Cleaning Up the Financial World

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This article was originally published in The American Interest.


Charles Davidson: Thank you, Senator Levin, for talking with The American Interest about a subject you tried to champion during your time in the Senate—namely, cleaning up the financial world, and especially getting at the offshore tax-evasion schemes that have lately made headlines thanks to the so-called Panama Papers revelation. But let me start by recalling that many years ago now TAI’s editorial board chair, Francis Fukuyama, once introduced you to a conference organized by Global Financial Integrity by drawing a parallel between how our wealthy corporations and individuals try to dodge taxes and the conditions in France preceding the Revolution. In particular, he mentioned that in the lead-up to the Revolution, Louis XVI lost virtually all ability to tax the nobility; so the crown resorted to selling offices—in other words, resorted literally to venality. Do we face a somewhat analogous situation?

Senator Carl Levin: I don’t see much of an analogy because in the United States we have elections in which people can change the government. This is not a place where the theft of public resources by leaders or dictators can lead to justifiable violence in an effort to overthrow a corrupt government. Some anger exists in the United States, for example about those who avoid paying taxes through the use of tax havens, but people understand that they can channel that anger toward constructive change. That wasn’t the case in monarchical France.

And we have not lost the ability to tax the wealthy, or to put pressure on unlawful behavior or behavior that ought to be unlawful. As you know, tens of thousands of U.S. citizens cheated on their taxes by putting money into Swiss bank accounts. After that was disclosed, in part through our hearings, the IRS offered an amnesty to those who were hiding revenue and owed taxes on it if they came forth and voluntarily paid those taxes. They would be charged interest but not penalties if they did so—that was the offer. And something like 40,000 to 60,000 U.S. citizens—I don’t have the actual number in my memory—responded, and we collected about $6 billion dollars.

So there’s real anger in this country, and it’s largely middle-income anger because it’s the middle-income earners who mainly bear the burden when the very wealthy manage to evade paying their share by law. I’ve seen some interesting recent polls which show that even a majority of Republicans want to close down these tax havens and make sure that people don’t use them to avoid paying taxes. Among independents and Democrats, it’s way higher than 50 percent, but even among Republicans there is a very deep feeling that something is wrong when the wealthiest among us, and when highly profitable corporations like Apple, can simply shift their intellectual property to tax havens and avoiding paying taxes even though the wealth was created here in the United States. Products might be manufactured in China and sold in various places around the world, but again the wealth was actually created here. Yet huge amounts of corporate revenues end up in Ireland, for example, where they’re paying 1 percent tax.

So we do have a real outpouring feeling here in the United States about behavior like this, but it’s nowhere near a revolutionary feeling. It’s just a strong feeling, and it’s one that can be expressed at an election.

CD: Do you see it playing out in the current presidential election?

Senator Levin: I do. I see it playing out mainly in the Sanders campaign, but the problem with the Sanders campaign is that he goes too far when he uses the term “socialist” or “revolution.” He uses both those terms, neither of which, I think, resonates with Middle America. But it’s not just playing out in the Sanders campaign. Depending on what Trump is saying on a given day you can see it there, too—as when he mentions an additional tax on upper-income folks, or when he talks about Wall Street in a critical way.

The problem with Trump is that a day later he’s saying, “No, no, we didn’t mean we wanted to increase the tax rate on upper-bracket people,” so you never know what he really believes or thinks. But I think to some extent his campaign was intended to attract people who are disaffected, and he is brashly trying to reflect and exploit that anger.

CD: If we go back to the history of tax evasion—say to the LGT Bank of Liechtenstein case, UBS, Julius Baer, the shutdown of Wegelin Bank, Credit Suisse, the voluntary disclosure that you mentioned earlier—have the most sophisticated schemes now been unraveled and shut down, or is tax evasion by U.S. citizens still a serious issue? Since you’ve been the member of the Senate in recent decades most involved in reform in this area, you probably have the best long-term perspective.

Senator Levin: We’ve made significant progress, but the problem has not gone away. The tax avoidance schemes that use bank accounts have been addressed in a very significant way with the FATCA (Foreign Account Tax Compliance Act) legislation. Congress passed a law in 2010 that says that if foreign banks hold investments in U.S. Treasury notes or receive any dividends on those investments from the U.S. Treasury or American companies, they are subject to a 30 percent withholding level unless they disclose the U.S. accounts to the IRS. That law has forced foreign banks with U.S. accounts to end the secrecy surrounding them. And I think nearly 200,000 foreign banks are now signed on to agreements with the IRS mandating the disclosure of Americans who own assets or hold accounts in those banks to the IRS. And the agreement is strong on defining beneficial owners, so we can get to the real owner if he or she is an American.

