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This Sunday, The International Consortium of Investigative Journalists has unveiled a huge analysis of tax havens around the world based on a huge leak of documents from 14 offshore service companies. The ICIJ calls the leaked documents the “Pandora Papers”.
The investigation is expected to be particularly enraging for ordinary citizens around the world, as it has found 35 current and former world leaders who use complex financial maneuvers to hide their wealth, avoid taxes, or both.
At the same time, readers may feel a sense of desperation: The wrongdoing that ICIJ reports reveal seems so Byzantine that stopping it seems beyond the capacity of democratic governance. In 2004, President George W. Bush encouraged Americans to embrace this sense of futility, saying there was no point in raising taxes for the rich because “the real rich figure out how to dodge taxes.”
In reality, however, there is no technical reason why the world of international financial secrecy and all of its associated injustices could not be eliminated. The challenge is purely political. That’s not to say it’s not intimidating, especially since the Pandora Papers show that the people who write the laws often do so not only on behalf of their wealthy patrons, but also for themselves. But that means no one should fall for specious claims that it’s impossible.
This is especially important now that societies around the world are increasingly dividing themselves into two. It’s bad enough that tax havens shift the tax burden from the super-rich onto everyone. The greater damage they cause, however, is fueling the precise and corrosive understanding across societies that there is one set of rules for ordinary people and quite another for those at the top of the pyramid.
There is no technical reason why the world of international financial secrecy and all of its associated injustices could not be eliminated. The challenge is purely political.
For example, a particularly infuriating discovery in the Pandora Papers is that former British Prime Minister Tony Blair and his wife avoided more than $ 400,000 in taxes by buying an offshore company that owned a townhouse in London with a worth nearly $ 9 million. Blair was by far the most important prime minister in the last 40 years of the Labor Party, the Democrats’ counterpart in the United States. There simply cannot be a working liberal policy, which asks everyone to contribute to the common good, led by people like Blair, who actively avoids doing so.
To understand what can be done about offshore tax havens, it is important to understand who is using them and why. First, they can serve as a means of taxation avoidance, which is carried out on a large scale by companies and is generally legal (in part because companies help draft the laws). Second, there is the tax evasion, which is mainly carried out by individuals and is illegal.
The Pandora Papers generally do not deal with corporate tax evasion. Ending corporate tax evasion would require changing our current “territorial” tax system, under which corporate profits are taxed in countries where corporations claim they were earned, to a “formal pay-as-you-go” system. , Under which taxes would be assessed on metrics, such as sales or payroll.
The revelations of Pandora Papers are more about the behavior of individuals. Tax havens allow individuals to hide assets with two simple attributes: Tax havens often do not report assets to the relevant tax authorities, and they have strict secrecy laws that can obscure who the ultimate owners of the assets are.
Gabriel Zucman, associate professor of economics at the University of California, Berkeley, offers several easy ways to solve this problem. Zucman is one of the world’s leading experts on tax havens and the author of the short book for the general public “The Hidden Wealth of Nations”.
Zucman points out that there has already been progress on the first front. The Foreign Account Tax Compliance Act, passed by Congress in 2010, imposed U.S. rules on financial institutions around the world. Under FATCA, banks in Bermuda, Switzerland, the Cayman Islands, and all other countries must search their records for accounts held by U.S. citizens and then report their income to the IRS.
The adoption of FATCA created momentum for similar measures in other countries. What is needed now, says Zucman, is for this momentum to continue and for other countries, individually or collectively, to unite to demand that foreign banks pass the income of the citizens of each country to the authorities. taxes of that country.
However, thanks to trusts and shell companies, financial institutions can in many cases honestly say that they do not know who owns the assets they hold. This problem could be addressed by an international financial register showing exactly which individuals own which assets.
Zucman thinks that such a register is “by no means utopian”. Countries already have such records for one type of wealth: property. And although little is known about it, there are now private registers for many other types of property. The Depository Trust Company tracks the ownership of all shares issued by US companies. Euroclear France does the same for the shares of French companies. Euroclear Belgium and Clearstream do this for bonds issued by American companies but denominated in European currencies.
Existing databases could presumably be merged into one. This would require the supervision of a public institution with extensive financial expertise. But we already have one: the International Monetary Fund.
This would not directly solve the problem of financial obfuscation – the IMF in this scenario would only have information indicating ownership by trusts, limited companies, etc. Unraveling the different layers of secrecy would be costly, laborious and sometimes impossible.
The IMF should levy a wealth tax of 3% on all stocks, bonds, mutual funds, land and property in such a register which would be refunded if the ultimate owners were unmasked.
But Zucman has a sneaky solution: The IMF should levy a 3% wealth tax on all stocks, bonds, mutual funds, land and property in such a register that would be refunded if the ultimate owners unmask themselves.
The individuals revealed in the Pandora Papers would thus have two options: they could keep their assets secret, and thus be eaten up by the 3% tax each year to the point that there would be no financial advantage in using tax havens, or they could reveal themselves, making their assets taxable and therefore also unnecessary tax havens.
Again, this is without a doubt a great political mountain to climb. And those who oppose financial transparency will argue that there is no way to force tax havens to comply. But this is simply not true: the United States and the European Union have enormous power which they constantly wield against other nations when they choose. Zucman calculates that France, Italy and Germany could force even a wealthy country like Switzerland to agree to any necessary transparency changes by imposing a 30 percent tariff on Swiss products. This would cost Switzerland more than it earns as a tax haven. It would also be legal under World Trade Organization rules, as this tariff level would allow the three countries to recover roughly the same amount of tax revenue that Switzerland is costing them.
Meanwhile, there are many international public interest organizations that understand the importance of the issue and are trying to get it on the global agenda. “This is where our missing hospitals are located,” said an Oxfam International representative in a press release, responding to the publication of the Pandora Papers. “This is where the salaries of all the teachers, firefighters and extra civil servants we need are found. Whenever a politician or business leader claims there is ‘no money’ to pay for climate damage and innovation, for more and better jobs, for a post recovery -COVID fair, for more overseas help, they know where to look. “
Members of Congress have only been required to disclose their finances since 1978. Until 2010, Americans could hold assets abroad that would not be reported to the IRS. A provision banning shell companies in the United States was recently inserted into a National Defense Authorization Act that was passed by President Donald Trump just before he was removed from office. Financial secrets have already been exposed, and they can be exposed again.