Steven Mnuchin and the Tax-Haven Divide

Treasury Secretary Nominee Steve Mnuchin On Economic Growth | Squawk Box | CNBC
Mnuchin is only one of several enormously wealthy financiers whom Trump has nominated to enact his policies.CreditILLUSTRATION BY MATT DORFMAN; SOURCE PHOTOGRAPH BY SPENCER PLATT / GETTY

If confirmed, Steven Mnuchin, the nominee to be Donald Trumps Treasury Secretary,will have a portfolio that touches on many critical issues, including tax policy, financial regulation, international trade, and the myriad conflicts posed by the next Presidents opaque business dealings. Also on the list is the matter of whether extremely wealthy investors will have the ability to avail themselves of offshore tax shelters in the future. That last responsibility became a central line of questioning at Mnuchins confirmation hearing on Thursday afterit was revealed, on the eve of his appearance, that Mnuchin, a hedge-fund manager, had failed to disclose to Congress his role as a director of an investment fund in an offshore tax haven. After a friendly introduction from Senator Orrin Hatch, of Utah, Senator Ron Wyden, of Oregon, the highest-ranking Democrat on the Finance Committee, began to speak. He started by criticizing the truly disgusting inequity and abuse of Americas tax laws in general, before turning to Mnuchins situation in particular.

There is no clearer example than Mr. Mnuchins hedge fund setting up outposts in Anguilla and the Cayman Islands, an action that can be explained only by the islands zero-per-cent tax rate, Wyden said. He then suggested that millions of dollars in profits from mnuchins various business ventures had been funnelled into an offshore web.

Mnuchin is only one of several enormously wealthy financiers whom Trump has nominated to enact his policies. A son of Wall Street through and through, Mnuchin spent seventeen years at Goldman Sachs, ran his own hedge fund, and bought out a mortgage lender that was on the edge of bankruptcy during the financial crisis. That company, OneWest, foreclosed on thousands of homes and was an extremely profitable investment for Mnuchin himself. (Bloomberg estimatedthat he made two hundred million dollars from the deal.) The disconnect between Mnuchin and the American middle class for whom Trump has claimed to be a savior and standard bearer was made even starker by Mnuchins additional revelation that hed neglected to disclose a hundred million dollars in real-estate assets to the Finance Committee.

In his opening statement, Wyden expressed outrage about this as well. Then he reminded those attending the hearing of an interview Mnuchin had given shortly after his nomination in which he said that there would be no net reduction in taxes for wealthy taxpayers under President Trumps future tax plan. Im going to start calling it the Mnuchin Rule, Wyden said, reiterating the pledge. No tax cut for the upper class.

Wydens list of charges against Mnuchin was so long that Senator Pat Roberts, a Republican from Kansas, addressed the ranking Democrat with what he called a pinprick of humor:Senator Wyden, Ive got a Valium pill that you might want to take before the second round.

Mnuchin, for his part, looked uncomfortable as the senators took turns subconsciously expressing their feelings, hostile or otherwise,by pronouncing his name in different ways. (Wyden called him Min-u-chin, with each syllable exaggerated, while Hatch started out with the friendlier-sounding Mun-chin.) Mnuchinsface looked weathered and reddish, and he squirmed and squinted, occasionally pursing his lips into a pout. I am committed to stimulating prosperity for all Americans, for economically empowering every citizen, he said, grasping for a theme that would help explain why someone like him was being put forth for the job. We will not rest in our mission until that is a reality.

He insisted that his failure to disclose the hundred million dollars in assets and the offshore funds had simply been a mistake, and that he was overwhelmed by the forms he had to fill out. Let me be clear, he said at one point. I did not use the Cayman Islands to avoid paying taxes myself. I paid taxes on all that income.

Wyden asked again about his investments in Anguilla. How many employees did you have in Anguilla? he said, adding later, Did you just have a post-office box?

Mnuchin acknowledged that there were no employees based in the tax havens, but he defended the choice to do business there. He was only satisfying the needs of his investorshe mentioned pension funds and nonprofits, although hedge-fund investors typically include wealthy individuals as wellwho wanted the option of an offshore fund.

Mnuchin went on for a while about the needs and demands of investors and how it was normal for hedge funds to cater to them this way, until Wyden, who had apparently not taken a Valium, broke in:Im very troubled about this question of how youre going to unrig the system if youve got a record of taking advantage of tax shelters that in effect have a zero-per-cent tax rate.

Even Hatch, Mnuchins defender, felt obliged to warn the nominee, almost apologetically, Youre going to get questions like this, and what was legal at the time is still being criticized.

Other than offshore funds, the big theme of the hearing was confusion. The subjects on which Mnuchin seemed to diverge from congressional Republicans, as well as the next Commander-in-Chief, were numerous. Mnuchin clarified that he does not favor a privatization of Fannie Mae and Freddie Mac, the two giant government-owned housing-finance companies that are central to the functioning of the mortgage market, dashing the hopes of hedge-fund investors who are betting on the opposite (and perhaps some Republicans who have been demanding that they be shut down). He said that he did not believe that taxpayer-insured banks, which include every bank that serves retail customers, should be involved in proprietary tradingthat is, investing speculatively in the stock market with the banks money. (The prohibition on propriety trading was championed by Democrats.) He also made a surprising and vigorous plea on behalf of the Internal Revenue Service, which has been starved of resources by Republicans for years. Mnuchin even acknowledged at one point that the extent of debt owed by the Trump Organization to foreign entities was a piece of information that policymakers deserved to know about (although he fell short of pledging to personally wrest that information from the President-to-be himself). It all underscored the strange dissonance that accompanies the power changeover thats under way in Washington, and the unsettling sense that no one, not even those in the seats of influence, has any clue what President Trump really believes or is likely to do.

Isnt it true that a lot of his debt is held by foreign interests? Claire McCaskill, the Democrat from Missouri, asked, referring to Trumps business interests.

Uh, I dont know, Mnuchin said. Ive just read it in the papers.

Like Mnuchin, America, and the world, are in uncertain watersand all anyone can do is to guess what might happen next.

Source: http://www.newyorker.com/news/news-desk/steven-mnuchin-and-the-tax-haven-divide