Now, that law applies only on individual bank accounts overseas. The bigger problem, I believe, has been the way in which our most profitable corporations, like Apple, have avoided paying taxes through the use of tax havens and transfer pricing gimmicks. That’s a bigger problem even than the secrecy that used to surround foreign bank accounts belonging to individuals. In terms of lost revenues we’re talking about $100 billion dollars in corporate tax revenues overseas per year. Several major American corporations hold revenues overseas, a significant portion of which come from the transfer of intellectual property by those corporations to themselves in tax havens. So when royalties are collected on the sales of their products, such as those of Apple and Google, those royalties sit overseas. These corporations and others that are very successful, and that have created great products, have also avoided paying taxes through the use of these offshore tax havens. We have not solved that problem yet.

CD: If we go back to a piece of legislation that you’ve championed over the years, the Stop Tax Haven Abuse Act, we see that the bill was originally co-sponsored by Obama and Coleman. What has happened to President Obama’s interest in this legislation over the years? Once in the White House he seems to have backed away.

Senator Levin: I think the President has continued to support the closing down of tax havens in response to some abuses. But the Administration has not weighed in on the reform area until recently. It has weighed in on an area that mainly has to do with the transparency of corporations, which is connected to this issue. But what is really needed is to end the loophole that’s been created in the tax code section called Subpart F.

CD: Right.

Senator Levin: When John Kennedy came into office, one of the first things he did as President was to come to Congress and say, “We’ve got to end tax haven abuses.” This is 1961, and he persuaded Congress in 1962 to pass a law called Subpart F, which really clamped down on tax havens. After about 20 or 30 years of effective clamping down on tax havens through the use of Subpart F, first the IRS probably inadvertently, and then Congress intentionally, created a loophole in Subpart F, so now the original stringency is easily avoided. What we need to do is return to a very effective Subpart F approach that really clamps down on tax havens. And that’s something that the Administration has not done.CD: Why not, do you think?

Senator Levin: I’m not sure why not. We’ve pressed the Treasury on this and other issues in some areas, again for instance FATCA, which we talked about before. They’ve done a tremendous job in leading the way toward clamping down on the individual accounts opened by Americans in tax havens and ending that abuse. And basically, I believe, they have succeeded—although it’s only partly implemented today.

But in the corporate area, it may be that the Administration lacks a legislative remedy, and this probably can’t be done by executive order. It may be that it knows that Congress will not go along in any event because the Republicans in Congress are not going to close the kind of tax haven loophole that I described. In my judgment they won’t close it until it’s part of what they call comprehensive tax reform. They want to save that reform for a comprehensive tax reform approach. The problem with that approach is that it’s unlikely to happen, for many reasons we could talk about. There’s not going to be comprehensive tax reform as far as the eye can see.

So what we ought to do is shut down these unjustified tax loopholes—the use of tax havens, transfer pricing abuses, revenue stripping—and not wait for a comprehensive tax reform that may never happen.

CD: Let’s move now to another form of financial-world dirt. I remember the hearing you held in the wake of the financial crisis in which Goldman Sachs was convection-roasted for selling shitty deals and betting against its own customers. In the wake of the financial crisis, no one was really punished. We got Dodd-Frank, a real bookshelf filler, and various regulatory tweaks; but how much have things changed?

Senator Levin: What’s needed is the implementation of Dodd-Frank. Just a couple of examples will illustrate what I mean. Dodd-Frank contained a provision that prohibits the type of activity that Goldman Sachs engaged in, which was betting against your own client, selling your client crap from your own inventory, and then betting against those same securities.

CD: It was quite profitable.

Senator Levin: It was, indeed. In one deal they shifted $2 billion to their own pockets by going short on their own clients. And that was the deal involving crap they had packaged from their own inventory that they knew was crap. It was really shocking. And they hadn’t paid a price for doing that deal, and as far as I know they still haven’t—though there may be a lawsuit still pending on that. In any event, Dodd-Frank does have a provision saying you can’t bet against a security you sell to your own client, but it’s not been implemented. And that provision came right out of the Goldman hearings.

