Finance. A hearing Thursday by the Senate's Permanent Subcommittee on investigations will focus on the role of Swiss bank UBS AG and a small Liechtenstein bank, LGT, in assisting U.S. clients seeking to avoid tax responsibilities. The panel, part of the Homeland Security and Governmental Affairs Committee, is investigating tax havens as Investigations Subcommittee Chairman Carl Levin, D-Mich., and ranking member Norm Coleman, R-Minn., press for passage of legislation to strengthen laws intended to stop overseas banks and their clients from using overseas accounts and shell companies to hide assets from the IRS. The senators hope outrage over the practice amid the economic slump will help advance their bill, which stalled in the Senate after introduction last year, and encourage the IRS to take steps to force overseas banks to disclose the names of American clients.
These tax shelter strategies are the result of the United States' decision to not impose any tax on interest income earned in the United States by foreigners. The removal of the withholding tax in the early 1980s is one cause of the dramatic growth of the U.S. trade deficit, part our pursuit of foreign savings. In addition this has helped drive down U.S. interest rates and U.S. savings rates.
Hopefully the investigation will also examine the abysmal lack of reporting carried out by U.S. banks. Unless foreigners with money in U.S. financial institutions voluntarily report their income on taxes, their home country will be none the wiser. Heritage foundation estimates several years ago when the IRS was considering revising the rules to report this income suggested that hundreds of billions of dollars were invested in the U.S. to take advantage of the loophole. (The Heritage Foundation thought this was a great thing).