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.

A new article in the Weekly Standard explains what’s at stake.

Early last year the Treasury Department published its “Guidance on Reporting Interest Paid to Nonresident Aliens,” which would require banks to report to the Internal Revenue Service the interest paid to foreign depositors with a U.S. bank account. While the Treasury and the regulatory apparatus insist that the cost and inconvenience of adhering to this regulation is next to nothing, the rule may cost the U.S. banking system hundreds of billions of dollars in lost deposits, in turn costing our economy billions of dollars, while providing no discernible benefit to banks, depositors, taxpayers, or the U.S. economy. …a much bigger problem—for banks and the economy—than the compliance costs is the threat of a massive capital flight. The United States is a very popular place for foreigners to park their savings, for a variety of reasons. For starters, we offer a stable government that can be trusted to keep its hands off deposits—something that appeals greatly to residents of Venezuela, Argentina, Ecuador, and any number of other unstable countries. …As a result, a staggeringly large amount of savings from abroad is currently held in U.S banks. While the Treasury asserts that “deposits held by nonresident alien individuals are a very small percentage of the [total] deposits held by U.S. financial institutions,” that very small percentage amounts to more than $3.7 trillion, according to a 2011 Bureau of Economic Analysis report, hardly a pittance. The massive amount of foreign savings here is a boon to the U.S. economy. Banks lend against these deposits, mainly to companies here in the United States. Jay Cochran, an economist at George Mason University, studied the impact that the more limited 2002 reporting requirements would have had on the banking system, estimating that it would have resulted in nearly $100 billion in deposits leaving the U.S. banking system. A reporting regulation that covers all foreign accounts would likely result in two to three times more capital flight. The impact would be harmful not just for the banks but for the broader economy. The decline in profits in the banking sector alone from a roughly quarter-trillion-dollar capital flight would be in the range of $5-10 billion—which makes a mockery of the notion that the costs of the regulation are under $100,000.

For more information about this wretched proposal, here’s a video I narrated on the topic.

To put it bluntly, the Obama Administration is pushing this regulation because it thinks the anti-tax competition agenda of Europe’s welfare states is so important that it is willing to risk the health of the American economy, undermine the soundness of U.S. financial institutions, disregard the rule of law, and abuse the regulatory process.

Indeed, this proposal is even worse than the increasingly infamous Foreign Account Tax Compliance Act.

And that’s saying something, because with each passing day, it is more and more obvious that FATCA is a destructive law that will significantly harm the American economy. But at least it’s a law, one that was approved by Congress and signed by the President. And the costly FATCA regulations being developed by the IRS are for the purpose of enforcing the law.

The interest-reporting IRS regulation is also costly and destructive, to be sure, but what makes it so perverse is that it is – at best – completely gratuitous. It is being advanced solely for reasons of ideology, regardless of the law and consequences be damned.

Both of these extremes do great disservice to the party. Conservatives need to avoid painting caricatures of each other. These insults weaken the party, prevent reasoned debate, and offer Democrats potential talking points like Christmas presents wrapped with silver bows.

The immigration debate involves many principles worthy of serious discussion. The two most important—often exaggerated or underestimated by opponents and the media—are justice and compassion.

The principle of justice is intimately connection to the rule of law. Those who prioritize justice above all focus on the following question: Does a sovereign nation like the United States have the right to set immigration policy and, as a result, remove any and all breakers of immigration law, even if certain persons have lived in the United States for decades, have contributed to society, and attend church? Hardline conservatives answer with an impassioned and simple “yes”.

Many conservatives, on the other hand, believe that the primary concern in the immigration issue should be compassion. Presumably, many consider it immoral to deport whole swaths of people from their homes, especially those hardworking and otherwise moral people who have resided here for decades and who have contributed something important to society. Many undoubtedly are interested in garnering support specifically from the Latino community, hoping that the fastest growing minority voting bloc could be swayed by compassionate immigration policy.

The crucial point here is that for those whose number one priority is justice, compassion is not unimportant. Conversely, those who emphasize compassion generally do not dismiss the rule of law. It appears that Newt Gingrich, for example, seeks to prioritize both. Many hardline conservatives appeared crestfallen by their interpretation of his immigration policy, which equated a plea for compassion with amnesty. But Gingrich never suggested that compassion should trump justice—only that it should be a crucial consideration.

Both camps have legitimate viewpoints. It is essential that the Republican Party attend to both in developing a thorough, multi-faceted immigration policy—one far superior to the “comprehensive immigration policy” the Obama regime supports.

Behaviorist principles can inform the issue of immigration. By definition, all reinforced behaviors will continue or increase in frequency or intensity. Surely, illegal immigration makes up a set of behaviors that have been reinforced for decades. Illegal immigrants are directly rewarded by powerful financial incentives, including employment opportunities and an array of entitlements. Indirectly, they are reinforced by the weak Executive Branch follow-through on immigration laws. These are the “magnets” to which several Republican candidates have often referred.

