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News that the Justice Department has filed a lawsuit against Swiss banking giant UBS is just the latest chapter in the curious case of Phil Gramm.  Just one day after UBS agreed to pay a $780 million criminal fine and admitted to conspiring to defraud the IRS, the DOJ demanded access to 52,000 accounts as part of its broad tax evasion probe.  Which is more than just a little ironic.  After all, before he became a UBS vice-chairman in 2002, then Senator Phil Gramm helped lead the 1990's Republican war to gut the Internal Revenue Service.

Gramm's fingerprints, of course, have been all over the financial meltdown and steep downturn gripping the U.S. economy over the past year.  In his role as an adviser to John McCain's presidential campaign, Gramm famously decried the "mental recession" and mocked the United States as a "nation of whiners."  And the Texas Senator's machinations in the Senate to create the 1999 Gramm-Leach-Bliley Act which helped lead to catastrophic losses at UBS in subprime mortgages during his tenure there.

But it was Gramm's role over 10 years ago in decapitating the IRS' ability to enforce tax laws against wealthiest Americans may well have UBS's schemes possible.

As David Cay Johnston describes in his book Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott and Alaska's Frank Murkowski decried the IRS' "Gestapo-like tactics." Don Nickles of Oklahoma raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton signed the IRS Reform and Restructuring Act in 1998.

Even as IRS Director Charles Rossotti warned Congress about an epidemic of tax cheating which had reached $195 billion a year, Senator Gramm in May 1998 denounced the agency.  Peddling myths of jack-booted IRS agents tormenting American tapayers, Gramm called on Rossotti to fire his 50 worst employees.  Gramm concluded:

"I have no confidence in the Internal Revenue Service of this country.  You do not have a good system. This agency has too much unchecked power."

As the New York Times recounted that spring, the plan to gut the IRS advocated by Phil Gramm and his allies was a popular political gambit, but almost certain to create incentives for tax evasion:

Mr. Gramm spoke at length of how he had ''no confidence'' in the I.R.S., remarks that were in sharp contrast to those of every other senator, who emphasized that the majority of I.R.S. workers were honest and most taxpayers law-abiding.

A variety of tax experts have said in recent weeks that attacks on the I.R.S., which polls show are a potent device to win votes and contributions for Republicans, give comfort to tax cheats and discourage honest taxpayers.

Which, of course, is exactly what happened.

Those reforms in essence gave wealthier Americans carte blanche to cheat and fundamentally undermined tax fairness in the United States. Within one year, property seizures for unpaid taxes dropped by 98%. Liens were sliced by three quarters and levies on bank accounts by two-thirds. Johnston describes (p. 134) the overnight shift of tax policing onto poorer Americans:

In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.

By 2007, the amount of federal revenue lost to fraud and unpaid taxes catapulted to $300 billion.  When Congressional Democrats sought expanded funding for the IRS to help stem the losses, the Bush administration and its GOP allies stopped the effort dead in its tracks.

Which brings us to the UBS imbroglio this week.  As the New York Times reported Wednesday:

Prosecutors suspect that from late 2002 to 2007, UBS helped American clients illegally hide $20 billion, letting them evade $300 million a year in taxes.

In a striking admission, UBS said that from 2000 through 2007, some of its private bankers and managers had "participated in a scheme to defraud the United States" and the I.R.S. by helping American clients set up and conceal offshore accounts. The scheme involved falsifying or not properly obtaining or filing certain tax forms required of both the bank and its clients.

As it turns out, that time frame just happens to coincide with the arrival of Phil Gramm at UBS Warburg.  And what started out last year as an investigation into the possible criminal activity of 20,000 wealthy Americans has now mushroomed to involve as many as 52,000 people.

For UBS, Phil Gramm has brought a reverse Midas touch.  Suffering billions in losses from subprime lending and steep losses in its stock price, UBS (along with other institutions) may soon witness the end of secret Swiss banking.  As for the American people, the economic devastation wrought by Phil Gramm is far from over.

** Crossposted at Perrspectives **

UPDATE: Almost on cue, Phil Gramm takes to the op-ed page of the Wall Street Journal to point the finger of blame elsewhere. (Hat tip to John Minehan.)

Originally posted to Jon Perr on Fri Feb 20, 2009 at 01:44 PM PST.

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