The Legacy of Carl Levin

Corporate Welfare

The Legacy of Carl Levin

Corporate America will cheer the Michigan senator’s retirement. His investigations have flagged hundreds of billions in offshore tax evasion.

December 30, 2014

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This article was published in the Fall 2014 issue of The American Prospect magazine.

For 15 years, Senator Carl Levin has taught Americans how our tax system really works. Hearings by the Senate Permanent Subcommittee on Investigations (PSI), which he heads, have exposed modern accounting alchemy that turns the black ink of domestic profits into the red ink of tax-deductible expenses. Levin has shown how profits can be shipped tax-free to the Cayman Islands and, amazingly, how Apple figured out that profits booked in Ireland could be hidden from tax authorities of both Ireland and the United States in a cloak of invisibility. He exposed tax favors that were supposed to create jobs but ended up destroying them. He made Swiss bankers who solicited tax evasion on American soil squirm, destroying their claims that criminal conduct was the work of rogue bankers.

The senior senator from Michigan revealed that Goldman Sachs sold clients securities that it then bet would fail, eliciting eye-opening testimony from its CEO, Lloyd Blankfein, who saw nothing wrong with this. Over the decades, Levin has exposed wasteful, and sometimes corrupt, military contracting arrangements. His mind is even keen enough to attack regulations that strangle business while supporting stronger environmental and trade regulations that improve public health and create jobs.

Now at age 80, after 36 years in Washington, Levin is retiring.  He could easily have won a seventh term—voters gave him 63 percent of their ballots in 2008, up from 60.6 percent in 2002 and margins in the 50th percentile in his first three races.

Pending retirement makes it a good time to assess his career, including accomplishments that few expected in January of 1979, when he came to Washington as a middle-aged lawyer from Detroit elected only because the popular incumbent flubbed his re-election bid. Now, with Levin as the last of the 20 freshman senators of that class, his departure raises the question of who will champion tax fairness in the Senate, and who will have the skill to win support for hard-hitting investigations of bad business practices with such decency that Republican senators like John McCain and Tom Coburn praise the reports.

Who will possess the personal integrity, never touched by the slightest hint of scandal, along with the backbone and brains to take on the most powerful institutions in America on behalf of not just the little guy, but of a healthier republic?

 

(AP Photo/Susan Walsh)

Levin walks to a train on Capitol Hill in Washington, Tuesday, July 8, 2014, after chairing a closed meeting of the Senate Armed Service Committee on the situations in Iraq and Afghanistan that included then-Defense Secretary Chuck Hagel and Joint Chiefs of Staff Chairman General Martin E. Dempsey.

Last year, 55 of the Fortune 500 companies escaped $147.5 billion of U.S. corporate income taxes by siphoning domestic profits to offshore jurisdictions, where they paid an average tax rate of 6.7 percent, according to tabulations by Citizens for Tax Justice. The group also found that 362 of the 500 companies maintain at least 7,827 subsidiaries in tax havens. U.S. firms stuffed so much profit into Bermuda that it equaled 16 times the entire Bermudian economy. Ditto for the Cayman Islands.

I have long reported on statistics like these. Levin’s great contribution has been to use his investigative powers to show just how companies like American Express, Nike, and PepsiCo pulled off this feat. There are three basic techniques, complex in execution, but simple in principle. They are known as: check-the-box, deferral, and transfer pricing.

Check-the-box is an IRS regulation that makes transactions between related offshore subsidiaries invisible to tax auditors (though not to Levin’s determined gumshoes). Deferral occurs when companies pay fees to their offshore subsidiaries, like royalties for using a patent, making the profits go untaxed unless and until the money is brought home. Transfer pricing occurs when a company sells goods to itself as they move from factory to company marketing arm to the ultimate customer, allowing the company to book the profits in a tax haven. Add them up, and multinational corporations pay tax at a rate far lower than most working Americans.

As PSI chairman, Levin can issue subpoenas on his own, authority that he used to pry loose many millions of pages of documents revealing the secret world of corporate and individual tax avoidance and evasion, of government contracting fraud, of abuse of bank customers, and many other issues. His hearings resonate because Levin gives the staff time to develop a deep understanding of the subtleties of corporate deals that can turn the burden of tax into a bounty.