Understanding this, who can blame immigrants who enter our country illegally? Presumably, they are aware of basic immigration laws; surely, they are equally aware that these laws are weakly, if ever, enforced. Can a parent blame a child who regularly sneaks candy and every time he gets caught, his parents simply say, “Oh Junior, you shouldn’t have” but do absolutely nothing about it (like locking the cupboards or allowing the child candy only when he has eaten a healthy meal)? When the behavior continues, the blame should be laid on the agent of reinforcement (parents), not the child.

Now imagine if after years of allowing the child to sneak candy, the parents determine to change their policy. They announce that they will keep the cupboards full with healthy food and few sweets, which must be earned. Additionally, any sneaking sweets will result in the removal of the child’s favorite reinforcers (e.g., dessert, electronics, sleepovers) for a week. And to the child’s surprise, the parents follow through on their policy.

No one would deny the legitimacy of this change in policy and enforcement (i.e., an increase in the rule of law). But some cry foul at the notion that we could legitimately change our immigration policy. Of course, there is a marked difference between being deported from the greatest nation on earth and losing one’s XBox for a week.

Just as children are—often inadvertently—trained to misbehave, our nation’s policies have trained immigrants to come here illegally. For decades, we have welcomed them in and now we are complaining that they are here. Again, we have the right to change immigration policy and to enforce it actively and consistently. However, punishing current illegal immigrants for behaving in ways that we have actively encouraged seems unfair to many. More importantly, it focuses on the wrong source of the problem: our own immigration policy and its enforcement.

The question remains: which principle trumps all others? The Republican Party actively and nobly struggles with this question; we have been witnessing this struggle during the Republican primary debates. Voters are getting a sense of whose immigration policy satisfies the principles that match their priorities.

Voters are quite able to prioritize and emphasize multiple principles. It would be wise for Republicans to recognize that these voters—particularly independent-minded voters—likely desire a candidate whose policies simultaneously and successfully emphasize multiple principles. Voters will be repulsed by a candidate whose one-track mind lacks nuanced thinking. Republicans must be skilled and assertive in explaining their position on immigration in a way that protects them from appearing to lack this balance and complexity.

George W. Bush advanced the cause of conservatism by espousing principles and policies under the banner of “Compassionate Conservativism”. Conservatives would do well to skillfully communicate an immigration policy that espouses both justice and compassion. True compassionate conservatism should reflect a commitment to work hard to balance the rule of law with compassion. Comprehensive immigration policy would not only be moral, but pragmatic. It would satisfy those voters for whom the rule of law is supreme and those who emphasize compassionate treatment of illegal immigrants. We don’t have to choose only one.

I call all Republican candidates to not only cease using caricatures in attacking their opponents, but to seek to honor the principles underlying the difference in their opponents’ policies. A candidate who believes that justice should remain one of the highest priorities—second only to mercy and compassion—is not heartless, any more than a conservative who seeks to prioritize compassion is guilty of flaunting the rule of law.

The Republican nominee will have plenty of opportunity to release his or her venom on Obama’s policies, which err on many sides and whose priorities are radically different from those of almost every Republican candidate. For now, they should follow the dictum of Ronald Reagan to “speak no evil of a fellow Republican.”

Career lawyers in the civil rights division of the Justice Department, who were frequently sidelined and overruled during the Bush Administration, are reasserting their authority and independence under Obama. They may be the only ones who can halt the GOP’s war on voting.

This is the same Department of Justice that abandoned the open-and-shut case against the New Black Panther Party for voter intimidation.

As whistleblower J. Christian Adams writes in his new book, Injustice: Exposing the Racial Agenda of the Obama Justice Department: “from the advent of the Obama administration in January 2009, it was clear resistance to the case went to the top of the Civil Rights Division and beyond.”

Two presidents, two administrations, two complaints. Who is right? Is the argument over voter rights enforcement merely a political battle that Americans are doomed to re-live with each change of government?

The debate goes deeper than partisanship. It is a clash between two different visions of civil rights and tolerance. One applies the same rules to all. The other imposes different moral and legal burdens according to race.

That double standard goes far beyond the Department of Justice.

For several days, the mainstream media has obsessed over whether the word “nigger” might have appeared on a rock in the Texas backcountry where Republican contender Rick Perry hunted:

The governor’s record on matters of race is attracting new scrutiny after The Washington Post’s account of a secluded West Texas hunting property that Perry and his father leased that has long been known by a name containing a racial epithet.

The name, “Niggerhead,” was painted in block letters across a large rock by the property’s entrance. Perry has described the word on the rock as “an offensive name that has no place in the modern world.” But it remains unclear when or whether he dealt with it while using the hunting camp.

