The rotten system of tax havens

The international investigation known as the Pandora Papers, in which this newspaper is a partner and whose revelations are still underway, has uncovered the perverse workings of tax havens. It has also shed light on the tremendous extent of tax avoidance – and occasionally evasion – by government leaders, celebrities and businesses. Suspicious jurisdictions are the tools and the breeding ground that allow them to get rich at everyone else’s expense, by shifting the burden of their absenteeism to faithful taxpayers. Occasionally, these financial operations may be funding bigger crimes such as money laundering, illegal arms trafficking or the drug trade. The vast amount of money involved, the fact that it affects individuals in over 90 countries, and the pervasiveness of these practices following earlier revelations such as the Panama Papers, represent a triple alarm.

The first alarm indicates that the fight against tax evasion, improved in recent years thanks to lists of suspicious jurisdictions and a proposal for a minimum global corporate tax rate of 15%, remains insufficient: its successes are like a modern-day tale of Sisyphus, the character in Greek mythology who was forced to keep rolling a boulder up a hill only to see it roll down again and again. The second cause for alarm points to the indispensable need for citizen pressure, tough action by states and international cooperation as tools to prevent fast moves against regulatory efforts. And thirdly, the alarm warns us that we should not entrust everything to crises, because these react to the derision in ambivalent ways: they can stimulate greater fiscal awareness, but they can also create incentives for minority groups seeking even more substantial returns.

The rotten system of tax havens creates a long list of nefarious consequences that undermine trust in democracy

Every year, around €370 billion in tax ($427 billion) is lost to tax havens, according to the Tax Justice Network, and this lost tax revenue means fewer resources for the welfare state. It also sets up a downward tax spiral that compounds these problems in the expectation that reducing taxes would reduce capital flight. But it’s even worse than that, because avoidance by the wealthy takes away revenue from income tax and from wealth tax, so that those taxes then become less progressive as they proportionately affect the working and middle classes more. And what tax avoiders fail to pay tends to be offset with increases on consumption taxes: this is also an anti-progressive move because this levy on consumption places a greater burden on low earners, since most of their income must go toward consumption rather than savings.

As for tax avoidance by businesses, it’s a similar story: in advanced economies within the Organisation for Economic Co-operation and Development (OECD), the average corporate tax rate dropped from 32% in 2000 to 23% in 2018. Again, this data point is worse in Spain, where the state is collecting just a little over half of what it used to before the Great Recession of 2008, while revenue from all the other major tax categories has amply recovered.

The rotten system of tax havens creates a long list of nefarious consequences that undermine trust in democracy: it erodes collective morals on the duty to pay taxes, it reroutes trade and investment flows, it creates unfair asymmetries between some companies and their competition, it shifts capital to other territories, it corrupts the middlemen and foments a passive attitude by professional associations that engage in ethical relativism. Action on this front is not just a fair popular demand, it is a need of the state. Harmonizing tax rules at a global level is no doubt indispensable, but in addition, individual states urgently need to step up efforts against homegrown fiscal crimes, reinforce bans on eligibility for government contracts and subsidies (including the EU’s Next Generation funds) for companies and banks operating in tax havens, and to create “quarantines” for certain professionals, such as state solicitors and tax inspectors, who later go work for the same people they once used to track down. In short, there is still effective leeway for political action against perpetrators of high-level tax fraud.