Dodd-Frank also has a provision that prohibits conflicts of interest. It’s a generic, general provision I helped write, because of the conflicts of interest that we unearthed and demonstrated in the Goldman case. That’s not yet been implemented either. Several parts of Dodd-Frank have been implemented, including the requirement that banks increase their capital reserves, so that we’re going to have fewer big banks that are liable to fail.

CD: How about if we move to the Panama Papers. What’s your reaction to this huge data leak? How do you think that will affect possible reform efforts in this field of offshore finance and taxation?

Senator Levin: The global community was moving toward reform in this area anyway because so many treasuries of so many countries have lost revenue to corporations using offshore dodges to avoid paying taxes. It’s not just in the United States. So we’ve made some real progress, and that is partly thanks to cooperation with the European Union. The United States, however, has been a leader, and I think the Panama Papers revelation has given the effort additional momentum.

CD: Recently the President gave a speech in which he pushed for reforms regarding shell companies, beneficial ownership, and such matters. Are these suggestions for reform good ones? Many in the tax reform area think these are either neutral or even damaging because they open up new loopholes and they don’t dig deep enough into past behavior. What’s your view on this?

Senator Levin: The purpose is good. The President actually supported this kind of legislation, which I had introduced, that had a strong beneficial ownership definition—in other words, that really got to the actual people who actually controlled the corporations. The way we worded our legislation made that provision airtight. Now, while the purpose of what the President is proposing is a good one, the way it’s worded, I believe, is weak. It’s weak because under one interpretation—and we can be darn certain that the tax avoiders would use that interpretation— it would still allow the people who run the operations in tax havens to put up people to act as the managers of a corporation or the trustees of a trust. And if they can do that, they can hide the real beneficial owners, and that undermines the purpose of what the President seeks.

Now, there’s a bigger problem than that, and that’s the resistance in Congress. We’ve had legislation pending in Congress to get to the beneficial owners of corporations. Senator Sheldon Whitehouse has a bill in the Senate, and I believe it’s Congresswoman Maloney who’s got a bill in the House, requiring that the real owners be disclosed in corporation documents. The legislation is strongly supported by our law enforcement community because it goes after corporations that could be used by terrorists, gun-runners, drug kingpins, and other criminals.

But the Secretaries of State in the country, especially in places like Delaware, Wyoming, Nevada, and a few others, have been able to pressure their congressional delegations to stop such legislation from passing. That’s letting actually very dangerous people operate freely.

CD: The Financial Times ran a piece I think the week before last about how the United States is now the number-one secrecy jurisdiction in the world. So what is our real hope for changing all this? What do you see as the way forward?

Senator Levin: There is hope because the President is now clearly speaking out on it. On the other hand, the states that make a living out of organizing corporations—and there were two million corporations formed last year, and every year in the United States it’s a huge money maker for a lot of states—oppose requiring the disclosure of the real beneficial owners of corporations. They think it may hurt their business model.

CD: So we need to deal with this on the Federal level, then?

Senator Levin: Yeah, and that’s what our bill would do. It would require the Secretaries of State to have a line in their corporation documents requiring that the real owners be disclosed. That is something the banks are now required to do and there’s no reason why people who incorporate should be required to do anything less.

CD: Thank you so much for this, Senator—and just one last question, please: Who will carry forward your legacy regarding these matters in the Congress, in the Senate, and among potential Presidential candidates? As you say, despite some progress, there is a lot more work ahead, and work requires leadership.

Senator Levin: Well that’s going to depend on the public. There are plenty of people who are willing and able to do it. But it’s up to voters to raise these issues and insist that they be taken seriously. I think taxes are going to be right in the heart of the presidential campaign. It’s going to be a campaign where tax-avoidance schemes and tax loopholes that can’t be justified are going to be raised as issues. They already have been. And I think the public is going to see more and more that the growing income gap in this country is totally unacceptable, and that in part it is caused by tax avoidance by profitable corporations and by wealthy individuals. If there is sufficient voter demand, then we’ll get candidates taking strong positions in this area, and that will translate into better prospects for action in Congress.

CD: Senator Levin, thank you very much.

Senator Levin: Sure, glad to support the good work you do.


Carl Levin served as U.S. Senator (D-Michigan) from 1979-2015, and was a leading voice in Congress on efforts to combat abusive tax and financial practices. Charles Davidson is publisher of The American Interest and Executive Director of the Kleptocracy Initiative at Hudson Institute.