Why We Need the Hackers behind the Panama Papers

Why We Need the Hackers behind the Panama Papers

April 28, 2016

The outrage heard around the world on the release of the Panama Papers brings to mind Claude Rains’s turn as the Vichy prefect of police in Casablanca, “discovering” gambling going on at Rick’s Café. The fact that many of the world’s richest people and most corrupt politicians squirrel away hundreds of billions of dollars in secret offshore accounts has been common knowledge for years. Less well known is the dogged opposition of Congressional Republicans to reforms that would end much of the secrecy surrounding the untaxed offshore wealth of the very rich and very powerful, reforms that most other countries have embraced.

The ownership and assets of these offshore accounts are hidden by complex networks of trusts and shell companies, often distributed across multiple tax havens from the Cayman Islands and Bermuda to Luxembourg and Singapore.  Lawyers and bankers create and maintain these trusts, shell companies and accounts in ways that have kept them hidden; at least until hackers accessed 11.5 million pages of files on the networks held by the Panamanian law firm Mossack Fonseca, a leading fixer in this shady practice.

The outstanding question is why governments allow these networks to remain secret, when they shield trillions of dollars in investment gains and profits that escape normal taxation and the ill-gotten riches of criminal and terrorist organizations and crooked politicians. The United States has two major laws in this area. For 46 years, the Bank Secrecy Act of 1970 has directed that any U.S. citizen, resident or business with financial interests in offshore accounts must report any income earned on those accounts.

The Foreign Account Tax Compliance Act of 2010 goes further. It directs all American citizens and residents that file U.S. income tax to report all offshore financial assets valued at $50,000 or more, and mandates that all foreign financial institutions report to the U.S. Treasury all of their accounts with substantial U.S. owners that also receive payments from the U.S. Both laws carry big financial penalties for violation; but neither law has any enforcement provisions, so the laws have little effect.

As financial losses from cross-border tax evasion and corruption have mounted, the Organisation for Economic Co-operation and Development (OECD) stepped in to sponsor new international standards for financial transparency and, equally important, new protocols for the automatic exchange by governments of the information they collect. Under these OECD standards and protocols, each government agrees to collect information on all account balances, investment income and other proceeds from financial assets within its jurisdiction; and to automatically share that information with the tax administrators of the nations where the owners of those accounts, investments and assets reside.

The G-20 finance ministers endorsed these standards and protocols in 2014. Since then, 97 countries have signed on, including most tax havens.  Even Panama agreed to the new standards and protocols, although the OECD reports that Panama and 10 other countries have not yet implemented them.

But the whole system is on hold, because the United States has not signed on. The Obama administration endorsed the new transparency system and proposed legislation to require U.S. financial institutions to collect the information on foreign-owned accounts held here and to authorize the automatic exchanges. Citing their longtime “respect for privacy rights,” Congressional Republicans flat-out reject both proposals.

On top of the administration’s proposals, Senator Sheldon Whitehouse has offered new legislation to strengthen the proposed transparency regime. His proposal targets many of the stratagems used by U.S. multinationals to avoid U.S. taxes, including shifting profits to tax haven countries. He also would tighten the OECD’s transparency standards and beef up compliance in several ways.

Whitehouse’s bill states that any foreign trust or shell company with substantial assets in the U.S. and managed here will be deemed a U.S. taxpayer, that U.S. taxpayers who set up entities in tax havens will be considered to control those assets, and that funds transferred from the U.S. to those entities will be deemed taxable income not yet taxed.  Most important, the proposal would bar U.S. banks from dealing with any foreign financial institution that fails to disclose offshore accounts opened by Americans and holding non-U.S. investments. Unsurprisingly, the Senate GOP has blocked the bill.

Such a bar is the big stick required to pierce the global secrecy treasured by the very rich and the very corrupt, and ensure that the automatic exchanges of information happen. In 2017, Hillary Clinton and a Democratic or divided but chastened Congress should pass reforms directing that all U.S. financial institutions comply with the OECD standards and protocols. This step would not only create real transparency; it also should produce several tens of billions of dollars in new annual revenues for the Treasury.

These reforms also must bar U.S. financial institutions from conducting business with any foreign financial institution that fails to disclose the ownership and holdings of accounts, trusts and shell companies owned by U.S. citizens, residents and businesses, within their jurisdiction. That’s a threat that every financial institution in the world will have to take seriously.