Levin showed how Apple devised a cost-sharing scheme using check-the-box that made much of its domestic profits disappear into an account in Ireland that is also invisible to Irish tax authorities. Apple structured its operations to take deductions in high-tax countries, notably the United States, and to declare profits in low-tax countries, like Ireland, where the corporate tax rate is 12.5 percent. Then Apple added a neat trick—it created two holding companies through which it ran two-thirds of its worldwide profits. By first siphoning profits out of the U.S. as tax-deductible royalties paid to one Irish holding company, and then transferring money to the second Irish subsidiary, it paid taxes only on the residue of profits caught in the net of technical tax rules.

Edward Kleinbard, a University of Southern California law professor who, as a Wall Street lawyer, designed such strategies, calls this “stateless income” because no country taxes such profits. Another former tax avoidance designer, Professor Stephen Shay of Harvard, calls this “ocean income” because to the tax authorities, it appears to be part of the deep blue sea, not profits on an accounting statement.

When you add it all up, Apple escaped $10 billion in federal income taxes each year—a huge sum when you consider that from 2009 through 2012, the corporate income tax revenue averaged less than $200 billion annually, all told.

 

Two years ago, Levin presided over hearings showing how Microsoft used research and development credits to reduce taxes on software it developed in the United States. Then, from 2009 to 2011, Microsoft, which does nearly all of its software development in the U.S., sold intellectual property rights to some of its software to Singapore and Irish subsidiaries for $4 billion. Then it paid these subsidiaries $12 billion in royalties, effectively siphoning $8 billion out of the U.S. and lowering its effective tax rate on that money from 35 percent to 3 percent, Levin found.

Consider the 2004 American Jobs Creation Act—Levin did. Multinational corporations and Republican senators insisted it would create 660,000 jobs and increase spending on research and development, which in turn would stimulate economic growth. The bill gave companies an 85 percent discount on their taxes, charging just 5.25 percent instead of 35 percent, if they repatriated profits kept overseas.

Levin’s investigation showed that 840 corporations brought money home. Jobs created? None. Indeed, the 15 corporations that brought home most of the money, $155 billion, ended up cutting 20,931 jobs.

The PSI majority staff study “found no evidence that repatriation funds increased overall U.S. research and development outlays.” Research spending actually slowed at the fifteen biggest firms: Altria, Bristol-Myers Squibb, Coca-Cola, DuPont, Eli Lilly, Hewlett-Packard, IBM, Intel, Johnson & Johnson, Merck, Oracle, PepsiCo, Pfizer, Procter & Gamble, and Schering-Plough (which merged with Merck in 2009). Levin warned in 2011 that new proposals to create another tax repatriation discount would produce similar results. Worse, he said, another tax break would strengthen the incentive for companies to siphon profits out of the country and invest overseas.

 

Facts have always been Levin’s stock-in-trade. As chairman or ranking member of the PSI, Levin has dug through mountains of papers to find golden nuggets of fact that he polished up before making public. He spends weeks studying the documents the staff brings until, at public hearings, he can distill essential truths.

Elise Bean, who went to work for Levin 29 years ago as a freshly minted University of Michigan lawyer and eventually became staff director and chief counsel of the permanent subcommittee, said Levin is constantly on the lookout for policy failures. He had one inviolate rule about proposed investigative subjects: “If it wasn’t complicated, Carl wasn’t interested,” Bean said.

Linda Gustitus, a former PSI staff director, said Levin “doesn’t bring harm to anybody; he has a hard time saying a mean thing. It’s funny because his reputation is as this bulldog on issues he cares about, mostly social justice. He has this absolute sense of fairness so when he takes on the head of Goldman Sachs or Citicorp or a defense contractor or a secretary of defense, it is because the facts have shown him that they are hurting people in an unfair way. He has a strong vision of government not as equalizing, but being supportive of people who need help legitimately. He thinks government is a good thing.”

Levin’s scholarly concentration inspired a dedicated and hardworking staff to not just investigate, but to conduct itself with respect for those under the microscope. Who and what was being looked at is kept confidential until the facts are thoroughly documented. No leaks. In this, Levin’s style is the opposite of the reckless Darrell Issa, the California Republican who makes accusations first and then looks for any shred of evidence to substantiate his claims, while ignoring facts that contradict what he has declared and silencing Democrats on his House Committee on Oversight and Government Reform.

Levin shut down various investigations over the years because the facts did not hold up under inquiry, said Bean, Gustitus, and others. No one, including Levin, would talk about who was the target of those closed inquiries.

