free-market tax policy.

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Last year, I came up with a saying that “Bad Government Policy Begets More Bad Government Policy” and labeled it “Mitchell’s Law” during a bout of narcissism.

There are lots of examples of this phenomenon, such as the misguided War on Drugs being a precursor to intrusive, costly, and ineffective money laundering policies.

Or how about government healthcare subsidies driving up the price of healthcare, which then leads politicians to decide that there should be even more subsidies because healthcare has become more expensive.

But if you want a really stark example of Mitchell’s Law, the internal revenue code is littered with examples.

The politicians created a nightmarishly complex tax system, for instance, and then decided that enforcing the wretched system required the erosion of civil liberties and constitutional freedoms.

The latest example of this process involves the Foreign Account Tax Compliance Act, a piece of legislation that was imposed in 2010 because politicians assumed they could collect lots of tax revenue every single year by getting money from so-called tax havens.

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President Obama recently told a group of CEO’s that America had “been a little bit lazy” about “selling America and trying to attract new businesses into America.” Is this the case, or has the quality of the product simply declined? America’s descent in the Heritage Index of Economic Freedom would certainly tend to suggest that it’s the latter. The reality is that laziness is not to blame for any increasing unattractiveness to foreign investors; government policy is.

There are two looming policies, in particular, that are threatening foreign investment in the US. One of those is the Foreign Account Tax Compliance Act (FATCA), passed in 2010 in an effort to raise revenue for the HIRE Act through greater tax enforcement. The other is an IRS proposed regulation which would require reporting of interest payment information on foreign depositor accounts, despite the fact that the US has no use for the information. Both policies are misguided, counterproductive, and will drive investment out of the US.

FATCA is designed to compel foreign financial institutions to become deputy tax collectors for the IRS. By 2014, these institutions will be expected to have implemented expensive new data collection and reporting systems, and those that have not complied will face a 30% withholding tax on US source payments to the institution. As if those costs aren’t enough, FATCA also conflicts with local privacy laws in many countries, placing FFIs in an impossible position. Already, institutions are deciding that it makes more sense to simply drop their US clients and disinvest in US markets than to continue jumping through IRS hoops. The result is billions in lost foreign investment, and there is only more to come.

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Earlier this year, President Obama’s IRS proposed a regulation that would force banks in America to report any interest they pay to accounts owned by non-resident aliens (that’s the technical term for foreigners who don’t live in the U.S.).

What made this regulation so bizarre, however, is that Congress specifically has exempted these account from taxation for the rather obvious reason that they want to attract this mobile capital to the American economy. Indeed, Congress repeatedly has ratified this policy ever since it was first implemented 90 years ago.

So why, you may be asking, would the IRS propose such a regulation? After all, why impose a regulatory burden on a weakened banking sector when it has nothing to do with enforcing American tax law?

The answer, if you can believe it, is that they want American banks to help enforce foreign tax law. And the bureaucrats at the IRS want to impose this burden even though the regulation is completely contrary to existing U.S. law.

Not surprisingly, this rogue behavior by the IRS already has generated considerable opposition. Senator Rubio has been a leader on the issue, being the first to condemn the proposed regulation.

Both Senators from Texas also have announced their opposition, and the entire Florida congressional delegation came out against the IRS’s regulatory overreach.

And now we have two more important voices against the IRS’s rogue regulation.

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Being the world’s self-appointed defender of so-called tax havens has led to some rather bizarre episodes.

The bureaucrats at the Organization for Economic Cooperation and Development threatened to have me thrown in a Mexican jail for the horrible crime of standing in the public lobby of a hotel and giving advice to low-tax jurisdictions.

On a more amusing note, my efforts to defend tax havens made me the beneficiary of grade inflation and I was listed as the 244th most important person in the world of global  finance – even higher than George Soros and Paul Krugman.

But if that makes it seem as if the battle is full of drama and (exaggerated) glory, that would be a gross exaggeration. More than 99 percent of my time on this issue is consumed by the difficult task of trying to convince policy makers that tax competition, fiscal sovereignty, and financial privacy should be celebrated rather than persecuted.

Sort of like convincing thieves that it’s a good idea for houses to have alarm systems.

