Mueller and the fate of the US republic

The ex-FBI chief has a zealous G-man quality to send shivers down White House spines

by Edward Luce

Robert Mueller is an all-American hero and he will not be intimidated © Getty

There are two words for those who think the US republic is teetering: Donald Trump. There is also a two-word riposte: Robert Mueller. While Mr Mueller stays in his job, the US system is working as it should. Credit where it is due. The single-minded former Federal Bureau of Investigation chief was appointed as special counsel by Mr Trump’s administration. If a nation’s politics is judged on how it responds to alleged crime in high places, America is acting in textbook fashion. In the words of his biographer, Mr Mueller is “America’s straightest arrow”. He is entrusted with the integrity of the system.

Yet the temptation for Mr Trump to fire him grows by the day. It would be hard to think of anyone more inoculated against a smear campaign than Mr Mueller. Unlike many of his detractors, he fought in the Vietnam war. He was wounded but voluntarily returned to lead his platoon in combat. He won several medals, including a Purple Heart. At the FBI he oversaw the largest mafia investigation in history, which ended with the conviction of John Gotti, head of the powerful Gambino family. A registered Republican, he was appointed to head the FBI by George W Bush — a job he began one week before the 11 September attacks.

Such a record tells you two things. Mr Mueller is an all-American hero and he will not be intimidated. He cuts the kind of figure Mr Trump normally admires — a tall, square-jawed, patriot straight from central casting. That, of course, is why Mr Trump wants to sack him. Mr Mueller has that zealous G-man quality that sends shivers down White House spines.

Whatever Mr Mueller’s investigation turns up — anyone who thinks they know where it will end is bluffing — the process is unflinching. Ask Paul Manafort, Mr Trump’s former campaign manager, who was marched into court on Monday to hear 12 criminal counts against him. Or George Papadopoulos, Mr Trump’s former campaign adviser, who has pleaded guilty to lying to the FBI.

Here is a public servant who actually believes in public service.

Such virtues are normally celebrated by patriots. They are also what make it so hard to bring Mr Mueller down. The pro-Trump media are nevertheless trying to do just that. From Fox News to the Wall Street Journal, the goal is to pave the way for Mr Mueller’s dismissal by casting doubt on his objectivity. Their case rests on two thin reeds. The first is that Barack Obama asked Mr Mueller to extend his FBI tenure for the first two years of his presidency.

That meant Mr Mueller was one of the nine agency heads, along with Hillary Clinton, who oversaw the clearance of the sale of a Canadian uranium mining company to a Russian one.

Neither personally approved the transaction. Yet this notional overlap is exhibit A in the appearance of collusion between Mr Mueller and Mrs Clinton.

The second is that Mr Mueller worked for a law firm that included several partners who gave money to the Democrats. Mr Mueller did not. Unlike the president, Mr Mueller is a life-long Republican. Mr Trump donated to both parties on many occasions. Should such standards apply, few prosecutors would make the grade. That is the sum of Mr Mueller’s alleged conflicts of interest. There is nothing there. But the campaign to tarnish his credentials is now the priority.

At this point two more words are relevant: Rupert Murdoch. Whatever doubts the conservative media baron had about Mr Trump are now forgotten. Any elected Republican who departs from this script would be risking career suicide. Mr Trump claims Mr Mueller is conducting a “witch hunt” against him. Mr Murdoch’s outlets clearly agree. They are thus rekindling a parallel witch-hunt against Mrs Clinton.

My bet is that on this turf Mr Mueller is wilier than either of them. He has one job — to pursue whichever leads he deems relevant to the Russia collusion inquiry. He knows how to conduct an investigation. But it is Mr Mueller’s professionalism that most endangers him. The deeper he probes, the bigger the threat to Mr Trump. As the quip goes, Mr Mueller would indict his mother if he thought she broke the law. Did Mr Trump collude with Russia? We do not know.

But in the course of his job Mr Mueller is examining Mr Trump’s business record, including his taxes.

Mr Trump has said any inquiry into his commercial history would cross a “red line”. Mr Mueller is already doing that. He is playing a bold game. People in autocracies should watch him work. This is democracy in action. Some might say that Mr Mueller is putting “America First”. Alas, those two words may get him fired.

The Lure of Luxembourg

A Peek Behind the VW Tax Haven Curtain

By Simon Hage, Martin Hesse and Blaz Zgaga

  Volkswagen headquarters in Wolfsburg

Volkswagen has established several companies in Luxembourg in recent years, worth a total of 17 billion euros. The structure has raised suspicions that the German carmaker is trying to sidestep the tax office back home.

