Comment Writer Alena Leemann takes a dive into the Pandora Papers, arguing that the extensive nature of the tax evasion present in the leaked data is unethical
This October an offshore data tsunami named the Pandora Papers has hit our world and shaken the trust we place in our political leaders. The biggest leak of financial records in history offers the public a glimpse into the inner workings of the global offshore economy and exposes hidden wealth, tax avoidance and money laundering of the world’s financial and political elite.
The Pandora Papers connect offshore affairs in tax havens such as Belize, Seychelles, Bahamas, the British Virgin Islands, Switzerland, or Singapore to more than 330 politicians and public officials, among them 35 current and former presidents, prime ministers, and heads of state. The investigation uncovers the covert owners of offshore companies, secret bank accounts, private jets, yachts, luxury property, and even artworks like Picasso, or Banksy.
Keeping offshore assets in tax havens and moving money through shell companies is a common practice among wealthy people and often done for privacy and security reasons. Estimates about the amount of money hidden offshore range from $5.6 to $32 trillion. Offshore structures allow both individuals and corporations to legally reduce their taxes to an extent that leads governments across the world to lose $600 billion in corporate tax revenue each year.
British territories, such as the British Virgin Islands, Bermuda, or the Cayman Islands, make up a significant part of tax havens, as revealed by the Pandora Papers. Britain and its oversea tax havens are thought to be responsible for around a third of global corporate tax avoidance risks. Hence, Britain supports the global system in which the richest obtain wealth from the rest. The widening rich-poor divide is a defining problem of our time and captures the attention of economists and politicians likewise. Yet, not enough measures are taken to create economic inequality, especially in regard to fair taxation. Unless politicians act, the wealth gap will continue to widen.
While tax avoidance is not a violation of the law, it does raise questions of ethics. Paying tax is a burden to many and a social obligation to all. By avoiding taxes corporations and individuals ignore their social responsibility. Tax provides the funds for a country’s infrastructure and services like healthcare and education. The government’s spending cuts on account of lost tax revenue affect people reliant on the structures fair taxation would provide; tax avoidance of the financially privileged affects those who do not have the same financial means. Thus, the exploitation of the tax system enabled by a network of shell companies in tax havens may be legal, but it can never be ethical. An ethical tax system would be based around the core principles of transparency, accountability and consistency. The Pandora Papers show that it is not.
Avoidance of transparency facilitated by offshore structures, moreover, opens the door for tax evasion, money laundering, or disbursements that are part of corruption. The financial system in tax havens therefore not only supports unethical but also illegal practices. Action against these illegal practices can only be taken by ending the secrecy surrounding the offshore system and improving transparency in concern to company and property ownership. Property in the UK, for example, can be owned by anonymous companies overseas. Money laundering through UK properties is thus quite common. A simple change in legislation to enhance transparency regarding property ownership, would disable the structures used to bend and break the law.
The access to offshore financial documents exposes the involvement of several important political figures in both legal and illegal offshore affairs. Many politicians hide their wealth and avoid paying their taxes. This suggests to me that the way politicians portray themselves often does not align with their actions.
The Czech Prime minister, for example, moved $22 million through offshore companies to buy a chateau in Southern France and kept his ownership secret from the public for over a decade. He failed to declare ownership of the property and the companies involved in this ownership, as required by Czech law. These actions could have significantly reduced his tax bill and stand in stark contrast to the public image he tries to maintain. While likely avoiding taxes himself, he led a crackdown on tax avoidance in an effort to restore his country’s financial health. The Czech Republic is estimated to lose $5 billion to tax avoidance by corporations, wealthy individuals and apparently also their prime minister.
To name another example, King Abdullah II of Jordan used offshore companies incorporated in the British Virgin Islands (BVI) to purchase $100 million in property across the UK and the US. He has been very secretive about his finances in general, as well as keeping his property ownership secret from the public. His lawyers stated that his overseas properties were purchased with his personal wealth and that he had no intention of hiding this from the public. The exposure of his hidden property empire might nevertheless hurt his public image. Hiding his wealth is morally questionable not merely because he is the leader of a country supported by billions of dollars in international financial aid, but also because it violates some core principles of political trust; transparency, sincerity, and integrity.
A significant number of British politicians were named or linked to those named in the Pandora Papers report. Among these politicians are former prime minister Tony Blair and current prime minister Boris Johnson. Blair had promised to create a fair tax system while benefiting from the unfair one in place. And Johnson was supported in his campaign by Mohamed Amersi, a prominent Tory donor, who was very closely involved in an offshore corruption scandal. During his time as prime minister Boris Johnson has done little to nothing in support of fair taxation or narrowing the ever-sharpening wealth gap. On the contrary, he has encouraged people to vote against taxes on wealth such as inheritance tax or levies on property, and recently announced a social care tax rise. Taxes for both middle- and low-income citizens keep rising and so do levels of economic inequality.
Tony Blair, in his first speech as Party Leader in 1994, attacked the offshore system allowing wealthy people to avoid taxes and promised that he ‘will create a tax system that is fair, which is related to ability to pay, where the abuses end, the perks stop and where ordinary families are not squeezed to pay for the privileged.’ Financial records now reveal that Tony and Cherie Blair bought a townhouse in central London worth £6.4 million from an offshore company saving £312,000 in property taxes. Although this is a perfectly legitimate business deal, the couple were able to save a lot of money solely because they have access to a system inaccessible to most. It does not seem fair to me that the offshore finance system only provides an advantage to those already at the top; a point Tony Blair himself actually seemed to agree with, when he said that ‘middle-income taxpayers get stung, whilst perks and privileges at the top roll on unstopped.’ The financial elite has access to a system allowing them to avoid both taxes and financial transparency while most citizens have to pay their taxes and abide by financial transparency rules.
These actions, among others, demonstrate how many politicians support and profit from a rotten capitalist system that continues to widen the wealth gap. Last year’s drastic rise of socioeconomic inequality caused by the pandemic has shown the need to stop the social divide between the rich and the poor from growing further. That would entail creating a more inclusive economy, making the tax code work better for low wage working families, and closing tax loopholes that only benefit the wealthy. The problem is that the system politicians are empowered to change and promise to act against is a system they themselves benefit from.
We place a great deal of trust in politicians that they will act in our best interest. This trust is essentially the key component of a well-functioning democracy and heavily relies on credibility, fairness, competence, and honesty. Now, is anyone who uses offshore networks to hide wealth or reduce taxes credible, fair, competent, or honest? Will politicians move beyond empty promises of equality and take action against these networks?
The Pandora Papers report has spread public awareness of how the economic system continually sharpens the rich-poor divide. Pressure from the public and the will to defend their public image might force political leaders to act. To end the secrecy surrounding offshore affairs and the advantages individuals and corporations derive from it, international financial regulations have to be strengthened, tax avoidance limited, and the ways enabling the wealthy to hide assets restricted.
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