US must chase disappearing dollars, critics say


The United States needs more money and President Barack Obama hopes to boost federal coffers by raising corporate taxes and coercing tax cheats into compliance.

This content was published on June 16, 2009 - 14:17

It is the latter that most directly affects Switzerland's institutions. As the US continues to accrue an elephantine debt, the hunt for missing money has led some ideological rivals to find common ground.

J.D. Foster, a senior fellow and tax policy specialist at the Heritage Foundation, a conservative think tank in Washington DC, sympathises with people who want lower taxes but says US citizens must comply with the rules.

"People should not be breaking the law," he told at the Heritage Foundation's offices, four blocks east of the White House.

A budget official in the George W. Bush administration until 2007, Foster muses that many "northeastern liberals" hide their money in offshore centres and then vote for liberal politicians who will raise domestic personal income taxes – which they avoid.

Michael Ettlinger, vice president for economic policy at the Center for American Progress, a left-leaning think tank, agrees that the US is justified in its stance on Swiss banking. He says the Obama administration could not justify raising taxes domestically without pursuing evaders.

To that effect, the US has taken more seriously the efforts that the Organisation for Economic Co-operation and Development (OECD) began a decade ago. Troubled by their own economic conditions, politicians east of the Atlantic have stepped up efforts to pursue fleeing assets.

Squirrelling their nuts

US authorities say that by pursuing tax evaders more aggressively, they can generate $210 billion (SFr227 billion) over the next ten years. Ettlinger believes the figure could be higher. Whatever the amount, Foster looks forward to finding out the identities of those squirrelling their money overseas.

He may find out soon. The US Internal Revenue Service (IRS) is trying to persuade a Florida judge to compel UBS, Switzerland's largest bank, to disclose the identities of as many as 52,000 account holders it suspects of hiding $15 billion (SFr16 billion) in assets.

Their indiscretions – or whether they committed any – are not known.

The Swiss government and a coalition of industry associations have filed third-party briefs, arguing that forcing UBS to disclose client names would violate Swiss sovereignty as well as existing bilateral agreements. The Swiss want the court case dropped and replaced with a diplomatic solution.

"The IRS, along with the Justice Department, are going to do their job as best as they see fit to get as many people they believe have information that leads to taxable income as possible," said Nicholas Mirkay, a professor at Widener University School of Law in Wilmington, Delaware.

Carl Levin, a Democratic Senator from Michigan, is one of the harshest critics of Switzerland among US legislators. In 2007 Levin said tax havens "peddle secrecy the way other countries advertise high-quality services".

Supply stimulates demand

And advertise they did. The UBS case, which has for the most part been relegated to the financial pages in the US, piqued the interest of the New York Times editorial board.

The newspaper noted on May 2 that "UBS has already been caught soliciting illicit business in the United States. It admitted in court that it sent dozens of bankers on thousands of trips with devious stratagems to hide money from tax authorities".

"This is a case where supply has actually stimulated demand," John Christensen, a development economist and former economic advisor to the government of Jersey, a British tax haven, told

Christensen believes that the rapid growth of high net worth individuals over the past decade has raised the profit potential for the world's private bankers. He also believes that the industry's main players – not only Swiss banks but British and American banks – have lost some of the discretion that characterised private banking in the past.

Christensen, who is also director of the international secretariat at the Tax Justice Network, a coalition that includes Swiss development charities, argues that when large corporations and the very rich set up complex structures to avoid taxes, "they're not just breaking the law".

"They are confronting head-on democracy, the will of the people, the state and the ability of states to tax progressively."

Social contract

It is that confrontation that in his view overrides the right to privacy.

"Privacy is a very important human right but at the same time, the basis of modern society relies upon a social contract between citizen and state, and that social contract has tax at the very heart of it," he said.

Christensen's message to libertarians: by offering secret banking, countries like Switzerland "impinge on the national sovereignty" of the United States.

He acknowledges that while Switzerland has cooperated with foreign jurisdictions on individual tax fraud cases, Bern is taking a "very legalistic" view of the issue.

"Until now, they have not treated tax evasion as a criminal activity," he said.

And if they did? Ettlinger doubts people would risk depositing their money in non-reputable centres just to avoid paying taxes.

Foster believes other jurisdictions would move to fill the void "even if only for ten years or so" before being cut down by the bigger powers.

Justin Häne in Washington DC,

Four-part series

This is the second in a four-part reportage examining tax haven news and views from the United States. Swiss officials are negotiating a new double taxation agreement with the United States on Tuesday.

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In a nutshell

Switzerland has been under fire from US lawmakers for a number of years over banking secrecy. Critics say it allows people to store illicit assets and avoid paying taxes.

On May 14, 2008, the problem got worse when a UBS banker and a Liechtenstein businessman were charged with helping a US billionaire evade taxes.

In July 2008, a Miami court said the Internal Revenue Service could issue a summons demanding the names of around 52,000 UBS accountholders without proof that they were all tax evaders.

Swiss banks are not allowed to reveal the names of people who only fail to disclose assets or income to the US authorities. The Swiss government said the order would violate the country's sovereignty as well as an existing Swiss-US income tax treaty.

Citing updates to a treaty dating to 1951, Switzerland says it cooperates in cases of "tax fraud and the like".

The Internal Revenue Service says the treaty should be "viewed in context".

UBS has in the meantime quit private banking in the US and will hand over a few hundred client names.

In March, the Swiss decided to ease banking secrecy. They are renegotiating double taxation agreements with a number of countries, including the US, but have already said they will drop the distinction between evasion and fraud.

Swiss officials will meet US officials for a second time on June 16.

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Evasion or fraud?

People wishing to dodge paying taxes on their assets can do so by three means: avoidance, evasion and fraud.

Avoidance is the legitimate means of structuring finances so they don't fall under the scope of taxable assets. This can be done, for example, by setting up a trust fund or by changing country residence or nationality.

Evasion is the deliberate concealing the true state of assets from the tax authorities – in other words, lying about the extent of your assets. This is a civil offence in Switzerland and some other countries, such as Austria and Liechtenstein, but criminal in most states.

The main distinction between evasion and fraud is that the perpetrator tells lies on official documentation. Unless tax fraud can be proved, Swiss banks are not obliged to hand over details of client assets to investigators. In some cases this information is needed before fraud can be established in the first place.

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