When Hans Dieter Pötsch was asked in early 2013 about the tax-shelter schemes used by some multinational corporations, his words seemed to reflect genuine indignation. "For Volkswagen, let me be extremely clear, we have never played such games."

At the time, the public was still unaware of the vast diesel emissions deception being perpetrated by the German automobile manufacturer, a scandal which has come to be known as Dieselgate. As such, Pötsch was able to hold forth, without fear of contradiction, on how important "good citizenship" is for the carmaker. The term is used these days to describe enterprises that adhere to the law, pay their taxes and perhaps even demonstrate social responsibility.

In other words, no tax games. Pötsch, who is now chairman of the supervisory board at VW, was certainly in a position to know. At the time, he was chief financial officer and thus responsible for his company's tax strategy.

In early 2013, though, Pötsch did leave a small detail unmentioned: Since 2012, VW had maintained a holding company and a financing company in Luxembourg, a country known for its business-friendly tax regime. And in the ensuing years, the Wolfsburg-based automobile giant has woven an almost impenetrable web of capital networks and cash flows within Luxembourg worth a total of 17 billion euros.

Pötsch was still the company's CFO in 2014 when VW decided to concentrate a large portion of its international holdings in Luxembourg. That same year, the automobile manufacturer transferred almost two dozen subsidiaries from a Netherlands-based holding company to Volkswagen Finance Luxemburg S.A. (VFL).

Regarding the motivation driving the shift to the Luxembourg model, the "good citizen" VW says today: "The establishment of holding and financing companies in an attractive regulatory location is done primarily for reasons of finance strategy." Taking steps to avoid the multiple taxation of dividends, the company says, "has nothing to do with a tax-shelter scheme." It makes it sound like the company is trying to protect itself from the perniciousness of German tax law.

A Significant Amount

Volkswagen prides itself on having paid 3 billion euros in taxes in 2016. But it could have been more, particularly in Germany. DER SPIEGEL and the journalism consortium European Investigative Collaborations have analyzed dozens of financial statements and other documents and come to the conclusion that the carmaker, 20 percent of which is owned by the German state of Lower Saxony, took advantage of various benefits associated with owning a holding company in Luxembourg, apparently allowing VW to cut its tax bill by a significant amount.

"When a company, in which the state is a large stakeholder, takes advantage of Luxembourg tax law to optimize its tax bill, it is particularly troublesome," says Sven Giegold, an expert on financial issues for the Green Party in European Parliament.

The debate over the low-tax models made available to multinational corporations by places like Luxembourg was most recently fueled by the particularly aggressive approach taken by the American internet giant Amazon. An initiative by the Organization for Economic Cooperation and Development (OECD) aimed at limiting such practices has thus far had little effect.

Hans Dieter Pötsch, left, together with Volkswagen CEO Matthias Müller.

In Germany, the issue is likely to crop up in ongoing coalition negotiations, as Chancellor Angela Merkel seeks to assemble a new government following September 24 parliamentary elections. "It is high time that the German government abandons its resistance to public tax transparency for large corporations," Giegold says. His Green Party is one of the parties currently in coalition talks with Merkel's conservatives. So, too, are the business-friendly Free Democrats (FDP), which included a demand in their campaign platform for an EU regulation against tax avoidance strategies that involve shifting profits across international borders.

Volkswagen, too, has established structures in Luxembourg that allow for the shifting of profits. VW taxes the cash flows of proprietary brands such as Skoda, SEAT and Bentley via its Luxembourg-based holding company, in addition to those of numerous subsidiaries in places such as Brazil, Britain, Russia, Japan and Australia. Volkswagen Finance Luxemburg S.A. holds 26 subsidiaries and has a balance sheet total of 14.8 billion euros.

Completely Normal

The number of employees, by contrast, is comparatively modest. This Luxembourg-based company empire is managed by just five fulltime staffers. "VW and the German government must answer the question as to why such a Luxembourg holding company is accepted by our tax laws," says Green Party financial expert Giegold. "It's rather cute to recognize a company with five employees as being sufficient to establish a tax home."

VW finds the situation to be completely normal. "The personnel configuration of our companies in Luxembourg is of high quality and adequate for the task at hand," the company said in a statement. In accordance with a verdict from the European Court of Justice, the statement continues, a company doesn't have to hire more staff than absolutely necessary.

The structure works as follows: From 2014 to 2016, VW subsidiaries have transferred 5.8 billion euros to Luxembourg. The holding company there, VFL, declared profits over that time period of 3.5 billion euros but paid only 1.7 million euros in taxes - a tax rate of just 0.05 percent.