 

Levin’s polite determination, fairness, and skill were on display last February in an all-day hearing into Credit Suisse, which had sent bankers to the United States looking for rich Americans willing to criminally conceal their income from the Internal Revenue Service.

Levin opened the hearing by saying that Credit Suisse had voluntarily told the committee about 150 trips to the U.S. by ten Swiss bankers. But then Levin foreshadowed what was to come by revealing that PSI staff “documented another 22 trips from 2002 to 2008.”

Levin elicited from Romeo Cerutti, the general counsel, that Credit Suisse was “very strict” about not allowing its bankers to solicit evasion on U.S. soil. Cerutti said U.S. trips were “only permitted for social purposes. … Unfortunately, as we got to learn during our internal investigation, people used ‘social purposes’ to get the trip approved and met other clients during the same trips.”

That defense—mistakes were made, policies violated—was methodically demolished over the next few hours as Levin demonstrated his mastery of arcane facts, legal concepts, and the art of cross-examination.

Cerutti and Brady W. Dougan, the American CEO of Credit Suisse, said their internal investigation report presented the “unvarnished” facts. They said a few Switzerland-based rogue bankers “went to great lengths to disguise their bad conduct from the bank.” Nearly three hours into the hearings, Levin asked Dougan to look at a March 2008 expense report filed by Markus Walder, head of the bank’s North American offshore private banking operation. It listed 49 meetings with existing and potential American clients.

“It’s obvious the person was doing business in the U.S., soliciting and servicing existing clients,” Levin observed.

“I would say it is, yes,” Dougan replied.

“Why did Credit Suisse ignore its own policies and pay for Swiss bankers to do this? Why did you approve that?” Levin asked.

 “I think it was a mistake,” Dougan replied, saying any misconduct simply had been overlooked. “If we had understood this type of activity was going on, it should have been stopped.”

That word—if—drew Levin’s interest. Were managers who signed off on the expense accounts, and the auditors who approved them, rogue bankers?

“Our policy is very clear,” Dougan said, evading the question.

Levin, in calm but firm voice, asked again. “Were all those bankers rogue bankers?”

 “They made mistakes,” Dougan replied, prompting another Levin question aimed at how higher-ups could not have been aware, given the many millions of dollars flowing from rich Americans into Credit Suisse.

“We felt these people were violating the policy intentionally and obviously hiding that from their management,” Dougan said, trying again to deflect responsibility.

 “This isn’t hidden from me,” Levin responded, holding the expense account form. “It’s pretty obvious. … Over and over again, hotel for dinner to prepare for an introduction to somebody, obviously a customer. We went to this person, followed by lunch. … This is not hidden.”

Dougan gave up. “I couldn’t agree more.”

But Levin was not done. He asked, again, were the managers and auditors rogue bankers? Dougan answered that there were errors, adding, “Perhaps they were not vigilant” in reviewing the expense reports.

“Even though this document on its face is very clear” that crimes were being solicited? Levin asked.

“It is very clear, you’re right,” Dougan responded, giving Levin the unqualified admission that Dougan’s and Cerutti’s formal statements and carefully nuanced answers were crafted to avoid.

Levin still was not done. He named two Swiss financiers, both indicted on tax charges, who arranged for their clients to meet Credit Suisse bankers. The Credit Suisse executives described these men as fiduciaries, meaning people who have a legal duty to put the interests of their clients ahead of their own interests, an important admission in law.

Who else? Levin asked, seeking the names of more fiduciaries. Cerutti, the bank’s general counsel, tried to escape an answer, saying he would need to check with others at Credit Suisse.

How about the people sitting behind you? Levin asked. Cerutti reluctantly turned to his entourage for a moment, and then said that under Swiss law, he was not allowed to name such people.

How many then? Levin asked. Cerutti then conceded that there were three other fiduciaries.

Levin continued this way for hours, question by carefully planned question, building a solid case that Credit Suisse knew exactly what it was doing, knew it was actively promoting criminal conduct on American soil and that its internal investigation report was not the unvarnished truth, but whitewash.

Alas, while Levin’s skillful interrogation did result in criminal charges, the bank was not expelled from the U.S. market. Attorney General Eric Holder, a corporate lawyer before and likely after his government stint, let Credit Suisse settle the charges by paying $2.6 billion in civil penalties.

