New Threats to Financial Privacy Could Affect Foreign Investment in the U.S. and Hurt Economy

Washington, D.C., October 9, 2001—How much the federal government should be allowed to invade people’s privacy and infringe on civil liberties has been the focus of much debate since the terrorist attacks of September 11.  But even before then, the U.S. Treasury was considering a proposal that could threaten the right to financial privacy and have a negative impact on the U.S. economy.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />


The proposal, analysed in a report just released by the Competitive Enterprise Institute, would require U.S. banks to collect information on all accounts maintained by foreign investment institutions, even ones held by tax-exempt foreign investors.  The goal is to strengthen enforcement of the income tax, but the author of CEI’s report, Stephen J. Entin, says it would do more harm than good.


“Many foreign investors may fear the IRS would pass on the information to authorities in their home countries,” Entin said.  “This loss of privacy could lead to the withdrawal of billions of dollars in foreign savings in the U.S., which would affect investment, productivity, and employment.”  Entin estimates if the new rule drove $400 billion in foreign investment out of the U.S., our GDP (gross domestic product) would be reduced by $80 billion a year.


In addition to the U.S. Treasury proposal, the Organization for Economic Cooperation and Development is also considering actions that could do further economic damage to the U.S. and other countries.  The OECD wants to use economic sanctions to pressure low-tax nations into raising their tax rates to protect the high tax rates of European members, and is proposing that nations considered tax “havens” be forced to repeal their financial privacy laws and share financial information with tax authorities in OECD nations. 


Entin says the best solution to these international tax enforcement problems is for countries to scrap their income taxes and adopt a system of unbiased consumption-based taxes.  “This would improve economies instead of hurting them, and get rid of the need for one nation to gather tax information from another,” he explained.



Stephen J. Entin is president and executive director of the Institute for Research on the Economics of Taxation (IRET).  He was a deputy assistant secretary at the Department of the Treasury during the Reagan administration.


The report, “New Threats to Foreign Investment: The U.S. Treasury and Information Sharing” is now available. For interviews with Mr. Entin, contact the media relations department at 202.331.1010.