Subsidiaries such as SEAT and Skoda, of course, pay corporate taxes in the countries where they are based and only transfer their net profits to Luxembourg. As such, VW declares that it is "economically correct" that VFL pays no taxes on the money transfers. Were the profits to be sent to a Germany based holding company, VW would have to pay an additional 5 percent in corporate and other taxes.

But in recent years, the Luxembourg holding company has only sent a portion of those profits on to VW's Wolfsburg headquarters. At least 3.5 billion euros either remained in Luxembourg or were transferred back to the country - and essentially recycled as loans within the Volkswagen Group - a second source of profit for VFL.

Several finance companies are dependent on the Luxembourg-based holding company. The company Volkswagen International Luxemburg, for example, is supplied by VFL with capital and liquidity and provides a substantial number of loans within the company. International VW subsidiaries in France, Sweden and Portugal pay interest on these loans, which they apparently write off to save on their tax bills at home.

Particularly Lucrative

The financing companies, in turn, transfer the interest income to VFL as dividends, on which the holding company pays no tax. Ultimately, the loan and capital relationships within the group lead to lower profits at VW subsidiaries and to a greater share of those profits ending up in Luxembourg.

The structure is particularly lucrative when there is a sudden profit spike, such as in 2016 when Volkswagen sold its 50 percent stake in the leasing company LeasePlan. The sale resulted in 1.75 billion euros landing in the account of the Luxembourg holding company. Similar to the case of the dividends, no tax is owed on capital gains as long as the money remains in Luxembourg. In Germany, by contrast, the total would have to be taxed at a 5 percent rate, which in the case of LeasePlan would have theoretically resulted in a tax bill of around 25 million euros.

Regarding the structures, VW says that having the companies taxed in Luxembourg "is based on legal regulations. Anything else wouldn't be allowed." There are, however, indications that VW is taking advantage of a so-called "tax ruling," a reference to an application of Luxembourg tax law agreed to with the country's tax authority. VW does not deny the possibility.

It's almost impossible to determine exactly how much VW saves on its tax bill by way of the structure, particularly since it's not just VW itself that takes advantage of the benefits offered by Luxembourg. Several subsidiaries, such as Audi, Bugatti, MAN and Scania, also have companies in the tiny country.

And the new era in transportation is also leading the "good citizen" VW to Luxembourg. In 2016, the company founded Volkswagen New Mobility Luxemburg to pool holdings and finance investments in the world of car sharing, electromobility and driverless vehicles. The new holding company has already made its first purchases, even though it still has no staff of its own.

The five employees of Volkswagen Finance Luxemburg S.A. are taking care of management duties for the time being.

Kennedy’s Death and the World of Conspiracy Theories

By George Friedman

Fifty-four years after John F. Kennedy’s assassination, the U.S. intelligence community finally released its files on his death. Only it didn’t release all the files – it urgently appealed to the president to hold the release of some of them. The intelligence agencies claimed that the files contained highly sensitive material that would damage national security and that they needed time to review and remove this information. Given that they had known from the beginning that the files would be released someday, and that they had known for years when that day was coming, the request was doubly extraordinary: First, that more than half a century after the assassination there was still material so sensitive it had to be withheld, and second, that they hadn’t yet identified all the critical information.

This is the point at which a reasonable person would assume that there is something amiss. The intelligence community wants the public to believe that the material is highly sensitive and that the complexity of removing said information is beyond the public’s grasp. The public takes this to a logical conclusion: that the intelligence community is hiding something important. Speculation grows about what that something is. And why not? This is called a conspiracy theory, and anyone who subscribes to conspiracy theories is ordinarily described as being “nuts.”

Reasonable Questions

Yet there are reasonable questions to be asked about the Kennedy assassination – the mystery that started it all – but also in other cases. Let me give two examples.
Lee Harvey Oswald defected to the Soviet Union. The Soviets sent him to Minsk to work in a radio factory. While there he met Marina, who lived with her uncle, a colonel in the MVD, the security arm of the Soviet Interior Ministry. He married her after knowing her for six weeks, then applied for an exit visa from the Soviet Union and received it for Marina and himself. This was at a time when exit visas from the Soviet Union were as rare as hen’s teeth. Yet the niece of an MVD colonel was permitted to marry an American defector and leave with him because he was dissatisfied with life in the Soviet Union. Upon returning to the U.S., the Oswalds were apparently not subjected to extensive debriefing.
On Oct. 26, the National Archives released a trove of classified files on the assassination of President John F. Kennedy. Photo by Mark Wilson/Getty Images

James Earl Ray, who shot Martin Luther King Jr., was an escaped convict who had spent much of his life in prison. Between his escape and the shooting, he acquired a car and traveled about. After the assassination, he went to Canada, where, in addition to obtaining a U.S. passport, he obtained a Canadian passport. According to many reports, he was found with about $10,000 on him. By all accounts, Ray was not the brightest bulb, and getting forged passports under other names took some savvy. I would also doubt that he had ever in his entire life had $10,000 on him prior to his capture.

