The Unintended Consequences of Panama Papers
The revelations about offshore accounts that came to light in the socalled Panama Papers will reinvigorate government efforts to rein in not just tax evasion, which is illegal, but tax avoidance, too.
They will also add to popular frustration that will challenge the authority of some government officials. The uproar will bring about enhanced enforcement measures. yet there also will be unintended consequences that will further erode the credibility and effectiveness of the political establishment, including its ability to govern from the center, which is already being tested.
In the wake of the global financial crisis, and given the alarming surge in wealth inequality, the governed will prove far less accepting of the legal distinction between tax evasion and tax avoidance. Both are now viewed not just as “tax dodges,” but also as the unfair perks of the better-off and moreconnected members of society in many countries.
Enter last week’s “Panama Papers,” the trove of more than 11 million pages of documents from Mossack Fonseca. The documents suggest that in both advanced and developing countries, some of those who hold power, and those with access to them along with the “rich and famous,” used the firm to establish and manage offshore entities that are designed to protect capital and minimise taxation.
The political repercussions were immediate, and are likely to spread. Already, the scandal has led to the resignation of Iceland’s PM, to a political outcry that has required UK PM David Cameron to release his tax returns, and has abruptly ended the political honeymoon of Argentina’s new president, Mauricio Macri.
In addition, countries including Germany are stepping up efforts to look into curbs on legal, but morally questionable tax avoidance schemes that benefit the wealthiest. As with earlier steps to limit money laundering, the focus will be on more stringent reporting requirements and better international sharing of data.
These changes will be quite visible; and will have a meaningful impact for those who, until now, have found it easy to use offshore financial vehicles to reduce their tax payments. The measures’ effects on politics and governance, while they will be less visible, could be more consequential for broader segments of society.
The Panama Papers are yet another blow to the political establishment. They amplify popular resentment toward governments that already are perceived by a segment of the population as turning a blind eye to tax-dodging. Though no laws were broken in most cases, the documents will feed the perception that the privileged are allowed to play by different rules.
There’s no doubt that the Panama Papers will produce greater efforts to reduce tax minimisation. That is good news for liberal democratic systems. But in the short-term this will be accompanied by even stronger resistance to the kind of political unity that is needed in several countries to deliver high growth and genuine financial stability.