"In this world nothing can be said to be certain, except death and taxes," wrote Benjamin Franklin. That truism seems a bit less true after the Panama Papers exposed one of the biggest tax dodging scandals in history. The reveals from the Panamanian law firm Mossack Fonseca showed that yes, death is inevitable, but some of us can avoid taxes. It is time to bury what lies at the heart of the problem: tax competition.
"The problem is bad laws."
That is what U.S. President Barack Obama said in response to the Panama Papers revelations about companies and people engaging in tax evasion and avoidance. Obama perfectly encapsulated what lies at the heart of the problem: that it is made possible by laws drafted by politicians. Lawmakers are the enablers.
Many smaller countries in Europe such as the Netherlands, Luxembourg, Belgium, and Liechtenstein, to name but a few, have in the past decades made tax avoidance legal. Bigger countries carry the blame too -- countries such as Great Britain, with its Virgin Islands, or the United States, with Delaware and Connecticut, or China with its Hong Kong territory, or Singapore with, well, Singapore. This is without mentioning some African nations, which appear to be the next refuge for dark money.
The Panama Papers scandal sheds a bright light on something morally untenable in society, which is that if you have enough money, you can avoid paying taxes.
To make matters worse, if you as Joe Sixpack make a small mistake in your tax return, or if you fail to mention that you had some money underneath your mattress and the tax man finds out, you're in deep trouble. This is not the case for those able to hire the right firm.
The scandal proves to many that the system is rigged. It also shows that those who represent us not only made it all possible, but some of them even benefited themselves.
The prime minister of Iceland had to resign after mass protests following revelations in the Panama Papers that showed his ties to dubious fiscal constructs. British Prime Minister David Cameron had to come clean about his own tax shenanigans. Just five days after being elected, the Panama Papers allege, members of the newly ruling left-wing party in Malta set up fiscal constructs to avoid taxes for themselves and some of their buddies, leading to protests similar to those in Iceland.
Schizophrenic
One of the linchpins of legal tax avoidance schemes is The Netherlands. Thanks to tax rulings and dual tax prevention measures, organizations such as Oxfam and Tax Justice estimate that between 8 trillion and 10 trillion euros flow through the small country annually.
Leftist parties felt they had to do something following the revelations. And so a parliamentary inquiry is to start soon, and it will force people to testify under oath. Chances are that the conclusion will be that tax avoidance would be impossible had the members of parliament doing the questioning prevented it.
Yes, one could say that the Dutch body politic has been somewhat schizophrenic about its approach to tax avoidance. It is also emblematic for the discussion in many other European parliaments.
In 2013, the right-wing firebrands of the nationalist Party for Freedom tabled a motion that forbade anyone in government or parliament to dub the Netherlands a "tax paradise." The motion drew the support of a majority of parties, including the center-left Labor party.
When news leaked that the Dutch embassy in Ukraine extolled the advantages of the Dutch international taxation regime during a presentation for Ukrainian businessmen, the Dutch government's foreign minister -- now European Commissioner Frans Timmermans -- said there was nothing wrong with it.
And just several weeks, ago the Socialist SP party publicly called in the Dutch parliament for a new tax avoidance scheme for Dutch harbors. It turned out that the Dutch state for years had granted its harbors -- among them Rotterdam -- a special tax exemption that made them more attractive than, say, its French, Belgian, and German counterparts to sea transport companies.
In the preceding years several European governments, the Dutch among them, have pushed the European Commission to enforce a level tax regime across the European Union for harbors. So when the Commission finally came through, with a directive to normalize the tax regime for Dutch harbors, the first thing Dutch parliament -- including the left-wing SP -- did was publicly press the government to establish tax avoidance measures to safeguard employment.
Yes, that's correct: a party that is probably far to the left of Bernie Sanders publicly advocated tax avoidance measures for companies. Why? Because tax avoidance is legal. Tax evasion isn't. Or so the corrupted Dutch political mind argues.
This example shows the hypocrisy. European creditor nations are constantly pushing debt-ridden countries such as Greece to eradicate bad tax morals, yet the creditors themselves engage in similar practices whenever it suits them.
Do the right thing
If countries truly wish to stop companies and people hiding their taxable wealth, they have to plug the self-created holes. This will prove a tough challenge.
National leaders never tire of touting the strengths of their societies. International companies, they invariably ruminate, invest in their country because of the excellent infrastructure, fantastic education system, and available resources.
If only this were true.
Countries increasingly engage in tax competition to lure companies. When OECD or G20 members crack down on tax avoidance and push out tax avoiders, the latter immediately seek out other countries to service them. And it works.
So if limiting one market leads to another market opening up, eliminating markets seems to be the only way to solve the problem. As a worldwide tax crackdown revolution doesn't seem to be the in the cards, a pan-European corporate tax rate (one applicable to faraway European territories) could at least provide a start. A lot of wealth originates within the European Union, so many companies would be hard-pressed to flee the Continent.
Especially when they're publicly named and shamed if they do.
So this is what we can thank the Panama Papers scandal for: It pushes leaders to show their true colors. The coming months will tell how principled they really are.
