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The Panama Papers: Wealth Inequality and Tax Havens

Analysis

2016-05-23

By Karla Esesarte Mauleón

Karla Esesarte Mauleón is a graduate student in Political Sciences at Tsinghua University. She is mainly interested in issues of comparative democratization and political parties in regime transitions.

The International Consortium of Investigative Journalists (ICIJ), announced an investigation linking politicians, businessmen and figures of public life around the world with a series of schemes of international capital movements, using corporation and firms ad hoc in order to move and protect fortunes in tax havens. In the meantime, the academy had already become interested in the wealth that is in tax havens as an integral part of research conducted in two specific areas: fiscal taxation and combating inequality.

The nature of these movements is diverse, ranging from tax evasion to money laundering or simply seeking greater profits by international corporations. Besides the serious issues in terms of corruption involved, there is a major problem for states and their capacity for fiscal autonomy. The almost perfect capital mobility that exists in the world, coupled with an economic globalization that is in a constant search for profit, both in financial activities and relocation of industrial production from country to country. Moreover, that it is always in search of maximizing benefits (lower taxes, cheap labor, among others), leaves countries facing a dilemma in which all lose or tax coordination is promoted internationally.

Yet, it is easy to see some problems that this arrangement may have. For example, it is easy to argue that the profits made in different parts of the production chain, exclude certain items that carries higher taxes rates. Companies can easily shift profits to tax havens and manipulate transfer prices between subsidiaries to deduct them from their taxes. 

The rules established during the International Finance Conference in 1920 held in Brussels, in which taxes are collected at the place where the gains have been made; companies can count internal trade between them and their subsidiaries at market place, no longer apply to a world of economic integration and capital mobility like today. Moreover, the link with growing inequality within countries is evident. While individuals with greater wealth have the ability to avoid paying taxes on these complex tax engineering mechanisms, most of the population receives most of the tax burden; while the wealth of the latter grows very slowly, the former expands rapidly.

Since no country can do much to fight unilaterally these financial flows, the solution is fiscal coordination to reduce the transfer of benefits and public policies that can more accurately record all sources of income (wages, rents, etc.) and tax them accordingly.

Fiscal coordination is the idea behind projects like the Base Erosion and Profit Shifting (BEPS) and is one of the solutions proposed by Thomas Piketty in his book “Capital in the Twenty-First Century” in order to fight global inequality. The need for fiscal coordination to curb the rapid growth of fortunes in tax havens is imminent and a reality soon to come.

The scale of the problem and its international implications require us to think: what can we do locally? What can be done to limit these capital flows? Some proposals usually found in the literature are: fiscally redefining what constitutes income to incorporate all sources of additional resources to wages; collecting taxes on wealth such as inheritance tax; circumvention of accounting rules by manipulation of transfer pricing and tax consolidations. Local actions would only partially alleviate the issue but in terms of international cooperation any country should have an active agenda to prevent the use of the tax havens.
 

© Inter Alia 2013