Monday, November 20, 2017

In Mexico, Not Dead. Not Alive. Just Gone.


XALAPA, Mexico — At 5 a.m., the couple stirred to the buzz of a cellphone alarm. They had hardly slept — Carlos Saldaña had been in the hospital the night before, betrayed by his fragile stomach.  He had prayed that the pain would subside, that God would give him strength. Today was the raid, the culmination of years of tracking the cartels, of lonely reconnaissance missions to find where they had discarded his daughter.

For so long, he had begged officials to do something, anything. Now, he wondered if he could even walk.

“Why tonight, God?” he had murmured in the hospital, doubled over. “I’ve been waiting so many years for this.”

He had spent the last six years searching for his daughter Karla, charging through every obstacle with an obsession that bordered on lunacy — cartel threats, government indifference, declining health, even his other children, who feared that his reckless hunt had put them in danger.





Mr. Saldaña with a shrine created in memory of his and Ms. Delgadillo’s missing children in the bedroom of their home. Daniel Berehulak for The New York Times
Vicky Delgadillo watched as he eased out of bed and grabbed a cane. She had a missing girl as well, Yunery, whom Mr. Saldaña now thought of as his own. For the last two years, the couple had shared a home, a life and a love born of loss.

She understood the raw fixation that defined his life. It defined hers too.
Before dawn, their prayers were answered. If not fully recovered, Mr. Saldaña was at least well enough to get to his feet. Sheer will and adrenaline would do the rest, allowing him to go on the raid of the ranch where he knew, deep down, both girls were buried — two bodies among the thousands lost in the state of Veracruz, among the tens of thousands nationwide.

The couple moved in silence, checking and rechecking their bags. Ms. Delgadillo packed a lunch — apples, carrots and a stew made of vegetables to avoid upsetting his stomach.

She heated water for instant coffee and made toast as Mr. Saldaña searched for his essentials: binoculars, gloves, boots and a battery charger.

Mrs. Delgadillo’s grandchildren — Yunery’s little girls — slept in the second bedroom. After making breakfast, she applied mascara in front of a mirror on the living room wall as Mr. Saldaña finished packing.

“I don’t think we will need this today,” he said, grabbing a long metal spike from behind their vinyl sofa, a crude tool they often used to find mass graves. “I think others will bring theirs for the search.”

They left before sunrise that humid June morning, carrying four bags and a familiar ambivalence, hopeful and afraid of what they might find.




‘The Entire State Is a Mass Grave’

Officially, the Mexican government acknowledges the disappearances of more than 30,000 people — men, women and children trapped in a liminal abyss — neither dead nor alive, silent victims of the drug war.
But the truth is no one knows how many people are missing in Mexico.
Not the government, which does not have a national registry of the missing. Not the families caught in emotional purgatory. Not the authorities in states like Veracruz, where both Karla and Yunery disappeared in a single 24-hour stretch.
When the new governor of Veracruz began his term last December, the state’s official figure for the number of missing was in the low hundreds. Upon the most basic review, the governor revised it — to nearly 2,600.
In the last year alone, the remains of nearly 300 bodies have been unearthed from clandestine graves in Veracruz, unidentified fragments that only begin to tell the story of what has transpired in the state, and more broadly the nation, over the last decade.
“There are an infinite number of people who are too scared to even say anything, whose cases we know nothing about,” said the state’s attorney general, Jorge Winckler.
Not that the state could handle many more. In March, Veracruz announced that it didn’t have money to do DNA tests on the remains that had already been found, leaving parents like Mr. Saldaña to panhandle in the street to raise it themselves.
Overwhelmed, the state also decided to temporarily halt all new searches for clandestine graves. There was simply nowhere else to put the bodies.
“The entire state is a mass grave,” the attorney general said.
For more than a decade, cartels across Mexico have taken out their rivals with utter impunity, tossing their remains into unmarked graves across the country. Soldiers and law enforcement officers often adopt the same approach, leaving many families too terrified to ask for help from a government they see as complicit.
It is both highly efficient and cruel: Without a body, there can be no case. And the disappearances inflict a lasting torture on enemies — robbing them of even the finality of death.
“The cruelest thing about a disappearance is that it leaves you with this desperate hope that your child might actually still be alive somewhere,” said Daniel Wilkinson, a managing director at Human Rights Watch. “You’re trapped in this horrific limbo where you can’t mourn or move on because that feels like betrayal, like you’re killing off your own child.”






“How could I stop looking for her?” Mr. Saldaña says. “She is my daughter.” Daniel Berehulak for The New York Times

Loss, and Then Love

In the summer of 2013, Mr. Saldaña’s love life was falling apart, which was hardly new for him. Only, he wasn’t recklessly careering from woman to woman, as he did when he was a younger man.
This time, his marriage was being torn apart by loss.
In the two years since Karla’s disappearance, he had become a man consumed by rage, impotence — and purpose. He spent every day planning his next search for his daughter, his next interview with her friends, his next stakeout of the men he thought responsible.
His wife at the time, who was not Karla’s mother, couldn’t take it. His single-mindedness was creating another hole in their home. After more than a decade together, they split.
On the walls of his new apartment, he taped up pictures of his daughter, a shrine of sorts. He loved her deeply, but theirs had been a troubled relationship, volatile. Karla viewed him as a part-time father, an accusation that stung all the more because it was true.
In a life ruled by urges, he had fathered nine children, with multiple women. He was short, with a heavy paunch and a square mustache, and he pursued women like some people devour food, to the point of addiction. To support his families, he gave up any chance of going to college and became a driver, leaving a trail of bitterness.
Finding Karla, in some way, would be his redemption.
She had disappeared with one of his estranged children, Jesus. The half brother and sister were close, though Mr. Saldaña rarely saw him, thanks to an ugly separation with his mother.
Jesus and Karla had gone out together that night, Nov. 28, 2011, to a party. They enjoyed the night life, though the clubs and bars were often populated with members of organized crime. The two were last seen in her car. It was recovered two days later in the possession of an off-duty policeman.
Mr. Saldaña wonders whether some cartel member hit on Karla at a bar that night, or whether she and Jesus witnessed something they weren’t supposed to. But as with so many other cases, the circumstances of their disappearance are unknown.
From that moment, Mr. Saldaña’s life was re-centered on a single mission — finding Karla and, with her, Jesus. He joined a collective of families and began attending meetings.
To search for a missing loved one in Mexico is to inhabit a life of desperate entrepreneurialism. Families, resigned to looking on their own, build coalitions, pressure and cajole officials, and cling to every shred of hope.
Mr. Saldaña threw himself into it, combing areas where criminals may have murdered people, organizing free DNA tests and raising money to pay for it all.