Whatever Some Candidates Tell You, the Incomes of Most Americans Have Been Rising

April 4, 2016

After a decade when most Americans saw their incomes decline, the latest Census Bureau income data contain very good news: A majority of U.S. households racked up healthy income gains in 2013 and 2014. The facts may not fit the narratives of Donald Trump, Ted Cruz, or Bernie Sanders.  But they do help explain why President Obama’s job approval and favorability ratings have passed 50 percent.

They also show that Hispanic households made more income progress in 2013 and 2014 than any other group, which may be one reason for their growing support for Demovrats.  A third surprise: Households headed by Americans without high school diplomas racked up their first meaningful income gains since the 1990s, thanks to the large job gains in 2013 and 2014 and the Obamacare cash subsidies beginning in those years.

These findings come from using the Census data on the median incomes of American households by the age, gender, race and education of their household heads, to track their income progress as they aged from 2009 to 2012. I focused first on millennial households headed by young women and men who were 20- to 29-years-old in 2009, which makes them 27- to 36-year-old voters today.

For decades, younger households have been the group with the fastest-rising incomes, and the recent period is no exception. Despite colorful stories of millions of young people living in their parents’ basements, the data show that the household incomes of these millennials (adjusted for inflation) grew 3.6 percent per year from 2009 to 2012, and those gains accelerated to 4.5 percent per year in 2013 and 2014.

The data also show that the incomes of millennial Hispanic households grew 5.4 percent per year in 2013 and 2014, outpacing the progress of white and African American millennial households of the same ages. To be sure, not all millennials did nearly so well: The household incomes of those without high-school diplomas, which had declined an average of 1 percent per year from 2009 to 2012, rose 3.1 percent in 2013 and 2014 — while the incomes of households headed by millennials with high school diplomas or college degrees grew 5 percent per year.

Two main factors are at work here, as well as in the big gains by Hispanic households, First, businesses created almost 2.5 million net new jobs in 2013 and 3 million more in 2014, and such strong job growth disproportionately helps those at the economy’s margin. Second, Obamacare’s cash subsidies for lower-income households kicked in the same years, and Census counts government cash subsidies as a form of income.

The years 2013 and 2014 also were good for most of Generation X. My analysis here focused on households headed by people who were 35 to 39 in 2009, which means they are 42- to 46-year-old voters today. In those two years, the median income of those Gen X households rose 2.3 percent per year — a major turnaround from 2009 to 2012, when their incomes had declined 4 percent per year.

As with the millennials, Gen X households headed by Hispanics made more income progress in 2013 and 2014 than did their white or African American counterparts. And thanks once again to the robust job growth and the Obamacare cash subsidies, Gen X households headed by people without high school diplomas made substantial income progress in 2013 and 2014 — in fact, more progress than Gen X households headed by high school or college graduates.

For many decades, the income gains of most Americans have slowed as they aged. Nevertheless, the new income data contain moderately good news for households headed by late baby boomers, those who were 45- to 49-years-old in 2009 and today are voters ages 52 to 56.  Their median household incomes rose in 2013 and 2014 by an average of .5 percent per year; but even that was a big improvement from 2009 to 2012, when their incomes fell 1.1 percent per year.

As with the millennials and Gen Xers, the Hispanic boomer households again fared better than their white and African American counterparts in 2013 and 2014: The median incomes of these Hispanic households grew 2.8 percent per year in 2013 and 2014, compared to gains of 2 percent per year by African American boomers and .1 percent per year by white boomers. Also, once again, the data show that the incomes of households headed by boomers without high school diplomas grew faster in 2013 and 2014 than the incomes of boomer households headed by high school or college graduates.

The Census Bureau will release the 2015 incomes data in a few months. We already know that the economy created another 2.65 million new jobs in 2015. If, as expected, the broad income progress seen in 2013 and 2014 persists in 2015, it will rebut much of the economic message touted by Trump, and badly weaken Sander’s critique of Hillary Clinton. These data may not penetrate those campaigns and the media that surround them, but American voters know when their own incomes have improved — and that will alter the landscape for next November in ways almost certain to favor Democrats and their nominee.