- “Perry built complicated record on matters of race,” Amy Gardner,

Washington Post, October 3, 2011

Yet Barack Obama used the word “nigger” over a dozen times in his first autobiography–not always quoting other people–without causing any fuss from 1995 to the present:

Maybe we could afford to give the bad-assed nigger pose a rest. Save it for when we really needed it.

- Barack Obama, Dreams from My Father: A Story of Race and Inheritance,

Three Rivers (1995), p. 82

Adams reveals how that cultural double standard, when applied by government, undermines the rule of law itself. He documents how the New Black Panther Party offered its public support to Obama at a moment when he was trailing Hillary Clinton and struggling to establish an authentic connection with black voters.

In that context, his administration’s decision not to pursue the case against the Panthers looks like political payback.

If the Department of Justice was “politicized” under George W. Bush, as critics alleged, at least it never embraced a double standard as a philosophy of law. And if Americans’ trust in government is at an all-time low, that is partly because there is seen to be one law for the political elite and the rich, and another law for everyone else.

In the administration of justice, a double standard anywhere corrodes the rule of law everywhere. That, more than race, is why the New Black Panther Party case matters.

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.

The Chairman of the Oversight Subcommittee in charge of the IRS, Congressman Charles Boustany of Louisiana, just sent a very critical letter to Treasury Secretary Geithner, and these are some of his chief concerns.

If the regulation were to take effect, it would not only run counter to the will of the Congress, but would potentially drive foreign investments out of our economy, hurting individuals and small businesses by reducing access to capital.  I write to request that IRS suspend the proposed regulation. …As the Internal Revenue Code imposes no taxation or reporting requirements on this deposit interest, the proposed regulation serves no compelling tax collection purpose.  Instead, it is my understanding that the IRS seeks this new authority to help foreign governments collect their own taxes abroad.  …It is disappointing to see the IRS once again try to impose unnecessary regulations and costs on U.S. banks. To attract investment of foreign dollars into the U.S. economy, the Internal Revenue Code generally exempts these deposits from taxation and reporting requirements.  These foreign investments in turn help to finance a variety of products essential to economic growth, such as small business loans and home mortgages.  Imposing reporting requirements on these deposits through regulatory fiat threatens to drive significant investments out of our economy by undermining the rules Congress has set in place specifically to attract it, and at exactly the time when our economy can least afford it.

But criticism is not limited to Capitol Hill. The Center for Freedom and Prosperity has spearheaded opposition from think tanks, taxpayer organizations, and public policy groups.

And now the business community has become involved. Here’s some of what the Chamber of Commerce recently said, and you can click this PDF file (USCC S1506) to read the entire letter.

Given the fragile state of America’s economic recovery, it is disturbing to see actions by the Treasury that could jeopardize deposits at U.S. banks and credit unions held by nonresident aliens. These deposits, which are not subject to U.S. taxes, are at risk of being abruptly withdrawn and future deposits deterred, which could lead to a reallocation of deposits out of the U.S. banking system and, thus, reduce lending to businesses. Furthermore, complying with the proposed regulation places additional reporting requirements and expenses upon financial firms. Without any real benefit stemming from the collection of this information, imposition of this reporting requirement seems to be a solution in search of a problem.

This may seem like an arcane issue and international tax matters often are not terribly exciting, but a couple of minutes of watching this video will make you realize there are some very important principles at stake.

Only the IRS could manage to combine bad tax policy, bad regulatory policy, bad human rights policy, and bad sovereignty policy into one regulation.

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.

The IRS is seeking to abuse its regulatory power to overturn existing law.

Not surprisingly, many members of Congress are rather upset by this rogue behavior.

Senator Rubio, for instance, just sent a letter to President Obama, slamming the IRS and urging the withdrawal of the regulation.

At a time when unemployment remains high and economic growth is lagging, forcing banks to report interest paid to nonresident aliens would encourage the flight of capital overseas to jurisdictions without onerous reporting requirements, place unnecessary burdens on the American economy, put our financial system at a fundamental competitive disadvantage, and would restrict access to capital when our economy can least afford it. …I respectfully ask that Regulation 146097-09 be permanently withdrawn from consideration. This regulation would have a highly detrimental effect on our economy at a time when pro-growth measures are sorely needed.

And here’s what the entire Florida House delegation (including all Democrats) had to say in a separate letter organized by Congressman Posey.

America’s financial institutions benefit greatly from deposits of foreigners in U.S. banks. These deposits help finance jobs and generate economic growth… For more than 90 years, the United States has recognized the importance of foreign deposits and has refrained from taxing the interest earned by them or requiring their reporting. Unfortunately, a rule proposed by the Internal Revenue Service would overturn this practice and likely result in the flight of hundreds of billions of dollars from U.S. financial institutions. …According to the Commerce Department, foreigners have $10.6 trillion passively invested in the U.S. economy, including nearly “$3.6 trillion reported by U.S. banks and securities brokers.” In addition, a 2004 study from the Mercatus Center at George Mason University estimated that “a scaled back version of the rule would drive $88 billion from American financial institutions,” and this version of the regulation will be far more damaging.