If these facts are true – and they seem to be, according to the Warren Commission report and published reports on Ray – then they raise questions that ought to be answered by the intelligence community half a century after the fact. Perhaps the investigations couldn’t find answers, or perhaps the official stories – strange as they seem – are the truth. What is clear is that the intelligence community’s handling of the conspiracy theories – dismissed with contempt but not answered in any way – does not build the community’s credibility.

I find the lone gunman explanation in both cases insufficient, but for the most part the intelligence community does not appear to me to be engaged in a vast conspiracy – they merely look clueless. It is only when I consider that the people in that position are not clueless that I fill the blanks with speculation. Let me emphatically state that I might have no idea what I’m talking about. But given what I think I know, these are not unreasonable things to question.

National Security

Starting with the handling of the Kennedy assassination, the intelligence community has done substantial damage to the stability of the United States. It has systematically created the sense that it knows more than it is telling about the assassination, one of the most traumatic events in American history. There’s a contradiction between telling the public that Oswald was a lone gunman but that sharing all the facts would be dangerous. If he operated alone, then there can’t be anything very important to reveal: He shot the president and that’s that. But then why the secrets?

The sense of mystery that the intelligence community generated about Kennedy’s death spread to other assassinations. If there is a hidden truth to the Kennedy assassination, why not to King’s killing four years later? If we can’t trust what we are told about those deaths, should we trust what we are told about 9/11? And if we are in doubt about those things, then perhaps Donald Trump is a Russian spy or Hillary Clinton was working for the Saudis. Kennedy’s assassination became the foundation of a worldview in which the truth is hidden and “reality” is an illusion. The belief that we are being lied to has gone from the margins of society to the mainstream. And the intelligence community, intentionally or not, has fueled this movement.

It’s the job of the intelligence community to find secrets and to protect how it collected them. But the need to protect secrets and sources can easily appear to be an attempt to keep the truth about how the world works away from the public, or even to lead the public to believe that the real secret is that the intelligence community is using its secrets to accumulate power for itself. This can be dismissed as crazy talk for only so long before the view legitimizes itself. “The CIA does not comment on its operations” frequently translates to “mind your own business” and can lead the public to assume that the business of governance is no longer the province of the people. And that, in the end, will destabilize the country.

The belief that there is a hidden world that governs the one we see, a world that is out of our control, is fatal to democracy. The intelligence community has as its primary duty “to preserve, protect, and defend the Constitution of the United States against all enemies, foreign or domestic.” At this point in history, the main threat to the Constitution is the growing conviction that the government can’t be trusted because it conceals the truth: that democracy has been supplanted by secret powers.

The intelligence community is far more concerned with the security of its foreign operations than with the state of American democracy. So it perpetuates the belief that there’s a frightening reality behind Kennedy’s assassination by insisting that revealing all the files would hurt American security. But national security is also about the Constitution, and the republic can’t stand if the public doesn’t trust the government. Right now, protecting clandestine operations overseas may not be as important as healing the breach between the American public and its government.

The intelligence community needs to look around its own country and recognize that “trust me” at this moment in history only increases distrust and further rattles the country.

This is obviously not something the intelligence community will solve itself. Elected officials must do that, which means the public must elect trustworthy leaders. But with half the electorate believing that the president is linked to Russia and the other half believing that the “deep state” is trying to destroy him, this is unlikely to happen.

The trail of distrust that began in 1963 and mushroomed into a political culture of fear and loathing is at the root of the problem. The intelligence community’s demand that the Kennedy files not be fully released is another small step down a dangerous path.



Spanish Prime Minister

STANFORD – Several years ago, I predicted that there would be a tectonic shift toward devolution, secession, and independence around the world, owing to the failure of political institutions to manage economic, cultural, ethnic, and religious differences.

Supranational economic and political institutions were clearly generating a backlash, as they concentrated more power in central governments. Citizens in many countries started to feel as though their sovereignty had been eroded. And they worried that the costs of increasing immigration were too high, given the slow recovery from the Great Recession, weak productivity growth, and labor’s declining share of income.