And it means I’m also condemned to the never-ending chore of debunking left-wing attacks on tax havens. The big-government crowd viscerally despises these jurisdictions because tax competition threatens the ability of politicians to engage in class warfare/redistribution policies.

Here’s a typical example. Paul Vallely has a column, entitled “There is no moral case for tax havens,” in the UK-based Independent.

To determine whether tax havens are immoral, let’s peruse Mr. Vallely’s column. It begins with an attack on Ugland House in the Cayman Islands.

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Senator Rubio continues to impress with his Reagan-like efforts to restrain government and promote growth. His latest initiative is legislation to curtail rogue IRS bureaucrats who are seeking to use regulatory edicts to overturn 90 years of law.

Here are excerpts from a report in The Hill.

Sen. Marco Rubio (R-Fla.) and other Senate Republicans on Tuesday introduced a bill aimed at blocking pending regulations that would require banks to report to the Internal Revenue Service all interest deposits paid to nonresident aliens (NRA). Rubio, along with Texas GOP Sens. John Cornyn and Kay Bailey Hutchison, introduced S. 1506 because they believe the pending regulations have the potential to drive billions of dollars of deposits away from U.S. banks. A summary of the bill provided by Rubio’s office argues that this could leave U.S. banks undercapitalized and less able to lend in the U.S. “Simply put, this rule will cause billions of dollars in important NRA deposits to be withdrawn from American banks and invested in countries with less onerous reporting requirements,” the lawmakers state in the bill summary. “A capital flight of any magnitude will hurt the lending capacity of community banks and damage local and state economies — not to mention endanger those who invest in U.S. banks due to corruption, inflation, and violence in their home countries, particularly in nations like Mexico and Venezuela.” The summary also notes that Congress has explicitly exempted NRA deposits from taxation… Rubio’s bill is a companion bill to H.R. 2568, which was introduced by Reps. Bill Posey (R-Fla.), Francisco Canseco (R-Texas), Mario Diaz-Balart (R-Fla.), Ruben Hinojosa (D-Texas) and Gregory Meeks (D-NY).

This may sound like a technical issue, but there are big implications.

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There hasn’t been much good economic news in recent years, but one bright spot for the economy is that the United States is a haven for foreign investors and this has helped attract more than $10 trillion to American capital markets according to Commerce Department data.

These funds are hugely important for the health of the U.S. financial sector and are a critical source of funds for new job creation and other forms of investment.

This is a credit to the competitiveness of American banks and other financial institutions, but we also should give credit to politicians. For more than 90 years, Congress has approved and maintained laws to attract investment from overseas. As a general rule, foreigners are not taxed on interest they earn in America. Moreover, by not requiring it to be reported to the IRS, lawmakers on Capitol Hill have effectively blocked foreign governments from taxing this U.S.-source income.

This is why it is so disappointing and frustrating that the Internal Revenue Service is creating grave risks for the American economy by pushing a regulation that would drive a significant slice of this foreign capital to other nations. More specifically, the IRS wants banks to report how much interest they pay foreign depositors so that this information can be forwarded to overseas tax authorities.

Yes, you read correctly.

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I’m not a big fan of the IRS, but usually I blame politicians for America’s corrupt, unfair, and punitive tax system. Sometimes, though, the tax bureaucrats run amok and earn their reputation as America’s most despised bureaucracy.

Here’s an example. Earlier this year, the Internal Revenue Service proposed a regulation that would force American banks to become deputy tax collectors for foreign governments. Specifically, they would be required to report any interest they pay to accounts held by nonresident aliens (a term used for foreigners who live abroad).

The IRS issued this proposal, even though Congress repeatedly has voted not to tax this income because of an understandable desire to attract job-creating capital to the U.S. economy. In other words, the IRS is acting like a rogue bureaucracy, seeking to overturn laws enacted through the democratic process.

But that’s just the tip of the iceberg. The IRS’s interest-reporting regulation also threatens the stability of the American banking system, makes America less attractive for foreign investors, and weakens the human rights of people who live under corrupt and tyrannical governments.

This Center for Freedom and Prosperity video outlines five specific reason why the IRS regulation is bad news and should be withdrawn.