A birthday party for a grandson offered a brief respite from grief, but Mr. Saldaña says he cannot give his family the attention it deserves. Daniel Berehulak for The New York Times
He and others scouted out suspicious plots of land, looking for signs of slightly upturned earth. When they found one, they hammered long metal crosses six feet into the ground, then wrenched them out to sniff for the smell of decay. This is how the poor search for their dead.
During his first year with the collective, he met Ms. Delgadillo, a 43-year-old mother of four with luminous brown skin and green eyes. She graciously welcomed him.
Like him, she showed up at every meeting, every fund-raiser and every media campaign, denouncing the government for its inaction or inefficiency. She was warm, too, bringing a calming presence to a group often seized with rage.
She and Mr. Saldaña had an especially haunting bond. Their children had disappeared less than a day apart — abducted, they believed, by the same group of criminals. To them, it seemed inevitable that their children would be buried in the same place.
Mr. Saldaña had scoured Veracruz for details of the criminal operation: where it conducted business, where it buried its enemies. A friend of Karla’s told him of a ranch where cartel members were believed to dissolve their victims in acid. He felt, somehow, that this was where their children had been taken.
He shared his suspicions, the fruit of his one-man investigation, with Ms. Delgadillo. They folded their individual searches into one, meeting over coffee to compare notes, and sometimes just to be in each other’s company. Slowly, the friendship became something more, a love wrought from the inescapable forces shaping their lives.
“We were friends and companions in this fight,” Mr. Saldaña said. “But we decided to spend our lives together and live this struggle united.”
On his birthday — May 24, 2015 — he moved in with her, shifting his modest belongings into the two-bedroom cinder block flat where she lived with Yunery’s two children.
Their life moves to the same rhythm these days, an odd cadence that is both comforting and isolating. Their friends, even their other children, are afraid of the course they have taken — the endless chase, the constant pressure on state authorities, the media campaigns.
They don’t tell people anymore when they find threatening letters on the windshield of their Volkswagen. Or when strangers call their phones with cryptic, menacing messages, ordering them to stop their crusade. The traumas have drawn them closer as a couple, but farther from their families.
“It just leaves you with so little time to raise and be a parent to the rest of your kids,” said Ms. Delgadillo, whose contact with her two other children tapered off in recent years.
Mr. Saldaña nodded. “One of my daughters called me up recently and said she wanted to chat. We went to a coffee shop and she told me: ‘Dad, please, I want to ask you to stop doing what you are doing. I am scared, scared for you, scared for me and for all of us. Please, just stop.’”
“I told her: ‘How could I stop looking for her? She is my daughter, she is your sister,’” he said. “I will never ever stop looking for her.”
He wiped away a stray tear and cleared his throat.
“It’s like you lose your other children as well,” he said.






Members from the Colectivo Solecito, a group of women whose children are missing, found more than 250 skulls at this site near Veracruz. Daniel Berehulak for The New York Times

The Dirty War Then — and Now

To disappear has a particular meaning in Latin America, a vocabulary shared by nations that have suffered its tragic distinction. It is not simply to vanish, but to be vanished: forcibly abducted and, often, never seen again.
In the 20th century, the authoritarian governments of Argentina and Chile disappeared thousands of supposed opposition members, robbing spouses, parents and children of closure. Guatemala and El Salvador razed communities of accused sympathizers, both before and during their ultraviolent civil wars.
Mexico took part in the campaign, amassing some 1,200 disappearances during the 1960s and 1970s at the hands of the Institutional Revolutionary Party, which ruled for nearly 70 years and governs again today. Historians call this period of disappearances the dirty war.
But unlike Argentina, Chile or Uruguay, Mexico never really investigated its atrocities. While truth commissions and exhumations of mass graves sought to exorcise the sins of past regimes elsewhere in the region, government responsibility in Mexico largely stayed buried. Attempts in the early 2000s fell apart, leading to few arrests or prosecutions.
As the nation wrestled with that mysterious chapter of Mexican history, another was already starting.
The disappearances continued, in a new form. The numbers were small, the cases isolated and the purpose distinct from earlier iterations. It was not political but criminal.
This time, the disappearances were carried out by organized crime as it battled for territory in the lucrative drug trade. Along the border with Texas, the numbers slowly ticked higher. The government eventually launched a war against organized crime in 2006. And as the violence mounted, so did the disappearances.
The cartels are not the only ones responsible. In hundreds of cases, the military and the police have been accused of disappearing individuals across Mexico’s coasts, deserts and mountains.
The families of victims in Baja California have meticulously documented 95 cases involving the authorities and delivered them to the International Criminal Court with a plea to investigate. Five hundred cases have been recorded in Coahuila and sent to the court as well. Similar disappearances in Chihuahua and Guerrero have also been brought to the attention of international bodies.
Until recently, the disappearances were largely ignored by a government neither willing nor capable of effectively confronting the atrocities. But as families have become more organized, their plight has become harder to ignore.
In 2012, leaked documents showed that the government believed there to be a total of 25,000 people missing across the country, perhaps the first time any official recognition of the problem surfaced. This year, the tally climbed to nearly 33,000.






