Why, after years of ignoring tax havens, do leaders care?

Tax avoidance by the wealthy is the most visible sign of a larger phenomenon. That phenomenon is globalization or, to be more precise, global capitalism. It is a system designed to produce maximum profits from around the world and concentrate them in the hands of a few. If those few happen to stash their gains in an offshore tax haven, such as the Cayman Islands, that’s just icing on the cake.

All of this is worth keeping in mind when going through the mind-numbing amount of data released in the so-called Paradise Papers.

At one level, the Paradise Papers - which were leaked to a consortium of journalists (including some at the Star) - are remarkably complex. They detail how wealthy families and companies use high-priced tax lawyers and accountants to shelter their money in ways that do not run afoul of the law.

Tech giant Apple, for instance, funnelled its profits through low-tax Ireland until that became politically untenable. Then it funnelled them through Jersey, a British dependency in the English Channel that typically doesn’t tax corporate profits at all.

But at another level, the story of the Paradise Papers is simple. The point of the modern global economy is to accumulate capital. If the tax regimes of national governments get in the way, they must be either bypassed or neutralized. None of this is accidental. Some of the most notorious tax havens are British overseas territories and dependencies, such as Bermuda and the Isle of Man. The national government in Westminster knows exactly what is going on.

Similarly, Ireland’s hyper low tax regime was part of a deliberate attempt by the government in Dublin to attract international capital. For a while it worked. Indeed, tax havens merely offer extreme versions of a standard right-wing demand. Taxes, the right says, must be competitive if job-creating business is to be attracted.

Canada, for instance, lowered its corporate tax rate to be competitive with the U.S. Now that the U.S. is contemplating its own corporate tax cuts, pressure is building on Ottawa to reduce rates again.

And on it goes.

If all of this is business as usual, why then the fuss over the Paradise Papers?

The answer, I think, is that tax havens have proved so embarrassing that they put the entire government revenueraising machine at risk.

The cost to Canada’s federal treasury of offshore tax havens is estimated at between $6 billion and $8 billion a year. While that may seem a lot of money, when compared to the roughly $300 billion that Ottawa pulls in each year, it is relatively small. Most tax revenue comes from the broad middle-classes - people who are willing to pay as long as they deem the system fair.

Revelations, like those in the Paradise Papers, which detail at an individual level how the wealthy and well-connected get special treatment, break that trust. This threatens the entire fiscal basis of the state. Which is why governments internationally are threatening to crack down on tax havens. The Organization for Economic Co-operation and Development has prepared a blacklist of the worst tax havens for consideration by the G20 group of nations.

A similar backlist of the worst 53 tax havens has been prepared by the European Council for the European Union. It is not clear what, if anything, these blacklists will accomplish. A 2015 EU attempt went nowhere. But it is interesting that anyone is trying to do anything.

The trick will be to reform the tax system in a way that doesn’t interfere overmuch with the accumulation and concentration of capital. Different political parties will have different solutions.

Prime Minister Justin Trudeau’s solution seems to be to marry tax reform with free trade deals.

By exposing developed economies to low-wage competition, pacts such as the North American Free Trade Agreement (which includes Mexico) or the truncated Trans-Pacific Partnership (which includes Malaysia and Vietnam) can reduce the cost of labour in Canada.

This is much more efficient as a way to encourage capital accumulation than permitting tax havens to flourish in the Caribbean.

It is also not as obvious.