‘Pandora Papers’ report opens taxation issues
Last month, the International Consortium of Investigative Journalists published the results of a multiyear, 600-journalist, 130-institution investigation of offshore accounts it dubbed the “Pandora Papers.”
The review is based on 11.9 million documents leaked from 14 financial services providers in offshore havens and is larger than the better-known Panama Papers, which came from a single law firm in Panama, Mossack Fonseca, in 2016.
The Pandora Papers named dozens of current or former world leaders, hundreds of public officials, 130 billionaires, well-known businesspeople and celebrities who have hidden wealth from their national authorities.
Former British Prime Minister Tony Blair’s wife was one.
The current leaders of Jordan, Chile, Kenya, Ukraine, Qatar and the UAE were, too.
We learned that although Colombian pop-star Shakira’s hips don’t lie, Spanish authorities had found she underpaid $16.4 million in taxes, so maybe her tax attorneys and accountants did lie? The Pandora Papers showed that even while Shakira was on trial for tax evasion in Spain she was creating new offshore entities.
It is not illegal to be wealthy.
Nor is it illegal to own property or wealth offshore. However, offshore entities are often useful for either hiding income from taxing authorities or hiding assets illegally acquired. And when they belong to public officials, undisclosed assets are a major red flag for corruption or tax avoidance. The investigative consortium estimates between $5.6 trillion and $32 trillion in wealth globally is held offshore, away from where
the money originated.
According to Mexican journalists leading a webinar hosted by Rice University’s Baker Institute for Public Policy, the Pandora Papers present Mexican President Andrés Manuel López Obredor with a particular political conundrum. In his rise to power as a left-wing populist, he made fighting financial corruption in Mexico a central promise. And yet three key allies — the president’s now former attorney, a powerful senator from his party and the head of the national electricity institute — have all been implicated in the Pandora Papers.
When fighting corruption is your political brand, what happens if you mostly ignore what’s happening inside your inner circle? To date, Obredor has not responded meaningfully to the disclosures.
A couple of thoughts bring this into sharper focus for U.S. citizens.
I was most interested in how little use Americans seem to make of these offshore hiding places. My speculation about why the Pandora Papers hasn’t made a bigger splash in the United States is because there are so many ways to minimize taxes for the very wealthy right here at home.
Indeed, the challenge of taxing wealth is at the very heart of political fights being waged right now in our country. And the central subtext of recent wrangling within the Democratic Party over President Joe Biden’s infrastructure programs is the question of societal fairness and how to tax wealth.
The Biden administration has developed two key talking points for its discussion of income, wealth and taxation. One was used by Treasury Secretary Janet Yellen in congressional testimony: “We have a $7 trillion estimated tax gap that we have a great deal of tax avoidance by individuals and businesses — typically very high net worth, high income individuals and businesses that have opaque sources of income that are not paying the taxes that are due.”
That’s a big number, and it deserves further explanation. Does she mean legal tax minimization? Does she mean illegal tax avoidance? The $7 trillion Yellen referred to is regarding high corporate and individual earners who may fail, prospectively, to pay all they owe in the coming decade. It’s a powerful talking point used numerous times in public communications, but it really needs a bit of fleshing out.
The other talking point is about the $160 billion the top 1 percent of earners don’t pay annually in income taxes — a second version of a tax gap. A beefed-up IRS, as well as additional compliance requirements for banks, are the administration’s two main proposed solutions to that problem.
How you feel about these tax gaps, tax avoidance and societal fairness could determine how you feel about shoring up the IRS to the tune of $80 billion over the next decade.
We in the United States are in the midst of figuring out whether wealth at the highest levels should and could be taxed.
A recently debated “billionaire tax” is a way to directly address the growing realization about the difficulty of taxing wealth.
As of this writing, Sen. Joe Manchin, D-W.Va., has rejected specifically targeting the richest Americans for their wealth, so it appears to be off the table for the moment. But it will come back.
Of course, as soon as we figure out how to tax wealth, we should expect more American names to appear in future reports like the Pandora Papers. It is an axiom of tax policy that the more you tax, the more people will engage in tax avoidance — both legal and illegal.
The legal part we should care about from a fairness and good society standpoint. This is the implication of Pro Publica’s bombshell report (propublica. org/article/the-secret-irs-files -trove-of-never-before-seen -records-reveal-how-thewealthiest-avoid-income-tax) a few months ago about how billionaires indefinitely avoid paying taxes in the United States. Currently, if you can avoid taking a salary, not sell assets and borrow money to live on until death, the IRS can hardly find any ways to tax you. This is the “buy, borrow, die” strategy.
The illegal part we should care about from a rule-of-law perspective.
The ICIJ engaged with 600 journalists worldwide to pursue the Pandora Papers investigation primarily because it is very difficult to do all the legwork required to track offshore assets and unpaid taxes.
Many countries have neither the taxing authority nor the rule-of-law powers to enforce the law against tax cheats or corruption. It seems the U.S. should aspire to have both the means to tax and the means to enforce tax compliance.