The cartel ranch in Veracruz state where Mr. Saldaña and Ms. Delgadillo accompanied officials on a search. Daniel Berehulak for The New York Times

The Search at the Ranch

The convoy left at 6:30 a.m. sharp, a procession of camouflage trucks bearing marines, police officers and officials. Mr. Saldaña and Ms. Delgadillo trailed in a small van transporting the families.
After countless phone calls beseeching the government for help, hundreds of hours chasing down leads, years of rallying other families and stalking officials with a megaphone of grief, Mr. Saldaña and Ms. Delgadillo were getting a shot. Maybe their only shot.
They drove for nearly an hour, slowing in the town of Cosautlán de Carvajal, the last population center before the ranch Mr. Saldaña had heard about. Like many places taken over by organized crime in rural Mexico, the property was scarcely discussed in town. Locals knew not to ask what the armed men were doing up there. They began to whisper as the convoy passed through the narrow streets, wondering what was happening.
Past a creek flowing over an unpaved road, the vehicles came to an entrance. The marines got out and began a clearing operation that lasted three hours.
The ranch, meandering over expansive terrain, had been abandoned. But only recently. The team — a mix of forensic scientists, police officers and investigators — discovered healthy horses, cattle and well-tended sheep roaming around when they arrived.
The couple wandered the grounds in a dream state, led more by instinct than clues. They stumbled on a large metal bin filled with dirt and random pieces of clothing, perhaps, they thought, the belongings of captives.
Having been the engine behind the entire raid, Mr. Saldaña tried to take control, barking orders.






Ms. Delgadillo and Mr. Saldaña preparing to leave home to search the ranch. Daniel Berehulak for The New York Times
The officials grew weary of his commands. He was pointing to undisturbed earth, where the police dogs caught no scent.
“I’m not simply looking for the remains,” he shouted. “I know you want to find body parts, but I have information that our kids were probably dissolved in acid or burned.”
“I’m looking for buried clothing,” he said, “and ashes.”
A woman from the federal prosecutor’s office intervened.
“All authorities are here to listen to the requests of these two,” she instructed the others.
The next day, they continued searching but came away with more questions than answers. A cinder block room contained a soiled mattress and chains — some grisly torture chamber, the couple imagined. Nearby, a stack of women’s undergarments — bras and panties — tied together.
What other use could this room have had than torturing and imprisoning people, Mr. Saldaña wondered. “No one would even hear if someone was screaming at the top of their lungs from here,” he said.
He and Ms. Delgadillo continued down the hill for another kilometer. He carried a metal stick with a hook fixed on its end, to pry loose items from the soft earth. His hook snagged a piece of clothing, and then another, and another. He laid them in a pile at his feet and called for help.
The forensic specialists took over, drawing a circle around the spot. They dug. An hour later, a pile of 500 items sat before them: baby outfits, women’s blouses, worn-out jeans and shoes.
A profound sadness settled over Mr. Saldaña. He took no comfort in finding the clothes that he had chastised officials to look for, no comfort in being right. It only reminded him how far they were from finding Karla, Jesus and Yunery.
“I wonder if this clothing might be as close as we ever get to our children,” he said to Ms. Delgadillo. “That its very existence means we may never reach them.”
The authorities gave the families one more day to search the property, a stretch of land that would take 10 times that many people a week to cover.
They found nothing else.






Relatives of missing persons gathered to give DNA samples at a church in Veracruz. Daniel Berehulak for The New York Times

‘A Body, Any Body’

In Veracruz, the missing are not only buried in secret graves. They are also recorded in small black books, where their names and details are lost to the modern age.
The state’s forensic laboratory chief, Rita Adriana Licea Cadena, pulled out a ledger. In it, she said, were the names of thousands of individuals who had turned over their DNA in the hope that it might match some of the remains disinterred from mass graves across the state.
But no one had been able to computerize the records, which were drawn from 2010 to 2013, some of the most violent years in the state. In notebook form like this, the data was virtually useless. No one could realistically search the DNA samples to find a match.
“We just don’t have enough people to do the work,” she said this March.
Outside her offices, a family sat quietly in the lobby, hoping for some news. The families come often, asking questions no one can answer.
“One woman came into my office crying, asking me to give her a body, any body, so she could bury it as her son,” said Mario Valencia, the official in charge of all forensics in the state. “I told her I could not: ‘How can I take someone else’s child to satisfy your grief? What about their grief?’”
The cause of the disappeared was often a forgotten one — until 43 college students vanished at once on Sept. 26, 2014, forcing a national reckoning in Mexico.
The students, who were preparing to become teachers, were heading to a protest in Mexico City. They had commandeered a fleet of buses to get there, a practice more or less accepted over the years.
But that night, the police opened fire, creating a panic that left at least six people dead. The remaining 43 students, frozen in fear, were rounded up by the police and turned over to a criminal gang that the officers were working for.
The motive for the attack has never been fully explained, and after more than three years, only one of the student’s remains has been positively identified.
After the mass abduction, hundreds of thousands of Mexicans poured into the streets in protest. The entire world was shocked. Mexican officials had not only failed to find the students. Some were clearly complicit in the crime.
Scenes of relatives hunting in the forested mountains of Guerrero for mass graves, equipped with little more than picks, shovels and blind resolve, reinforced the extent of the phenomenon.
The public pressure helped lead to a new law, enacted this month, to combat disappearances. Its passage has given some hope that the proper resources and attention might be paid to an issue long bled of both.
“It will not solve the problem, but it’s a start,” said Juan Pedro Schaerer, the director of the International Committee of the Red Cross in Mexico, who helped shape the legislation. “The challenge will be implementing the law.”
On paper, the Law Against Forced Disappearances creates a national registry of the missing, something that is currently maintained piecemeal across multiple lists, by multiple agencies. It should also bring more resources, for forensic investigations and the management of precious DNA information.
“Attending to the disappeared is my main priority, both as a public official and as a human,” said Roberto Campa, the subsecretary for human rights in the country’s interior ministry.
But in Mexico, laws are seldom the issue; on paper, they are often perfect. Rather, change hinges on the will and capacity to enforce them. On this score, advocates for the disappeared have tempered their hopes.
A highly touted legal overhaul, completed last year to replace an antiquated system, is facing an attack from the government that put it into practice.
Amid new laws to protect the nation’s media, more journalists have been killed this year than in any other in recent history.
Meanwhile, anti-corruption efforts passed with great fanfare this year have been met with scandal after scandal and a refusal to investigate.






