It has been a week since the publication of #PanamaPapers, and the international cooperation between journalists have had a massive impact. Forcing Iceland’s Prime Minister to resign from office and leaving UK PM David Cameron in a more than uncomfortable position, its political consequences are huge. While some argue that ICIJ is working for Western interest since relatively few US citizens appear to be involved in offshore companies in Panama (and they’re relatively low profile, too), it is clear that the whole content of Panama Papers has not been analysed, and that the US has been struggling with tax evasion on a national level itself. It is often argued that offshore companies and accounts are not illegal per se, and that there’s a tradition of tax evasion in many countries (an argument that keep surfacing in discussions in Luxembourg), but that is not the point. It’s not about whether or not the practice is illegal, but it’s much more about morality, and the lack of international regulation.
Taxes are not equal, and not fair
Looking at the contents of the Panama Papers, it’s obvious that it’s exclusively upper class or rich people who were involved with offshore companies/accounts. This is quite logical, since people with a lower income will have lesser access to the required infrastructure, and the required funds. Thus, mainly rich people benefit from possible tax evasion, and Gabriel Zucman, an US economist, estimates that around 8% of the world’s wealth, roughly $7.6tn ($7,600,000,000,000) is hidden in tax havens. He furthermore figures the annual loss of tax revenues at $200bn ($200,000,000,000) a year, costing governments all over the world the much required funds to invest in different areas, such as infrastructure or education. However, governments will need to compensate for the loss of tax revenues by increasing the tax for everyone. As such, it will be people with lower income, who are not evading their tax commitments, who are suffering from offshore banking. Governments will not only be likely to increase income tax, which is a more equal and fair tax since it hits people relatively to their income, but also basic taxes such as VAT, which is arguably the more unfair tax, since it will affect all citizens, regardless of their income.
But the problem goes further than this. In an interview with Vox, Zucman explains that tax evasion hits various parts from the world differently. He estimates that the US has between 4% and 8% of its wealth offshore, and the EU around 10%. At the same time, around 20% of Latin America’s, 30% of Africa’s, and even 50% of Russia’s financial wealth is stashed offshore. This especially hits developing countries, which are often struggling with revenue. A striking example is Uganda, where Heritage Oil and Gas Ltd Company hired Mossack Fonseca in 2010 to avoid to pay as much as $404 million on taxes, which is more than the annual health budget of the country. Even though Uganda was able to retrieve the money eventually, this has not been the case for others.
Towards a fair and equal solution?
The narrative we experienced during the #luxleaks scandal in 2014, mainly focussing on tax competition between countries, and the fact that tax evasion may not always be illegal, keeps surfacing again and is damaging to the desperately needed discourse. Luxleaks in 2014, as well as the Panama Papers now in 2016, are not an “attack” on a country, as Pierre Gramegna, Luxembourg’s Minister of Finance, labelled it, but rather an attack a system of inequality and unfairness, and even though progress has been made on this topic in the past, such as the automatic exchange of information, there’s still much to be done. In his interview with Vox, Zucman argues that modern transparency tools, such as financial registries are needed, and countries that are not cooperating need to be sanctioned.
But we also need to act on a national level: Mainly, we strongly need a shift of paradigm and mentality. We, and especially Luxembourg, need to realize that by helping offshore activities, we actively help destroying national economies of some countries. Tax evasion thus reproduces inequalities, hinders poorer countries to develop, and the gap between rich and poor is widening, and poorer countries and regions, such as Latin America and Africa, are more affected by it than we are. It’s a question of morality, not of legality.