Still, Levin elevated the public understanding of the calculated, deceptive strategies involved in the massive tax evasion among that thin but very rich slice of Americans who will commit felonies to escape taxes. Fair to say, Corporate America will not miss Levin, but honest taxpayers will.

 

Levin got to Washington only because Senator Robert P. Griffin, a popular Republican incumbent and the son of an autoworker, balked at seeking another term in 1978. By the time Griffin decided to get back into the race, the doubt his hesitation had created left an opening just large enough for a middle-aged Harvard lawyer, a Jew in a state with few synagogues, to win by a narrow margin.

John McCain told The American Prospect that he found it easy to work with Levin on the Senate Armed Services Committee partly because they shared similar views on military spending. Both men favor lots of it, but detest waste and contractor fraud. McCain went on and on, praising Levin as a man of his word, a character trait he indicated too few politicians possess. Levin would always check with the opposition first, he said, adding that they often found ways to agree, but when they could not, Levin would go his own way and fight for what he believed in—he never went back on his word.

(AP Photo/J. Scott Applewhite)

Senator Carl Levin, then Chairman of the Senate Homeland Security and Governmental Affairs Permanent subcommittee on Investigations, with Republican Senator John McCain, Republican of Arizona, who was the subcommittee's ranking member, arrive on Capitol Hill in Washington, Tuesday, May 21, 2013, for the subcommittee's hearing to examine the methods employed by multinational corporations to shift profits offshore. The two also joined forces to scuttle a measure sponsored by Senator Kirsten Gillibrand of New York that would have addressed the crisis of sexual assault in the military by removing adjudication of such crimes from the chain of command.

As a boy growing up in Detroit with his brother, Sander, now a Michigan congressman and his sister, Hannah, his parents emphasized moral obligations and respect for others, both brothers said. Levin said his parents and siblings were all “strong New Dealers,” believing government should play a major role in creating opportunity and promoting justice and fairness.

One summer around 1950, the brothers and some friends set off on a five-thousand–mile cross-country car trip, their parents insisting they ride in separate cars so both would not die in the event of an accident. Sander said the brothers instead rode together because they were much more cautious drivers than their friends.

As a young man, Levin worked briefly in an auto factory, learning firsthand the monotony of factory labor and the benefits of a strong union like the United Auto Workers. He also drove a cab, learning about a variety of people and their circumstances, work that he said has helped him understand the many sources and hearing witnesses he has met while exploring tax policy.

After graduating from Harvard Law and practicing at a private firm in Detroit, Levin first made himself a public figure by serving as general counsel of the Michigan Civil Rights Commission from 1964 to 1967. He was city council president when Coleman Young left the Michigan State Senate to become the city’s first black mayor, who, with Levin’s support, halved the city’s debt.

One of Levin’s favorite stories is about his father-in-law, an immigrant who in his will left $10,000 to the federal government. “He knew he wasn’t going to pay an estate tax—he was comfortable, but not wealthy—and as an immigrant he felt he owed a debt to America and he wanted to pay it one way or another. I tell that story, often on April 15, when wealthy people are complaining about their taxes.”

I asked Levin what he would tell his grandchildren if one wanted to become a politician. He spoke of politics in terms not of power and victory, but of that duty of loyalty, the fiduciary duty that bankers, brokers, and others we entrust with our money and assets try so hard to escape:

I would tell my grandchildren to first have an occupation they would be very happy in if they don’t win or, if they do win the election, that they can fall back on so they can follow the fiduciary path, which I believe is the right path for an elected official, which is to vote for what they think is best for their community. You have to be able to vote for what you think is best, even if it’s unpopular, if you want to be a fiduciary and truly represent the interests of your community and not yourself.

I would urge them to listen to their constituents, but also to the opposition, because the opposition deserves to be heard before decisions are made. I would urge them to learn how to compromise because that is the only way something gets done in a place like the Senate. I would urge them not just to listen to the opposition and to consider their arguments, but if they end up taking a position in prevailing I would urge them to give the other guy some ground to stand on.

Levin said that was “something Stennis talked a lot about,” referring to John C. Stennis, who chaired the Senate Armed Services Committee when Levin joined his freshman year as the junior Democrat. That Levin, a tireless advocate for civil rights, invoked as a mentor one of the most notorious white supremacists to serve in the United States Senate is indicative of Levin’s deep regard for the comity that makes the Senate function—or once did.