Forty-seven skulls were found at the mass burial site in Arbolillo. Daniel Berehulak for The New York Times

Raised Hopes, and Dashed Ones

The couple’s next target — another ranch, this one tucked into the verdant hillsides of central Veracruz — was abandoned when they arrived in late September.
A local lawyer from the prosecutor’s office had agreed to join the pair, out of a sense of solidarity. As they climbed a hill, Mr. Saldaña looked over at the young prosecutor and asked him where his gun was.
The man pulled a bible out of his pocket and said it was all the protection he needed.
Mr. Saldaña told him he was stupid.
Locals living nearby had whispered to Mr. Saldaña that the suspects in his daughter’s disappearance were using the place a few times a month, to conduct business and throw parties.
Mr. Saldaña had decided to take a look. But he agonized over whether to tell Ms. Delgadillo. Even as he packed his bags, walking stick and binoculars, he had still not made up his mind. Feeling guilty, he gave in.
As he had suspected, she immediately began packing her things, waving away his protests. They both knew he couldn’t deny her, not after the last few months she had endured.
In April, the couple had been scouring the state, as usual, asking to review case files, poring over the descriptions and pictures of missing persons. Suddenly, they got a hit.
The girl was short, with the same hair color and complexion as Yunery. Ms. Delgadillo could barely breathe. She begged the authorities to exhume the body for a DNA test.
“It wasn’t my daughter,” she said, sobbing lightly. “But still I feel a sense of peace, that another family has their daughter back, that they can stop looking.”
After that, Mr. Saldaña knew he couldn’t tell Ms. Delgadillo to stay home while he went out on his missions. With the prosecutor in tow, the couple searched the ranch for three hours that fall day, making their way through heavy brush before coming across a set of stables. The entrance was locked. Mr. Saldaña scaled the wall and jumped inside. A flock of bats stirred.
Once again, scattered throughout, were clothes belonging to a mishmash of ages and sexes. Some had been burned, and others were puzzling — like the stack of heavy coats in a state where the temperatures range from hot to infernal.
Further on they found what looked like tombs.
“It could be something,” Mr. Saldaña said, beaming.
They didn’t have the tools needed to open the covers, so they moved on. Later, they heard the sound of all-terrain vehicles, a favorite mode of transport for cartel lookouts.
The three fled, racing down the hill and back to the car.






Mr. Saldaña and Ms. Delgadillo traveled home by bus after a meeting in Mexico City, last month. Daniel Berehulak for The New York Times

Dreams of the Dead

A crowd of portraits lined the esplanade, taped down against the fierce harbor wind. A woman paused to study them, as if to remember every detail. But most bore only two: the names of missing people and the dates they disappeared, simple facts anchored in mystery.
“I loved you before I knew you, and I will love you to the end of my days,” read one poster with the faces of more than a dozen missing children, arrayed along the branches of a tree.
Mr. Saldaña, watching from the shade, sheepishly approached the woman to ask for help. His daughter was among those faces, he explained, pointing to a portrait of Karla.
“The government is out of money to buy the materials for DNA testing,” he told the stranger, lifting a straw hat from his head and mopping his brow. “So we are raising the money ourselves to pay for it.”
Dozens of other relatives of Mexico’s missing had joined him in the port city of Veracruz that bright Saturday in October, all to raise money for a government that, in their eyes, seemed incapable of helping them — or unwilling to. When told of their campaign, the federal government denied that it was necessary, saying it provides all the resources needed for DNA testing.
“My brother disappeared, too,” the woman told Mr. Saldaña, nodding tightly. A year of searching had produced no leads, she said, not in a state bankrupted by its previous governor, who has been charged with stealing millions of dollars.
“This is our government,” the woman concluded, fishing a small bill from her pocket and putting it into a slotted tin. “They took it all for themselves.”
The sun cast an acid wash over the port as Mr. Saldaña returned to the shade. Cargo vessels trudged in and out of the channels. Shipping cranes lined the sky like origami birds.
The other families waded into the blistering heat to approach passers-by, or to give chase when the breeze blew away the portraits of their children.
Everyone except for Ms. Delgadillo, who remained in the sun for most of the day, tending to all the portraits as if each one were her child.
It was humbling work. Most pedestrians slid past without a word. A few even picked up the pace when they saw a parent approaching.
“You sometimes wonder how it is that someone can’t even give one dollar,” Mr. Saldaña said, after being blown off by a Frenchman on holiday. “I guess they just don’t know what we are living.”






