A Paradise for the 0.1%

We should not be surprised at the scale of tax evasion revealed by the Paradise Papers.

As the name suggests, the basic dynamic of our economic system relies on capital accumulation, through the pursuit of private profits. The theory goes that this dynamic will work for the greater public good. An extreme form of the (unproven) “trickle-down” dynamic was successfully promoted as a way out of the productivity and growth crisis of the 1970s. Wealth was transferred from public balance sheets to corporations, private investors and financial markets, all controls on capital movements were removed and governments had to enter into tax competition to attract the – now free – capital that creates jobs, production and income tax for them.

In other words, the global elite is not only rigging the international financial system to their advantage: today’s international financial system, including the tax system, has been built to serve their interests. Tax evasion is no longer the occasional failure of an otherwise efficient tax system as it was seen before; it is in reality a global business conducted on a global scale by lawyers and bankers with the highest reputations. This wealth of intelligence should rather be put at the service of society as a whole.

Liberté, INégalité, fraternité

The personal responsibility of tax evasion beneficiaries is over-emphasised. This masks the crucial role of the private financial sector that, not only facilitates tax evasion, but most often has promoted it until recently, when it became globally scrutinized. Most beneficiaries of tax evasion schemes have likely blindly signed off on schemes that their wealth manager or private banker recommended to them. And these bankers, private shareholder-owned, are corporations with the purpose of maximizing their profits. Therefore, wouldn’t they when their own interests are aligned with those of their clients?

And even if the beneficiaries of tax evasion themselves were to blame, this will be for some of them on moral grounds only. Indeed, in most of the cases unveiled by the Paradise Papers, the structure they have put in place to minimize their tax is perfectly legal.

The result is a gross inequality. 80% of all offshore cash is owned by 0.1% of the richest households, with 50% owned by the top 0.01% . The average small businessand the average citizen cannot afford the services of Appleby to hide their money from the tax authorities. They pay a lot of tax; and indeed, more and more tax proportionally – as the countries are deprived from contributions of wealthy individuals and large corporations. The evaded taxes are conservatively estimated at € 120 bn for the EU and $ 500 bn globally . Tax evasion in France is estimated at € 80 bn a year, equal to the yearly deficit of the French State. How many hospitals, schools, roads and homes can you build with that? How many jobs can you create? How many farmers and seaside home owners can you help out of the consequences of climate change?

(Almost) all equal before the law

The constitutional principle of equality before taxation is ridiculed by the institutionalisation of tax evasion. When the largest part of the tax base does not pull its weight, and the bulk of the tax burden rests on the shoulders of those who can’t escape, on the people who work and earn too little to save, the cohesion of republican societies is at risk. This was ultimately made possible because countries became dependent on global capital. Over the past four decades, in advanced economies, States’ controls on capital flows have been progressively released and capital moves freely across borders. States are dealing in isolation with multinational corporations and wealthy individuals that shift revenues and capital where they want to. This makes it impossible for countries to preventively enforce a control policy over tax evasion. On the contrary, this liberalization of capital movements creates competition between countries.

After favouring the removal of capital controls for decades, the OECD has bravely embarked on Base Erosion and Profit Shifting regulations to start to restore the tax base of multinational corporations. This set of various anti tax evasion is gradually implemented by countries and hopefully will prevent corporations to play with different tax regimes. Similarly, the automatic exchange of tax information put in place since the 1st of January 2016 in many countries should help to prevent future abuse from both entities and individuals. Anti-money laundering regulations are also evolving quickly with (i) reinforced Customer Due Diligence in different countries across the world and (ii) tax fraud that has become a primary offence in the EU.

These regulations, together with the Paradise papers, the Panama papers, Luxleaks and the International Consortium of Investigative Journalists (ICIJ), is a fantastic effort to change things. Our economic and financial system should work for people, not for the 0.1% wealthiest individuals. We want a different financial system, where tax is an equally shared contribution to the building of a fair society, prosperous for all. It is time to #changefinance and tax.

The Finance Watch team