The geopolitics of tax dodges

16 April 2016 12:34 pm

Much attention lately has been placed on the massive 2.6 terrabyte leak of the law firm Mossack Fonseca’s Panama Papers

The Panama law firm has helped foreign corporations and individuals set up shell companies not just in Panama but also the Bahamas, the British Virgin Islands, and other notorious tax havens around the world.

Among other things, the documents so far have hinted at corruption in Russia, and have prompted a political crisis in Iceland.

The papers are striking because they show one obvious fact: the world's wealthiest and most powerful nations might have gone through complex negotiations to facilitate global commerce for the world’s biggest company but at the same time, they have allowed the wealthiest businesses and members of Western society to take advantage of shell companies and tax havens to shield their financial assets from taxation, or in some cases, divorce or bankruptcy settlement.

The reality is the powerful Western nations have done nothing to stop tiny Caribbean nations from undermining the integrity of the global tax system. Why? Because Western economic elites don't want them to.

How much is stashed away in these tax havens? In his book The Hidden Wealth of Nations, Gabriel Zucman, assistant professor of economics at Berkeley, puts it at at least $7.6 trillion, equivalent to 8% of the global financial assets of households.

Zucman wants to bolster information exchange. This can be done with a worldwide public register of financial wealth, recording the ownership of shares and bonds. Countries would be forced to comply by the threat of massive sanctions. With a financial register in place, it would be easy to impose a wealth tax at source.

It’s important to remember the difference between between tax evasion — illegally refusing to pay taxes through secret accounts hiding the money — and tax avoidance, where companies and the global elite hire clever people to help find and exploit legal loopholes to minimize their tax.

Tax avoidance is inevitable in any tax system. But it’s growing because politicians choose to let it happen to protect their mates, and to give multinational corporations access to their markets. There simply isn’t the same sort of mobilisation of intelligence that goes into drug trafficking and terrorism finance.

The United Nations has been told the war on drugs is a complete failure.

Developing global policies to tackle tax avoidance would be a more effective stategy, a better use of resources in the public interest.

The Panama Papers puts pressure on the UN and countries around the world to do something about it.