Ms. Delgadillo cried after flipping through a photo album of her missing daughter, Yunery. Daniel Berehulak for The New York Times
Kindness surfaced in unexpected places. Christian Carrillo Rios, an employee at the state victim’s assistance program, arrived with the parents shortly after 9 a.m., wearing a collared shirt and starched jeans in the stifling heat.
He crawled on the ground to tape down the portraits and chased spare change as if he, too, had lost someone. Ashamed that his office had refused to pay for refreshments for the families, he bought water and snacks on his own dime.
“I’ve always cared about this issue, but when I had a son last year it all changed,” he said, his voice breaking. He cleared his throat and shook his head. “If someone were to take my child from me, I don’t know how I could go on living.”
Two young brothers were so moved by the stories of loss that they raced home to retrieve the contents of their piggy bank. They returned with a bag full of change covered in bits of smashed clay.
A father who heard about the campaign on the radio took his entire family. He listened to a mother talk about her lost son while holding the hand of his own, weeping. Before he left, he emptied his wallet into the collection box.
“Most of the time we feel impotent and powerless, but when you see the goodness of people it gives you strength,” Mr. Saldaña said.
The families stood outside for 10 hours that day, until sunset, earning a little less than $600 — the equivalent of three DNA tests.
As a couple, Mr. Saldaña and Ms. Delgadillo have decided to adopt a new approach to mourning. Instead of learning to live without their children, they are trying to live with them. To celebrate them every day.
This October, the couple decided to throw their daughters a joint birthday party, with cake, candles and balloons. The girls’ birthdays were only days apart.
Mr. Saldaña and Ms. Delgadillo wanted to invite their extended family — the other parents, husbands and wives who had lost someone.
“We wanted to do something happy with them,” Mr. Saldaña explained.
“This way, until we find them, we will keep them present in our lives,” Ms. Delgadillo added.
But their plans soon gave way to reality, and there was no party. Between the trips up and down the state and basic necessities, they had no money for it.
Despite everything, Mr. Saldaña said he was filled with more hope these days than ever. He dreamed about Karla, felt her close to him, as if the end was near.
In a recent dream, he confronted the men responsible for Karla’s abduction. With an arsenal of automatic weapons, he fought them like an action hero, leaving no survivors.
In the dream, he said, it was up to him and no one else. No failing system, numb to his pleas. No crooked cops or courts that so often failed to reach convictions in Mexico. Only justice.
“If you kill them,” he said, “at least it’s over.”






Ms. Delgadillo and Mr. Saldaña in front of their home. “We decided to spend our lives together and live this struggle united,” he says. Daniel Berehulak for The New York Times
A version of this article appears in print on November 20, 2017, on Page A1 of the New York edition with the headline: Haunted by Loss, and Chasing Ghosts in Mexico. Order Reprints| Today's Paper|Subscribe
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Sunday, November 12, 2017

Paul Krugman: The Tax Foundation Has Some Explaining To Do

I’m hearing from various sources that the Tax Foundation’s assessment of the Senate plan, which purports to show huge growth effects and lots of revenue gains from this growth, is actually having an impact on debate in Washington. So we need to talk about TF’s model, and what they aren’t telling us.
The basic idea behind TF’s optimism is that the after-tax return on capital is set by global markets, so that if you cut the corporate tax rate, lots of capital comes flooding in, driving wages up and the pre-tax rate of return down, until you’re back at parity. That is indeed a possible outcome if you make the right assumptions.
But there are two necessary side implications of this story. First, during the process of large-scale capital inflow, you must have correspondingly large trade deficits (over and above baseline). And I mean large. If corporate tax cuts raise GDP by 30%, and the rate of return is 10%, this means cumulative current account deficits of 30% of GDP over the adjustment period. Say we’re talking about a decade: then we’re talking about adding an average of 3% of GDP to the trade deficit each year — around $600 billion a year, doubling the current deficit.
Second, all that foreign capital will earn a return — foreigners aren’t investing in America for their health. As I’ve tried to point out, this probably means that most of any gain in GDP accrues to foreigners, not U.S. national income.
So how does the TF model deal with these issues? They have never provided full documentation (which is in itself a bad sign), but the answer appears to be — it doesn’t. Judging from the description here, the current version of the model has no international sector at all — that is, it says nothing about trade balances. They say that they’re working on a model that
tracks the effects of rapidly increasing or decreasing desired capital stocks on international capital markets. The international sector captures the capital payments that leave the domestic economy to the foreign owners of domestic assets and adjusts the growth factors for the tax-return simulator to reflect the actual growth in incomes.
In other words, the model they’re using now doesn’t do any of that.
So while they’re peddling an analysis that implicitly predicts huge trade deficits and a large jump in income payments to foreigners, they’re using a model that has no way to assess these effects or take them into account.
Maybe they’ll eventually do this stuff. But what they appear to be doing now is fundamentally incapable of addressing key issues in the tax policy debate.
NYT
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Saturday, November 11, 2017

How Corporations and the Wealthy Avoid Taxes (and How to Stop Them)








By Gabriel Zucman A professor of economics at the University of California, Berkeley and author of “The Hidden Wealth of Nations.”
NOV. 10, 2017
The United States loses, according to my estimates, close to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens. That’s close to 20 percent of the corporate tax revenue that is collected each year. This is legal.
Meanwhile, an estimated $8.7 trillion, 11.5 percent of the entire world’s G.D.P., is held offshore by ultrawealthy households in a handful of tax shelters, and most of it isn’t being reported to the relevant tax authorities. This is… not so legal.
These figures represent a huge loss of resources that, if collected, could be used to cut taxes on the rest of us, or spent on social programs to help people in our societies.