Starting with what Stennis told him and then mixing it with his own values, Levin said:

Someday you’re going to not have the votes and you want the other guy to come out of the battle with something, so never give up on the principle [Stennis advised], but always give consideration to the other person’s position so they have somewhere to stand afterward.

I always look forward to being told by people who go after me, ‘I don’t agree with you but I respect that you tell the truth as you see it and you don’t speak out of both sides of your mouth.’ Frankly, I would—not quite, but almost—prefer to hear that to someone coming up to me and saying, ‘You’re great and I agree with you 100 percent of the time,’ because I don’t even agree with myself 100 percent of the time.

Levin, despite his support for military outlays, was a leading dove on the military committee when it came to resisting what President Obama memorably called “stupid stuff.” He opposed the war in Iraq and he took a role in denouncing torture and euphemisms like “enhanced interrogation techniques.” Levin often talks of his respect for those in uniform. He said the one surprise of his decades of work on the committee dealing with military spending was that senior officers turned out “to be much more cautious about the use of force than I expected” before becoming a senator. He said that before taking office, he thought, “perhaps stereotypically, that military leaders would think of force as the best approach to a problem, but they turn out to be much more cautious than many of our civilian leaders. … Even with Republican presidents, I found their military leaders to be much more cautious. Looking at [Colin] Powell, who really didn’t want to go to war in Iraq [in 2003]—one of his great failings was not saying that to the president and not saying he could not go along. That reluctance, however, came through to us on the Hill.”

Were he to stay in the Senate, Levin said he would “continue the battle I am waging right now. Much of the work on PSI has to do with role of taxes, tax avoidance, excessive greed, Wall Street abuses, which have all contributed to a growing income gap in this country.” The reason, he said, is the threat they pose to compliance with tax laws and support for government, as well as their undermining of government’s fiscal integrity.

And he said his primary behind-the-scenes goal would be to recruit Republican supporters for integrity in the tax system. “Loopholes in our tax law allow the wealthiest and most profitable corporations to avoid paying taxes—these are loopholes I have been fighting to close and will continue fighting to my last day. I am trying to find a Republican—who I know exists, but so far who will not sign up—for closing unjustified tax loopholes.”

 
(AP Photo/J. Scott Applewhite)

Carl Levin joins senators who opposed a measure called for by advocates for sexual assault survivors that would have addressed the crisis of rape and sexual crimes in the military by removing their adjudication from the chain of command. Levin's opposition to the measure, as chairman of the Senate Armed Services Committee, was key to its defeat. Senators who joined him at a December 4, 2014, press conference on the matter include, from right, Claire McCaskill, Democrat of Missouri; Kelly Ayotte, Republican of New Hampshire, and Deb Fischer, Republican of Nebraska. 

With Levin leaving, who, if anyone, will undertake the methodical, often tedious work of digging deeply into the complex maneuvers used by the most powerful economic interests in America? Next in seniority on the investigations subcommittee are Mark Pryor of Arkansas and Mary Landrieu of Louisiana, both centrist Democrats and both facing tough re-elections this fall. Of ranking Democrats on the Finance Committee, which has policy jurisdiction over taxes, Maria Cantwell of Washington state has shown a taste for investigation. But Cantwell is not on the PSI or its parent committee, and it’s not at all clear that Democrats will be the Senate majority party after January.

You might think, with hundreds of billions of dollars in the low-hanging fruit of evaded taxes, it would be easy to win recruits to his cause. But though the crusade for deficit reduction is underwritten by corporate elites, it is hard to find a corporate sponsor for collecting taxes owed. The senator is optimistic, though: “We are in the early stages of reform,” Levin said.

There will be reform because we are not going in a sustainable direction. This country is too ingrained as an egalitarian country to continue to accept this direction and the status quo; it is unacceptable. It is unacceptable that you have folks making billions of dollars, but avoiding paying taxes so they can make more billions of dollars without paying taxes. This is a function of leadership, to be able to explain clearly, and hopefully in a non-demagogic way, as I tried for my hearings, with some success in the legislation that has been enacted, that taxes and a fair tax system are central to our democracy.

Levin believes we will get real tax reform only when the gaming of the system by large corporations and super-wealthy individuals “becomes an issue, becomes the issue, in the presidential contest.” That may be a long way off. For now, the question is: Who will step into Levin’s very large shoes?

 
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