Both Texas Senators also have registered their opposition. Senators Hutchison and Cornyn wrote to the Obama Administration earlier this month.

We are very concerned that this proposed regulation will bring serious harm to the Texas economy, should it go into effect. …Forgoing the taxation of deposit interest paid to certain global investors is a long-standing tax policy that helps attract capital investment to the United States. For generations, these investors have placed their funds in institutions in Texas and across the United States because of the safety of our banks. Another reason that many of these investors deposit funds in American institutions is the instability in their home countries. …With less capital, community banks will be able to extend less credit to working families and small businesses. Ultimately, working families and small businesses will bear the brunt of this ill-advised rule. Given the ongoing fragility of our nation’s economy, we must not pursue policies that will send away job-creating capital.We ask you to withdraw the IRS’s proposed REG-14609-09. The United States should continue to encourage deposits from global investors, as our nation and our economy are best served by this policy.

Their dismay shouldn’t be too surprising since their state would be especially disadvantaged. Here are key passages from a story in the Houston Chronicle.

Texas bankers fear Mexican nationals will yank their deposits if the institutions are required to report to the Internal Revenue Service the interest income non-U.S. residents earn. …such a requirement would drive billions of dollars in deposits to other countries from banks in Texas and other parts the country, hindering the economic recovery, bankers argue. About a trillion dollars in deposits from foreign nationals are in U.S. bank accounts, according to some estimates. …The issue is of particular concern to some banks in South Texas, where many Mexican nationals have moved deposits because they don’t feel their money is safe in institutions in Mexico. …”This proposal has caused a wave of panic in Mexico,” said Lindsay Martin, an estate-planning lawyer with Oppenheimer Blend Harrison + Tate in San Antonio. He has received in recent weeks more than a dozen calls from Mexican nationals and U.S.-based financial planners with questions on the rule. …Jabier Rodriguez, chief executive of Pharr-based Lone Star National Bank, said not one Mexican national he has spoken to backs the rule. “Several of them have said if it were to happen, then there’s no reason for us to have our money here anymore,” he said. Many Mexican nationals worry that the data could end up in the wrong hands, jeopardizing their safety. If people in Mexico and some South American nations find out they have a million dollars in an FDIC-insured account in the United States, “their families could be kidnapped,” added Alex Sanchez, president of the Florida Bankers Association.

For those who want more information about this critical issue, here’s a video explaining why the IRS’s unlawful regulation is very bad for the American economy.

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.

But I guess we shouldn’t be surprised to see this kind of policy from the IRS with Obama in the White House. After all, this Administration already is using the EPA in a dubious scheme to impose costly global warming rules even though Congress decided not to approve Obama’s misguided legislation.

As an economist, however, I worry about the impact on the U.S. banking sector and the risks for the overall economy. Foreigners invest lots of money in the American economy, more than $10 trillion according to Commerce Department data. This money boosts our financial markets and creates untold numbers of jobs. We don’t know how much of the capital will leave if the regulation is implemented, but even the loss of a couple of hundred billion dollars would be bad news considering the weak recovery and shaky financial sector.

As a decent human being, I’m also angry that Obama’s IRS is undermining the human rights of foreigners who use the American financial system as a safe haven. Countless people protect their assets in America because of corruption, expropriation, instability, persecution, discrimination, and crime in their home countries. The only silver lining is that these people will simply move their money to safer jurisdictions, such as Panama, the Cayman Islands, Hong Kong, or Switzerland, if the regulation is implemented. That’s great news for them, but bad news for the U.S. economy.

In pushing this regulation, the IRS even disregarded rule-making procedures adopted during the Clinton Administration. But all this is explained in the video, so let’s close this post with a link to a somewhat naughty – but very appropriate – joke about the IRS.

The simple summary of the video is that economic liberalization and small government boost economic performance, not “jobs programs” or “stimulus packages.” But things are never as simple as they seem. Many Republicans, for instance, act as if any economic problem can be solved by cutting taxes. That’s a laundable instinct, to be sure, but fiscal policy only accounts for 20 percent of a nation’s economic performance and it is unreasonable to assume good tax policy can solve the problems caused by bad monetary policy or foolish regulatory interventions. Moreover, there is a big difference between good (supply-side) tax cuts that increase incentives for productive behavior and useless gimmicks such as tax credits and tax holidays. If Republicans want to rebuild their credibility on economic issues, they need to apologize for the reckless statism of the Bush years and rededicate themselves to shrinking the size and scope of the federal government.