How do they do it?

For an example, look no further than your search bar. In 2003, a year before it went public, Google (now a multinational conglomerate known as Alphabet) began a series of moves that would allow it to obtain favorable tax treatment in the future.

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND
Google Affiliate
Google Affiliate
Google Affiliate
Africa
europe
Middle
east

(now Alphabet)
Google Ireland
Holdings
bermuda
“Managed”
Google Ireland
Limited
IRELAND
IRELAND
$$$
Google Affiliate
France

(now Alphabet)
Google Ireland
Holdings
$$$
bermuda
“Managed”
Google Ireland
Limited
IRELAND
IRELAND
$$$
Google Affiliate
France
First, it transferred ownership of intellectual property related to its all-important search and advertising technologies to an entity named Google Ireland Holdings.
Why Ireland? Because not only did it have favorable corporate tax rates, its regulations also allowed Google Ireland Holdings to incorporate there but be “managed” in Bermuda.
Google Ireland Holdings then created another Irish subsidiary, Google Ireland Limited, and granted it a license to use the technology now owned by the Irish parent company.
Under this arrangement, which as far as we know is still in place, it is Google Ireland Limited that actually licenses the tech of Google’s main business to all the Google affiliates in Europe, the Middle East and Africa. (Google has a similar offshoot in Singapore that covers business in Asia).
Google France, for example, pays royalties to Google Ireland Limited.
That entity in turn moves its profits to Bermuda via a royalty payment to the Google Ireland Holdings.
See where this is going? In 2015, $15.5 billion in profits made their way to Google Ireland Holdings in Bermuda even though Google employs only a handful of people there. It’s as if each inhabitant of the island nation had made the company $240,000.

The corporate
tax rate there?

Zero

In doing this, Google didn’t break the law. Corporations like Google are simply shifting profits to places where corporate taxes are low. It’s not just Internet companies with valuable intellectual property that do this. A car manufacturer, for instance, might shift profits by manipulating export and import prices – exporting car components from America to Ireland at artificially low prices, and importing them back at prices that are artificially high.
According to the latest available figures, 63 percent of all the profits made outside of the United States by American multinationals are now reported in six low- or zero-tax countries: the Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland. These countries, but above all the shareholders of these corporations, benefit while others lose.
My colleagues Thomas Torslov and Ludvig Wier and I combined the data published by tax havens all over the world to estimate the scale of these losses. The $70 billion a year in revenue that the United States is deprived of is nearly equal to all of America’s spending on food stamps. The European Union suffers similar losses.

So what can be done?

Thankfully, Ireland has announced it will close the “double Irish” loophole that Google used, and arrangements that take advantage of that loophole must be terminated by 2020. But similar strategies will be used as long as we let companies choose the location of their profits.
Just look at what Apple did in 2014 — it’s one of the most spectacular revelations from the newly released Paradise Papers. After learning Irish authorities were going to close loopholes it had used, Apple asked a Bermuda-based law firm, Appleby, to design a similar tax shelter on the English Channel island of Jersey, which typically does not tax corporate income. Appleby duly obliged, and Jersey became the new home of the (previously Irish) companies Apple Sales International and Apple Operations International.
A potential fix would be to allocate the taxable profits made by multinationals proportionally to the amount of sales they make in each country.
Say Google’s parent company Alphabet makes $100 billion in profits globally, and 50 percent of its sales in the United States (a relatively similar scenario to the first quarter of this year, in which that figure was 48 percent). In that case, $50 billion would be taxable in the United States, irrespective of where Google’s intangible assets are or where its workers are employed. A system similar to this already governs state corporate taxes in America.
Such a reform would quash artificial profit-shifting. Corporations may be able to shift around profits, assets, and subsidiaries, but they cannot move all their customers to Bermuda.
This system is not perfect, but it’s orders of magnitude better than both the laws that now govern the taxation of international profits and the tax package being proposed by congressional Republicans. Under the proposed plan some international profits would be taxed at 10 percent, but there are many likely exemptions.
One advantage of allocating taxable profits as I suggest is that this reform can be adopted unilaterally. There is no need for the United States (or any other nation that wants to cut down on tax avoidance) to obtain permission from anybody.
But we’d still face an equally daunting problem, the far more shadowy – and ultimately illegal – tax evasion of ultrawealthy individuals, many of them with net worths already bolstered by the proceeds of corporate tax avoidance. Here’s an example.
Meet Michael. Michael is the (fictional) chief executive and owner of an American company, Michael & Company. Like many people, he would like to pay as little in taxes as possible. But unlike most people, he can take some steps that will allow him to do just that.

Michael & Co.
America
Anonymous
Shell Co. Inc.
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands

Michael & Co.
America
Anonymous
Shell Co. Inc.
Bank
Cyprus
Cayman Islands
First, he creates an anonymous shell company incorporated in the Cayman Islands, which has lax regulations on disclosing the identities of company owners.
He then opens an account under the shell company’s name in Cyprus (or one of many other tax havens, such as Switzerland, Hong Kong and Panama, whose banks cater to the wealthy and aren't reliable about cooperating with foreign tax authorities).
Finally, Michael & Company buys fictitious services from the Cayman shell company (“consulting,” for example) ...
… and, to pay for these services, wires money to the shell company’s Cyprus account.
The transaction generates a paper trail that can appear legitimate at first glance. But the reality is more insidious. By paying for fictitious consulting, Michael fraudulently reduces the taxable profits of Michael & Company, and thus the amount of corporate income tax he pays.
And once the money has arrived in Cyprus, it is invested in global financial markets and generates income that the Internal Revenue Service can tax only if Michael reports it or if his Cypriot bank informs the I.R.S.
It’s supposed to, but many offshore banks have routinely violated their obligations in the past, by pretending they didn’t have American customers or hiding them behind shell companies. So this way, Michael can evade American federal income tax as well as paying fewer corporate taxes through his company.
And meanwhile, in America, if he wants to use any of the money stashed in Cyprus, he can simply go to an ATM and make a withdrawal from his offshore account.