Since then, the United Kingdom has decided to withdraw from the European Union. “Divorce” discussions are now underway to determine how much the British will pay the EU, and what future trade relations will look like. The process has not been easy, because EU negotiators are worried that if the exit terms are too generous, other member states might follow the UK out of the bloc.

Meanwhile, the United States, under President Donald Trump, has withdrawn from the Trans-Pacific Partnership and abandoned the Transatlantic Trade and Investment Partnership with the EU. Now it is threatening to withdraw from the North American Free Trade Agreement unless Mexico and Canada make concessions.

In Spain, on October 1, the government of the semi-autonomous region of Catalonia held a referendum in which an estimated 43% of Catalans took part, voting overwhelmingly for independence. After the Catalan parliament declared independence, the Spanish national government invoked a constitutional provision to take administrative control of the region, escalating the crisis.

Not to be outdone, more than 90% of those who participated in recent referenda in Lombardy and Veneto, Italy’s two richest regions, voted for more control over local education spending and taxes. Italy’s massive public debt and subsidies to poorer regions were certainly on these voters’ minds. But Giuseppe Garibaldi, the general who united Italy’s city-states in the nineteenth century, must be turning over in his grave.

Elsewhere, Iraq’s Kurdistan Regional Government, having held an independence referendum in late September, is now trying to negotiate with the central government in Baghdad, which has sent troops to reclaim the region’s oil fields. And Chinese President Xi Jinping used this month’s 19th National Congress of the Communist Party of China to consolidate his position further, by shifting more power from the provinces to the central government in Beijing.

Even in countries long known for stability, there is a clear tension between centralized and decentralized political authority. For example, a group called Calexit is trying to introduce a California ballot proposition to secede from the US. According to early polls, one-third of Californians would support such an initiative. And early this month, California Governor Jerry Brown signed a bill declaring California a “sanctuary state” – a mostly symbolic gesture indicating that the state will not fully cooperate with the Trump administration’s efforts to enforce federal immigration law.

At the national level, congressional Republicans’ ill-fated attempt to repeal and replace the 2010 Affordable Care Act (Obamacare) sought to shift more responsibility to the states through federal block grants. And yet, the Republican tax-reform proposal that is now being discussed would eliminate a federal tax deduction for state and local taxes that other states consider a subsidy for high-tax states like California and New York. (Netting all the fiscal interactions and transfers, the reverse is closer to the truth.)

In Europe, the EU has continued to kick the can down the road, rather than deal with its crises in sovereign debt, banking, growth, and unemployment. EU leaders are hoping that a modest cyclical upturn will buy them time. But, at the end of the day, they will still have to confront a core problem: Germany, which has benefited the most from a monetary union in which its trading partners have no currency to depreciate, doesn’t want to foot the bill for bailing out profligate member states.

It may come as no surprise that a recent Pew Research Center poll found that 70% of Europeans, Canadians, and Americans favor more direct democracy, “in which citizens, rather than elected officials, vote on major issues.” This would horrify America’s founders, who regarded direct democracy as a precursor to mob rule, and established a system of checks and balances precisely to prevent such an outcome.

Each of the aforementioned examples of centralization and devolution is unique. But it is worth asking if there are also commonalities among them.

When the Nobel laureate economist Robert Mundell, the intellectual “father of the euro,” set out to determine an optimal currency area, he put a premium on natural trade and macroeconomic ties. As a Canadian, he was struck by the “horizontal” nature of the Canadian and American currency areas. To his mind, “vertical” areas comprising the Canadian and American west might make more economic sense.

Mundell’s insight can be applied much more broadly. Economic areas are continually forming, combining, and dissolving as a result of competing centrifugal and centripetal forces. Constant shifts in comparative advantages, economies of scale, and transaction costs affect the benefits of accommodating more homogeneous localized preferences.

Likewise, “optimal” political areas change over time, owing to changes in technology and demography, and their interaction with evolving cultural, ethnic, religious, and other factors.

These processes of coming together and falling apart can be beneficial or harmful. The EU has certainly been a great success as a trade area, but less so as an integrated labor market and currency union; and it has altogether failed as a banking and fiscal area.

Or consider the Indian subcontinent, where distrustful neighbors armed with nuclear warheads pose a danger to themselves and the world. Given that India still has almost as many Muslims as Pakistan, it is possible that religious tensions could have been mitigated within the confines of a single country. By my estimate, Pakistan and India’s current volume of trade should be 25 times higher than it is. That would greatly benefit both countries, not least because they would each have a greater stake in the other’s success.

Governing well in a context of economic, political, ethnic, and religious diversity is not easy. But failure to do so can mean substantially less growth – and substantially more political risk.

Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.