I’m not sure what upsets me most. As a believer in honest and lawful government, it is outrageous that the IRS is abusing the regulatory process to pursue an ideological agenda that is contrary to 90 years of congressional law.

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It’s easy to complain about the IRS, but more often than not the bureaucrats are simply carrying out the bad policies imposed by Congress. There certainly are some egregious cases of IRS abuse, but it’s typically the fault of lawmakers for enacting bad law.

But such is not the case with a regulation currently under consideration which would require that American banks put foreign tax law above U.S. tax law. The regulation deals with the obscure issue of reporting requirements for bank deposit interest paid to foreigners, but the economic impact would be significant. Worst of all, the IRS is seeking to overturn existing law. In some ways, this is the tax equivalent of the EPA’s notorious power grab scheme to impose cap-and-trade with regulatory edicts.

A bit of background. On January 7th, the IRS proposed this regulation (REG-146097-09) to force American financial institutions to report any interest payed to foreigners. Typically, U.S. tax authorities only require information used for U.S. tax purposes. And since Congress wants to attract this investment to the American economy, the law has clearly stated for 90 years that foreigners won’t get taxed, leaving no need to collect any information about this income. But now, as part of global efforts to undermine tax competition and usurp fiscal sovereignty, the IRS is unilaterally asserting the right to demand this information. Only it’s not to enforce American law, but in order to hand the information over to foreign governments so that they can tax this U.S.-source income.

There is good reason why investors would want to protect their personal information.

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In an amusing coincidence, Secretary of State Hillary Clinton and I were both in Latin America this week offering fiscal policy advice. But it won’t surprise you to know that Mrs. Clinton’s suggestions are radically different than the advice I provided. She spoke in Ecuador and, according to an AFP report, said it was time for “the wealthy across the Americas to pay their ‘fair share’ of taxes in order to eliminate poverty and promote economic opportunity for all.” She also claimed that “her appeal to overhaul tax systems did not amount to ‘class warfare’ and was instead a recognition that the ‘winner-take-all-approach’ was a drag on progress.” The AFP story concludes with Mrs. Clinton asserting, “We can’t mince words about this. Levels of tax evasion are unacceptably high,”

By contrast, in my remarks to the Fundacion Libertad in Panama and in my speech to the Chamber of Commerce in El Salvador, I explained that academic research shows that better tax compliance is best achieved by lowering tax rates and eliminating inefficient and corrupt spending programs so that taxpayers have more confidence that their money is not being wasted. But let’s touch on something even more important than economics. I also made a moral argument about the danger of giving national tax authorities too much power and information – especially in a region where governments oftentimes are the source of oppression, expropriation, and tyranny. Simply stated, there are some things that are more important than obeying tax laws. This Center for Freedom and Prosperity video explains that so-called tax havens are an extremely important refuge for people who are subject to persecution and other forms of government malfeasance.

Let’s consider some Latin American examples. Imagine a political dissident in Venezuela. Hugo Chavez has turned that country into a thugocracy and opponents of his sinister regime are vulnerable to having their assets expropriated (and worse). Thankfully, many Venezuelans are able to protect themselves from socialist tyranny by putting their money in Cayman, Panama, or Miami (the U.S. is a tax haven for non-U.S. people). But if Mrs. Clinton got to make the rules, tax havens would no longer exist and Chavez would be empowered.

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Thanks to provisions buried within the Obama/Dodd financial deform bill, your personal information — from ATM withdrawals to loans — will now be collected by the federal government with no protections to your personal privacy.

The legislation creates another federal bureaucracy — the Consumer Financial Protection Bureau (CFPB) that is nothing more than a systematic government invasion of your personal finances of every consumer creating a financial fingerprint for the government to watch over.

Dodd’s bill deputizes the CFPB to act as a new federal watchdog agency to collect consumers’ personal financial information and transactions including records from Automatic Teller Machines from any financial institution or firm.

Don’t believe us — read the bill.

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Yesterday we brought you “As Tea Party Activists Protest Dodd’s Big Brother Bill, Bank of America Deploys Security Forces,” the story of a group of  Tea Party and 912 Project protesters in Charlotte, North Carolina who showed up at the Bank of America headquarters to protest the bank’s sweetheart deal with Senator Kay Hagan on the financial reform bill currently moving through the Senate.  As protesters arrived with the intention of standing peacefully while holding signs that read things like  “No More Bailouts” and “CFPA = Big Brother”, they were met by several local police officers, a number of Bank of America paid security guards, and a few hired security extras from Wackenhut.

