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Panama Papers

Crack Down on Tax Dodgers

May 25, 2016 | by CRAIG WILLY

© Dominic Alves via flickr.com, CC BY 2.0
A banner with the words Stop Tax Dodgers

The Panama papers show that many countries around the world have failed to tackle tax avoidance and evasion. But making sure everyone pays their fair share is not just a question of increasing transparency of offshore accounts but enforcing international standards. 

If nothing else, the Panama papers have already achieved a major feat: Bringing unprecedented attention and indeed a global media frenzy on a most unlikely topic... accounting! Indeed, the leak of the 11.5 million documents detailing offshore bank accounts has led the highest levels of government to pledge to remove the veil of secrecy surrounding such practices.

“Tax avoidance is a big, global problem,” said U.S. President Barack Obama. “A lot of it is legal, but that's exactly the problem. It's not that they're breaking the laws, it's that the laws are so poorly designed that they allow people, if they've got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by.”

As Obama emphasizes, the issue is fairness: Wealthy individuals and multinational corporations can take advantage of financial globalization to avoid paying taxes in a way which ordinary workers and small businessmen cannot. This is a truly global problem which virtually all countries face today. As the Sustainable Governance Indicators (SGI) project by the Bertelsmann Foundation notes on Great Britain: “there are too many opportunities for tax avoidance, with the results bordering on evasion for the rich.” The same could be said about many other countries.

Tax dodging fosters inequality

Tax avoidance and evasion are not simply an accounting problem but have a large impact on people’s lives. They have played an important role in the steady increase in inequality seen in most of the developed world over the past 30 years, with ever-more wealth accruing to the top 1 percent. Economic inequality in general has been correlated to a host of negative outcomes, including lower social cohesion and mobility, poorer health, and higher crime.

Tax dodging has also played a role in the economic crisis and weak recovery of recent years insofar as they have worsened deficit spending. The U.S. Senate has estimated that tax evasion and avoidance account for losses of revenue of around $100 billion every year in America alone. In the European Union, the European Commission similarly estimates a figure of between €50 and 70 billion. Tax dodging has made it considerably more difficult for governments to balance their budgets, meaning more spending cuts and tax increases. This has been a drag on economic activity, leading to more unemployment and growth than would have otherwise been the case.

The SGI project shows that numerous countries have failed to tackle tax evasion and avoidance. This kind of corruption has played a major role in the difficulties of countries like Italy, Portugal, and Greece in cutting their deficits. Many smaller countries and territories have even based their economic models in part on encouraging tax optimization. These include many smaller European countries, Caribbean islands, and Singapore.

Tech giants like Apple and Google are notoriously difficult to tax

Everyone then has an interest in seeing each pay their fair share of taxes. But opportunities for international tax avoidance and evasion have grown enormously with the globalization and information revolutions. Whereas old manufacturing companies tended to employ people and pay taxes in the home country, tech giants like Apple and Google – with almost “non-territorial” business models – have been notoriously difficult to tax. Furthermore the liberalization of capital flows has made it easier than ever for the rich to stash their cash almost anywhere across the world.

An obvious answer has been to increase transparency of offshore accounts. The Organization for Economic Cooperation and Development (OECD) has spearheaded such efforts with new international standards. Different countries have signed hundreds of treaties in recent years to enable information sharing and transparency regarding taxes.

There remains the problem of enforcement however. Pressure has certainly been building up on smaller countries that enable tax evasion. But a few observers were troubled by the relative lack of American names in the Panama papers. One reason for this is that many Americans prefer to simply do their tax optimization at home. In the words of one banker the United States “is effectively the biggest tax haven in the world.” 

Indeed, several American states are known to be tax havens, but even the federal government under President Obama has declined to join the OECD’s new standards. The United States is in unusual company: Only a handful of other countries also declined, namely Bahrain, Nauru and Vanuatu. As Bloomberg reported: “Advisers around the world are increasingly using the U.S. resistance to the OECD’s standards as a marketing tool -- attracting overseas money to U.S. state-level tax and secrecy havens like Nevada and South Dakota, potentially keeping it hidden from their home governments.”

Tackling this challenge could be a problem no matter who wins the White House come November. As it turns out, both leading candidates Donald Trump and Hillary Clinton have “tax loophole” addresses in the state of Delaware, a known tax haven.

Certainly, countries everywhere have their own homework to tackle tax dodgers both at home and internationally. There is no need to wait for the United States or any other country to do that. But ultimately tax fairness will only be real if the playing field is really even, with no special exceptions.

Craig Willy is an EU affairs writer. He writes for the Bertelsmann Foundation’s SGI News and BTI Blog. His blog is available here.

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