How do we know all this?

Until recently, we did not have a good sense of who owns the wealth held offshore, but with my colleagues Annette Alstadsaeter and Niels Johannesen, we have been able to make progress thanks to leaks over the last few years. In 2015, the Swiss Leaks revealed the owners of bank accounts at HSBC Switzerland, and in 2016 the Panama Papers revealed those of the shell companies created by the Panamanian law firm Mossack Fonseca. These showed that 50 percent of the wealth held in tax havens belongs to households with more than $50 million in net wealth, a minuscule number of ultra-high-net-worth individuals who avoid paying their fair share. In the Paradise Papers, we see that these are not only Russian oligarchs or Belgian dentists who use tax havens, but rich Americans too.
As I mentioned above, about 11.5 percent of world G.D.P. is held offshore by households. For a long time, the bulk of it was held in Switzerland, but a fast-growing fraction is now in Hong Kong, Singapore and other emerging havens.
We can stop offshore tax evasion by shining some light on darker corners of the global banking industry. The most compelling way to do this would be to create comprehensive registries recording the true individual owners of real estate and financial securities, including equities, bonds and mutual fund shares.
One common objection to financial registries is that they would impinge on privacy. Yet countries have maintained property records for land and real estate for decades. These records are public, and epidemics of abuse are hard to come by.
The notion that a register of financial wealth would be a radical departure is wrong. And the benefits would be enormous, as comprehensive registries would make it possible to not only reduce tax evasion, but also curb money laundering, monitor international capital flows, fight the financing of terrorism and better measure inequality.
The onus here is on the United States and the European Union. Why do we allow criminals, tax evaders and kleptocrats to ultimately use our financial and real estate markets to launder their wealth? Transparency is the first step in making sure the wealthy can’t cheat their way out of contributing to the common good.

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Wednesday, November 8, 2017

Endowments Boom as Colleges Bury Earnings Overseas

In 2006, the endowments of Indiana University and Texas Christian University invested millions of dollars in a partnership, hoping to mint riches from oil, gas and coal.

The partnership was formed by the Houston-based Quintana Capital Group, whose principals include Donald L. Evans, an influential Texan and longtime supporter of former President George W. Bush. Little more than a year earlier, Mr. Evans had left his cabinet position as commerce secretary.

Though the group had an impressive Texas pedigree, presidential cachet and ambitions for operations in the United States, the new partnership was established in the Cayman Islands. The founders promised their university and nonprofit investors that the partnership would try to avoid federal taxes by exploiting a loophole called “blocker corporations,” which are typically established in tax havens around the world.




A trove of millions of leaked documents from a Bermuda-based law firm,

Appleby, reflects some of the tax wizardry used by American colleges and universities. Schools have increasingly turned to secretive offshore investments, the files show, which let them swell their endowments with blocker corporations, and avoid scrutiny of ventures involving fossil fuels or other issues that could set off campus controversy.

Buoyed by lucrative tax breaks, college endowments have amassed more than $500 billion nationwide. The wealth is concentrated in a small group of schools, tilting toward private institutions like those in the Ivy League and other highly selective colleges. About 11 percent of higher-education institutions in the United States hold 74 percent of the money, according to an analysis in 2015 by the Congressional Research Service.


The House Republican tax plan includes a 1.4 percent tax on the investment income of private colleges and universities with endowment assets of $250,000 or more per student. It would not apply to public schools. If passed, the new tax would affect about 70 elite private colleges, though it would not touch the type of offshore benefits the Texan partnership pursued.

On Monday, 45 education groups declared their opposition to the bill in a letter to Kevin Brady, the Texas Republican who is the chairman of the House Ways and Means Committee.

Indiana University also put money into the Cayman Islands partnership, which was designed to exploit a loophole that would avoid federal taxes in the United States. Luke Sharrett for The New York Times

Tax ‘Blockers’

College and university endowment earnings are usually tax-exempt. But as endowments have sought greater investment returns in recent years, they have shifted more of their money out of traditional holdings like United States equities to alternative, potentially more lucrative investments. These include private equity and hedge funds that frequently borrow money, opening them up to tax consequences.

When schools earn income from enterprises unrelated to their core educational missions, they can be required to pay a tax that was intended to prevent nonprofits from competing unfairly with for-profit businesses.

Establishing another corporate layer between private equity funds and endowments effectively blocks any taxable income from flowing to the endowments, the reason they are called blocker corporations. The tax is instead owed by the corporations, which are established in no-tax or low-tax jurisdictions like the Cayman Islands or the British Virgin Islands.

“Congress is essentially subsidizing nonprofits by allowing them to engage in these transactions,” said Norman I. Silber, a law professor at Hofstra University who co-authored a paper on blocker corporations in 2015. “They’re allowing them to borrow so that they can build up their endowments.”

The use of blocker corporations has raised concerns among policymakers in recent years. That’s partly because they cost the United States Treasury millions of dollars, but also because they legitimize an opaque offshore network sometimes used for nefarious purposes.

“They’re not cheating. They’re not hiding money or disguising money,” said Samuel Brunson, a law professor at Loyola University Chicago who has studied endowment taxation. “But they’re adding money to a system that allows people, if they want to hide their money, to do it.” Not only do the universities benefit — so does the wealthy and influential private equity industry.