No one knows how the police or Bank of America were informed of the protest, as the event coordinators had not sent such a notification, nor had they filed for a permit with such a small number of attendees.  Further, the event was only scheduled the prior day.  Nonetheless, the bank was obviously prepared enough to have beefed up their security staff and hired the extra guards.

All that, for this peaceful bunch of patriotic citizens, there only to exercise their 1st amendment rights and express their discontent with the out of control bailouts and Big Brother environment created by the marriage of Big Government and Big Banks.  The financial reform bill only makes that environment even worse.  So they had something to say about it.

Sure, officers and security guards have every right to direct citizens away from private property and onto the public property boundaries.  Standing there in a line however, and hovering in the corner  in numbers that outweigh that of the protesters themselves only creates a chilling effect on 1st amendment rights like free speech and the right of the people to peaceably assemble.

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In Charlotte, North Carolina, there’s apparently a growing deadly threat to worry about.  It seems that protesters there are getting unruly these days – so unruly that local businesses have brought on extra security detail to help out the local police.

That’s what happened when one such group of protesters descended upon the Bank of America headquarters on Saturday, May 8th.  The group showed up around lunchtime, eager to protest the financial reform bill currently making its way through the Senate.  Upon their arrival, not only were they met by three Charlotte police cars and a couple of local officers, but evidently Bank of America had somehow caught wind of the event and sent out another six or so Bank of America paid security staff. As an extra precaution, the bank had also hired at least two Wackenhut security officers to augment their usual staff.  Apparently, Bank of America felt it necessary to prepare for some sort of pending siege – these are Tea Party protesters we’re talking about here.  According to our own members of Congress and their allies, they’ve deemed Tea Partiers, the very constituents they are supposed to represent, a violent, racist bunch of potentially unstable people.

Well, when I heard about the incident, I couldn’t wait to get a look at these dangerous rabble-rousers.

So this is the riot mob that Bank of America sent out its security force, including extras from Wackenhut, to aggressively resist.

Meanwhile, these protesters showed up simply to draw attention to Bank of America’s role in trying to influence the current financial reform legislation.  In North Carolina, Bank of America has a special place in the heart of Democratic Senator Kay Hagan, who has been pushing an amendment to the bill on behalf of the giant bank.  (Coincidentally, it also benefits another of the Senator’s AND Bank of America’s favorites, the Center for Responsible Lending…but that’s for another post).

Hagan, a former Vice President with Bank of America who oversaw subprime lending programs there, has proposed the amendment under the guise of “protecting consumers”, but when Bank of America is a staunch supporter of the legislation, it’s easy to be suspicious of anyone’s supposed good intent.

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The University of Basel’s Institute of Governance recently published a map showing the nations most linked to dirty money. What made the map interesting is that only one of the 28 nations listed was a so-called tax haven, thus exposing the left-wing lie that low-tax jurisdictions are somehow hotbeds of dirty money.

A more fundamental question is whether anti-money laundering laws are an effective way of fighting crime.  The evidence is not encouraging. The system costs billions of dollars each year. Banks are forced to set up expensive monitoring systems to snoop on their customers. They are then required to send reports to the government for all large or unusual transactions. Theoretically, these reports are supposed to alert law enforcement to patterns of criminal activity, but since banks are compelled to send millions of reports every year, it is impossible to sift through haystacks of data to find needles of criminal activity. This is why conservatives, such as a former Reagan Justice Department official John Yoder, think the laws do more harm than good. This six-minute video from the Center for Freedom and Prosperity explains why the time has come for politicians to reconsider the current approach.

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A Swiss court just threw a wrench in the gears of an IRS effort to impose bad US tax law on an extraterritorial basis, ruling that UBS does not have to hand over data to the American tax authorities.

This ruling nullifies an agreement that the Swiss government was coerced into making with the US government last year. In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the internal revenue code imposes double taxation on income that is saved and invested and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:

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