The Un­in­tended Con­se­quences of Panama Papers

The Economic Times - - Money - MO­HAMED A EL-ERIAN

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.

— Bloomberg

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