In the light of the release of the Panama Papers, Elizabeth Cobbett and Toby James consider why tax avoidance matters for democratic accountability and public services.
The release of the Panama Papers has led to a political storm worldwide. The documents implicated seventy-two current or former heads of state, including dictators accused of looting their countries and duly elected presidents and prime ministers, of holding funds in offshore accounts. There is a difference between tax avoidance and tax evasion. Tax avoidance is entirely legal and can be done by employing smart accountants and creating offshore shell companies. Tax evasion is illegal. It is where you deliberately break the rules and deceive the taxman about what your tax bill should be. The issue is that rich people have ways to avoid taxes while the poorer members of society do not.
But does this really matter to the citizen? Aren’t politicians people too, who are entitled to their privacy and a right to conduct their affairs in a way that they see fit? William Hague argued this week that Winston Churchill’s private affairs were a mess, but he is often held up as an archetypical ‘great leader’. What matters, so the argument goes, is whether or not they are good at conducting the nation’s affairs well.
Well exactly! The elite’s tax avoidance is a nation’s affairs. It becomes an issue when the ‘private’ behaviours of the ruling elite impact on funds available to run the country.
The Panama Papers reveal serious deficiencies in the quality of democracy in many countries. Just to clarify, the Panama Papers are not just about the Central American country, the problem of tax evasion and avoidance is a global one. More than this, in a globalised world, where there has been much rejoice about the long term spread of liberal democracy, and talk of global democracy, the Panama Papers reveal a serious leak in global governance and leader accountability.
One of the defining features of democracy, wrote political theorist David Beetham, is open and accountable government. Transparency is vital to this and is now considered an essential principle by those conducting audits of democracy worldwide. It ensures that we know what our leaders and representatives private interests are. Knowledge about their private affairs deters them from putting private interests ahead of the public interest, because they can expect the public to try foul.
How does this link to the offshore world? The goal is to hide money. Tax havens hide your involvement in a company that hides your money; no one will ever know (unless there is a leak). And by implication, we lose track of the interests of our leaders and representatives.
One way of hiding money is to create a shell company – shell because it doesn’t do business – that allows individuals to move money around without having their names directly connected to the transactions. This is where the Panamanian law firm, Mossak Foncesca, comes in. It has created more than 200,000 companies in offshore tax havens.
In Iceland, a secret offshore company called Wintris holds the Prime Minister Sigmundur Gunnlaugsson and his wife’s fortune. These funds have interests in Iceland’s banks worth millions of dollars. The couple were creditors to three banks that failed in the 2008 financial crisis. He, as Prime Minister, was able to influence the couple’s fortunes through policies to regulate the banks. This conflict of interest was never declared to the Icelandic Parliament. In democracies, holders of public office have a duty to declare any private interests relating to their public duties. Gunnlaugsson seemingly campaigned against creditor bailouts. Later, however, he became involved in negotiations to bail out the banks with whom he had a link. He effectively helped put in place policies that which would affect the value of his investments in the banks concerned.
In Britain, the same issues surface. The cabinet, responsible for making decisions on tax, can be the direct beneficiaries of policies they make. David Cameron is currently questioned about offshore money received from his parents and on which he did not pay inheritance tax. Blairmore Holdings was managed by the Camerons in Panama. In 2013, Cameron put tackling tax avoidance at the heart of the G8 meeting. This was for very good reason. In our globalised world, an ongoing question is whether states are losing power to markets and private interests. It is often said that there is a ‘race to the bottom’ for governments setting taxes, with agile capital flowing to where it can find the least taxation.
We can understand it in this way. Taxes are a very important tool at states’ disposal. Taxes are needed to run the state, provide essential services and redistribute wealth through welfare and social programmes. Offshore tax havens – special geographical locations around the world – are a means for the wealthy to avoid paying taxes. An important feature of these havens is financial secrecy which underpins their common goal to help rich people and companies pay less tax in their country of origin. Basically, they support tax avoidance, otherwise known as “tax dodging”.
This is one main reason why the Panama Papers matter. They suggest that considerable sums of tax income, which is vitally important for funding public services, are being ciphered off by the rich and powerful at a time when major cuts in public services are taking place. There is a serious problem of democratic accountability when our leaders use shell companies to avoid paying all the taxes in relation to their private wealth.
There is a serious ethical problem when these same leaders put in place policies that cut national budgets because there is not enough money to carry out all that is needed. In other words, these heads of states are doing two contradictory things: they are trying to run a country that depends on taxes and they are simultaneously taking their money outside of the said country in order to not pay taxes.
As citizens, we expect our leaders and governments to defend our interests. This is why they have been elected. However, many state leaders and representatives are using financial globalisation networks to undermine the very states they lead. In spite of promises to do otherwise, leaders too often support this culture of tax avoidance of the very rich. Unfortunately, there is no corresponding tolerance for the non-payment of taxes by the ordinary citizen.
It is hard not to join the dots and come up with the conclusion that much of the global ruling elite are given too much freedom to not serve the populations that elected them. And it is the absence of transparency that is allowing this.
Dr. Elizabeth Cobbett is a lecturer in International Political Economy at the University of East Anglia
Dr. Toby James is a Senior Lecturer in British and Comparative Politics at the University of East Anglia
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