Perhaps illustrating the sensitivity of the topic, officials at most of the college and university endowments that use blocker corporations, including Colgate, Dartmouth, Duke and Stanford, declined to comment specifically, citing longstanding policies against discussing their investments. Among them was Matt Kavgian, the director of strategic communications for Indiana University’s $2 billion endowment, which had invested $10 million with Quintana.

An exception was the Quintana shareholder Texas Christian University, whose chief investment officer, Jim Hille, acknowledged that the $1.5 billion endowment had used blocker corporations. Mr. Hille said the decision to use one often came down to whether the expected return would offset the cost of establishing a blocker corporation.

References to such corporations in the Appleby files, shared with The New York Times by the International Consortium of Investigative Journalists, which obtained them from the German newspaper Süddeutsche Zeitung, date back at least to 2003. At that time, five elite schools — Columbia University, Dartmouth College, the University of Southern California, Stanford University and Johns Hopkins University — became partners in a Bermuda-based group called H&F Investors Blocker.

H&F Investors Blocker was formed to invest with one of the largest private equity firms, Hellman & Friedman, in shares of Axel Springer, a German publisher of newspapers and magazines.

Minutes from meetings at Appleby’s office in Hamilton, Bermuda, never mention tax avoidance or even explain why the word “blocker” is used in the partnership’s title. But an audit by Ernst & Young, contained in the minutes, shows that H&F Investors Blocker would owe no federal income tax.

By 2008, the University of Texas system — whose endowment last year was $24.2 billion, behind Harvard’s ($34.5 billion) and Yale’s ($25.4 billion) — asked Appleby to set up a Cayman Islands company called TX Liquidity Capital so “certain tax advantages will accrue to the system,” documents show.

Colgate University, with an endowment worth $822 million last year, stood to benefit from blocker corporations in 2008 when it invested in Genstar Capital, a private equity fund specializing in leveraged buyouts, according to the records. One investor in that Cayman Islands partnership, called Genstar Capital Partners V HV, took pains to include a handwritten a note near his signature: “elect to invest through the blocker.” Other investors were Dartmouth, Stanford and a Duke fund called Gothic Corporation.




In 2003, Dartmouth College became one of five schools to invest in a Bermuda-based group that would owe no federal income tax on its investments. Ian Thomas Jansen-Lonnquist for The New York Times

A Shift in Public Attitude

While legal, blocker corporations are part of a system of endowment tax breaks fueling an undercurrent of populist anger. Many students across the country struggle under massive college debt. At the same time, critics say, some wealthy schools use these tax advantages to stockpile endowments that exceed the gross national product of entire countries.

Last year, three influential Republican legislators, led by Senator Orrin G. Hatch of Utah, sent a letter to 56 private universities with endowments of $1 billion or more, requesting information on “the numerous tax preferences” they enjoy. “Despite these large and growing endowments,” the letter said, “many colleges and universities have raised tuition far in excess of inflation.”
So far, universities have mobilized lobbyists to emphasize the public benefits they deliver, beating back challenges to their tax breaks. But there is evidence that the mood has shifted, said Charlie Eaton, a professor at the University of California, Merced, who has studied endowment tax breaks.

“In some ways, the anti-elite and anti-university spirit of Trumpism could create a favorable environment on Capitol Hill for some kind of action on this,” Dr. Eaton said. “That’s part of the reason universities urgently need to grapple with this. Because people genuinely feel that our elite universities have become islands of wealth.”

In a study this year, Dr. Eaton estimated that a trio of tax breaks benefiting universities costs federal taxpayers $19.6 billion a year. Taxpayers, many of them wealthy, get breaks when they donate to colleges. Tax-free municipal bonds allow schools to borrow money at low rates. And for the most part, endowment investment returns are tax-free.


Columbia University’s investment fund held shares in a company, registered in the Isle of Man, that generated controversy over a pipeline project in Brazil. Karsten Moran for The New York Times

Controversial Ventures

Multiple Appleby documents offer a glimpse into the complex financial transactions and investments, some controversial, that university endowments engage in all over the world, aside from using blockers.

Universities have been under pressure from both students and activists to shift to “green” investments in response to climate change, as well as to take social policy and global governance issues into account in investments.

The Appleby records show that investment funds of Columbia and Duke, both ranked in the top 20 endowments, held shares as recently as 2015 in Ferrous Resources, registered in the Isle of Man. Its primary business is iron mining in Brazil.

The company drew criticism there with a planned 480 kilometer pipeline to transport iron slurry from a mine in Minas Gerais to a port.

“Major demonstrations took place against this project, which culminated in the creation of a campaign,’” researchers wrote in a 2015 paper published in the journal Society & Nature.

A 2010 environmental study of the pipeline revealed that more than 110,000 people might be affected by noise, dust, soil degradation and water quality issues. The project was postponed in 2012 after a downturn in iron prices.

The company, Ferrous Resouces, declined to comment, except to say that the project had been discontinued.

Columbia, which owned more than eight million shares in Ferrous Recources, or 1.1 percent of the company, declined to comment. Various investment funds connected to Duke, which also declined to comment, held more than two million shares in the company.

While some schools have announced shifts away from controversial investments, others have pointed out that divesting from fossil fuels would probably lead to a significant drop in operating funds.

Underscoring endowments’ reliance on hydrocarbon holdings, 10 schools invested in a Cayman Islands partnership in 2012 known as EnCap Energy Capital Fund IX-C, part of EnCap Investments, a private equity firm known for the acquisition and development of North American oil and gas properties.
Among the investors were the University of Alabama, DePauw, Northeastern, Pittsburgh, Purdue, Reed College, Rutgers, Syracuse, Texas Tech and Washington State.


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