The Panama Papers, a set of 11.5 million documents, emails and database files, have been at the center of international attention since being leaked on April 3 to the German newspaper Süddeutsche Zeitung.
The papers are considered to be the biggest data leak in history and reveal the offshore holdings of politicians, businessmen, criminals and celebrities that Panamanian law firm Mossack Fonseca had concealed.
Hiding income in offshore bank accounts to evade taxes is illegal in most countries, but loopholes exist. The wealthy and influential have turned to law firms like Mossack Fonseca to create and invest in shell companies outside their home countries to avoid taxation.
While these types of businesses are not officially illegal, some argue that they have contributed to growing global income inequality.
According to Anton Korinek, an assistant professor of economics, the hidden wealth of the world’s top 0.1 percent lies in tax havens like Panama and the British Virgin Islands and Switzerland.
“Around the world, there has been this really small class of the super-connected and super-wealthy who have managed to come up with a number of different ways encouraged by low tax paradises like Panama to shield their wealth from taxes,” Korinek said.
He continued to describe this taxation loophole.
“One part of the increase in wealth at the very top was because they managed to set up systems in which the wealthiest pay lower taxes. One thing that’s obvious is that if they pay fewer taxes, we have to pay more taxes. And if they manage to save a large amount of taxes by hiding the money, then the rest of society will have greater tax rates. Society will be more unequal because those who have the most pay the least.”
Panama is only one of the more than 90 tax havens around the world, so the Panama Papers leak only publicized a small portion of the anonymous private financial wealth in the world. According to Korinek, the immense scale of hidden wealth is the most shocking revelation made by the data leak.
“Economists are aware that vast sums of money have been moved into tax havens, areas of very low taxes or financial secrecy, in the past few decades,” he said. “What the Panama Papers have put the spotlight on is how vast these funds are and how the global 0.1 percent have really created in a sense their own economic and taxation system that is much more advantageous for them than for the rest of humanity. I think that one third of, or maybe even up to one half of, the increase in inequality was simply because of preferential tax treatment of the super wealthy.”
Nicolas Jabko, an associate professor and director of undergraduate studies of political science, agrees that the key takeaway from the data leak is not the fact that tax avoidance is occurring, but its scale and spread.
“What this story reveals for everybody is that there is a whole global financial infrastructure that helps to support unprecedented levels of economic inequality, and that facilitates tax evasion on a massive scale,” Jabko wrote in an email to The News-Letter.
The significance of the Panama Papers leak has shaken the world stage partially due to the big names involved. Icelandic Prime Minister Sigmundur Davíð Gunnlaugsson has resigned after he was named in the documents. Other influential leaders such as President Vladimir Putin of Russia, President Petro Poroshenko of Ukraine, President Mauricio Macri of Argentina and President Xi Jinping of China have been tied to the offshore finance scandal. Celebrities such as Jackie Chan and Lionel Messi have also been linked to the Panama Papers.
Jabko found the reactions of the influential public figures named in the Panama Papers shocking.
“My sense is that there’s a lot of hypocrisy around these leaked documents,” he wrote. “Even before the leak, it was an open secret that Panama was a place for very rich people to stash away their money.”
Jabko also explained that many people mentioned in the papers are finding excuses to explain their involvement.
“Now many of the people whose names have come out deny that they ever wanted to hide their assets. Or they pretend like they didn’t know about it. Or they admit that they put their money there, but insist that they did nothing illegal. Vladimir Putin even says this is a western conspiracy against him. It’s really pitiful,” he wrote.
In fact, several others, including people named in the documents, have directly denied that they have taken part in any illegal activity. In a website press release, the Mossack Fonseca law firm said that their system is the victim in this situation.
“We have a long history of working proactively with relevant authorities in various jurisdictions when questions are raised and additional information is required, and in many cases we’re the ones who actually initiate that contact when suspicious activities are detected. In this case, we’re the ones against whom a crime has been committed,” the statement said. “Our systems having been unlawfully breached by parties external to the firm.”
From a legal standpoint, the activities detailed in the Panama Papers are not unlawful. Law firms like Mossack Fonseca are employed to make sure the offshore finance their clients take part in is on the right side of the law.
Political Science Professor Renée Marlin-Bennett commented on the difference between illegal tax and legal tax minimization.
“Tax evasion is illegal, by definition. Tax minimization, using legal means to reduce one’s tax liability, is legal. And not just legal; it’s prudent and appropriate. There are definitely illegal practices, under national laws, that involve hiding assets in ‘tax haven’ countries. There are also practices involving maintaining assets in another country in ways that minimize tax but are not illegal,” Marlin-Bennett wrote in an email to The News-Letter.
She added that tax minimization is justified in some situations.
“I think it is reasonable for people to take advantage of legitimate means of limiting their tax liability. In a globalized economy, it is not unlikely that maintaining foreign assets will be part of that, especially for the very wealthy,” she wrote. “I think the temptation will be very strong to cross the line into illegal tax evasion, especially when the stakes are large.”
The Panama Papers are spurring discussion about both the ethics and legality behind the wealthy concealing large amounts of their assets. While the public denounces the individuals involved in the scandal, Marlin-Bennett points out that within the current system it is not illegal.
“Of course, tax avoidance can be fixed if governments make tax avoidance practices illegal. Governments can certainly close tax loopholes, but as long as those loopholes are legal, there is nothing wrong with taking advantage of them,” she wrote.
Even from a purely ethical standpoint, Marlin-Bennett noted that tax avoidance isn’t always the intention behind offshore finance.
“I will say, though, that there are many reasons that a person would want to stash assets in another country. For example, I know a woman from an Austrian Jewish family. When her wealthy parents started to see the writing on wall in the lead up to the Nazi take over, they sent a lot of their money to Switzerland,” she wrote. “Luckily, they survived the concentration camp and were able to reclaim their funds after the war. If you are a Syrian family right now, you might want to have money in an account outside the country because you might want that money accessible when/if you flee.”
