Why should citizens be concerned?
Tax avoidance is a major drag on the ability of governments to act in the wider interests of society. The majority of avoidance comes from the largest companies and richest individuals. Tax avoidance increases inequality in many ways. Most simply, of course, by the rich just not paying their share. But a second effect is that a lack of tax funds restricts any government’s ability to provide a social safety net and acts as a brake on tackling climate change. Both failures disproportionately affect the poorest in society. We can go further: as tax avoidance and the offshore world grows, it continually undermines our governments’ abilities to act for the rest of us, it tears at the very fabric of democracy as we have known it since the Second World War. We are seeing the emergence of two distinct legal regimes, onshore for most of us and offshore for the wealthiest individuals and largest corporations.
The financial system plays an absolutely critical role in tax avoidance as ‘enablers and intermediaries.’ It is financial firms that dream up the schemes to move money to offshore centres, or to transfer profits to countries where there is less tax. As MEP Sven Giegold says: “These transactions are made possible by banks, law firms and auditors operating, and often based, here in the European Union.”
The Tax Justice Network has compiled various estimates of global tax avoidance:
- IMF researchers have estimated the annual tax loss to governments to be around $600 billion, split between $400 billion in OECD countries and $200 billion elsewhere.
- UNCTAD’s World Investment Report 2015 estimates $100 billion annual tax losses just for developing countries’ losses from direct investment through ‘tax havens.’
- OECD researchers have estimated $100 billion to $240 billion globally per year.
- UniGlobal Union says: ‘wealthy individuals (not including companies) are estimated to hold up to $32 trillion offshore.’
What should we change?
The singlest biggest thing we need for tackling tax evasion is political will. The European parliament itself backs a report that says so. This report by a special committee of the European parliament not only highlights the lack of political will but also says ‘seven EU countries (Belgium, Cyprus, Hungary, Ireland, Luxembourg, Malta and The Netherlands) display traits of a tax haven and facilitate aggressive tax planning.’ Similarly, the European Banking Authority recently voted to reject an internal draft report on the Baltic money laundering scandal and ‘close the investigation without adopting any findings.’
The particular law changes required are as numerous as the loopholes that banks and finance open up. Encouraging further reporting such as country-by-country reporting and trying to erode financial secrecy, especially through targeting tax haven jurisdictions, will help. But, more generally, running around after financial firms closing loopholes no faster than they open new ones is not the solution.
Instead, the whole burden of proof should be changed for financial activities. Finance should be constrained to certain activities in certain places at certain times – and not free to innovate unless activities have been explicitly approved. Much like medicines – financial activities should be tested and approved as safe and appropriate before being allowed. “But you’ll stifle innovation” the banks will cry! Well, the type of financial innovation we have seen for the last 30-40 years has brought us financial crises and the resulting misery of austerity. It has left us entering ecological and social breakdown with life getting worse for the majority of people and only better for a financial elite.
You can find more detailed policy ideas elsewhere on the Finance Watch website and on the Change Finance website.