The Panama Papers reveal deep problems at the heart of our economy
The Panama Papers –the biggest tax leak ever – have proven without doubt that hundreds and thousands of individuals and corporations are using tax havens to limit their tax liability and sometimes, to launder dirty money. And remember this is just the tip of iceberg. Many other offshore law firms are in existence. A total £12 trillion is believed to be held by individuals offshore, enough to end extreme poverty globally twice over.
Looking through the coverage this week there’s been a lot of valid points made: while not always illegal, hiding money in tax havens is immoral; tax havens are a British problem, with more than half of the leaked Mossack Fonseca cases routed through British overseas territories; the Panama Papers alongside other news, such as the Tata steel works sale, demonstrate that there is one rule for the rich and another for everyone else; that the scale of tax avoidance demonstrates how corrupt our model of capitalism has become.
Two points deserve a bit more attention.
The first is linked to the revelations about David Cameron’s father, his late admission of his own stake in his father’s offshore company alongside a letter showing he wrote to the then President of the European Council to ask that trusts not be included in new tax transparency rules. This exception for offshore trusts is likely to have created new tax loopholes. Taken together these events demonstrate one of the most damaging impacts of inequality – vested interests and political capture. This is a simple idea and something we all intuitively understand – that people act in their own self-interest. If you have an offshore trust or if you are close to others that have them you are unlikely to push to limit them. Put it this way – turkeys don’t vote for Christmas.
Joseph Sitglitz, Thomas Piketty and Oxfam have spoken at length about how the 1% are using their wealth and power to advocate for policies that protect their wealth but hurt the majority. Ultimately the levels of inequality we have now coupled with a group of senior politicians from elite backgrounds means that our democracy is being undermined. As the US Supreme Court Justice Louis Brandeis famously said, ‘We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.’
And it is not just tax havens that our government has been slow to act on. The big bad banks that brought the global economy to its knees have managed to get away with it relatively unscathed. Financial regulation has been rolled back and our government has defended the bankers and their bonuses at the EU level. Vested interests are also demonstrated by the way in which we have seen public spending cuts hit the poorest most, while there have been tax cuts for the richest.
For me, the Panama Papers and the Prime Minister’s involvement makes crystal clear the need for a more diverse set of political leaders as well as absolute transparency. We simply cannot trust a rich elite to work in our interests.
The second missing point in the debate this week is that for years now we have failed to make the positive case for tax. The OECD found that corporate taxes have seen a pronounced shift downwards across high-income countries and middle and low-income countries have also engaged in a race-to-the-bottom on corporate tax, too often prompted by multinational companies threatening to go elsewhere if not given beneficial tax rates. Worse still, tax subsidies in cash starved developing countries are not uncommon. One can only conclude that while we have been making some headway on the argument on tax collection, we have been losing the argument on tax.
The reality is that people don’t always get why they should be paying tax and corporates do not always recognise their moral responsibility. Somewhere in the midst of technical terms and minutiae policy details we have forgotten to remind everyone that tax is what pays for vital and beloved health services, educating our children and building our roads.
The Panama Papers have opened a Pandora’s box of issues – the rich hiding their money is symptomatic of deep problems with our political and economic systems. It is these problems – most notably wealth and income inequality – that we must address if we want to tackle tax havens for good.