‘The psychological tolerance to the state’s exactions has a threshold. Beyond that threshold, tax is theft.’
Thus spake Marc Bonnant, star lawyer of the Geneva bar, neatly summing up the prevailing financial mores of the last thirty years, which the Panama Papers revelations have brought under unprecedented scrutiny. The marvellously murky world of offshore finance that the International Consortium of Investigative Journalists (ICIJ) has been exposing for the past few weeks was the same world Mr Bonnant opened to his clients, which included an arms dealer, a blood-diamond trader sought by Interpol and the butler of Jean-Marie Le Pen, the wealthy founder of Front National, France’s far-right party, which has championed for years the virtues of national sovereignty against the evils of global finance.
Thanks to an anonymous whistle-blower and the work of hundreds of investigative journalists, we now have a better idea of how lawyers like Mr Bonnant, banks like UBS or HSBC and shell company providers like Mossack Fonseca operate to put taxable wealth beyond government’s reach. Combined with previous leaks made public by the ICIJ (Luxembourg Leaks, Swiss Leaks), we begin to understand the inner workings and the actual extent and ramifications of a system of tax evasion and tax avoidance shared by global corporations, corrupt politicians, dictators, criminals and frankly anyone able to pay the moderate fees for creating a fictitious company in Delaware or in the British Virgin Islands. That most of this is perfectly legal should not blind us to the fact that tax evasion and tax avoidance on such a systemic scale is potentially as harmful to the cohesion of modern democracies as the old bête noire of policy-makers: corruption.
In grappling with the challenge of offshore finance, we may actually learn something from past efforts to fight corruption. Historians have linked the establishment of modern bureaucracy and the gradual transition to lower levels of corruption in Western Europe after 1800 with a sharper distinction between the public and private spheres and the dissolution of a state of competing systems of values (Normenkonkurrenz) built on privilege. Legal and political ambivalence had created administrative inefficiency, encouraged corruption and bred inequality and social tension by perpetuating private interest in government and by exempting the aristocracy from fiscal duties. In order to reduce that ambivalence, the existing confusion of laws and privileges had to be replaced by a single, clear, rational set of laws, applicable to all regardless of social status. This process of harmonisation and clarification, which had been beyond the reach of even the most reformist premodern governments, strengthened public authority at the expense of privilege and patronage, and laid a sounder foundation for the future improvement of government.
In his Essai sur les privilèges (1788) Sieyès described the privileged as constituting a separate order, a nation within the nation. Nowadays, the privileged who use offshore tax havens to ‘optimise’ their tax declarations, launder their dirty money or hide the proceeds from their corrupt dealings form a sort of nation outside the nation. It occupies, to borrow Robert Harris’ characterisation of modern political corruption, an interstitial space of legal loopholes and competing tax arrangements, sustained by undue complexity and opacity. The fortunate inhabitants of this offshore nation are effectively removing themselves from the real societies where they live and make their wealth and from the fiscal obligations that support those societies.
As public outcry over offshore tax havens and tax avoidance grows, the pressure will mount on governments and legislators to take decisive action. Their failure to do so will further erode public trust in institutions, fray social ties and feed anti-democratic and nationalist sentiments. The challenge is certainly formidable, entailing as it does some form of reversal of the liberal policies of the last three decades. The demand for transparency and accountability in public affairs that has been the cornerstone of anticorruption policies in recent years must be extended to global finance. This can only be accomplished by unambiguously reasserting the social function of tax and by creating a new, fairer fiscal compact and simpler rules for global finance and fiscal competition. The main difficulty will be international coordination, as necessary as it is elusive. We must demand that governments do not stop at half measures and devise creditable means to identify the real beneficiaries of financial assets, to control the enablers of offshore finance – the lawyers, banks and accounting firms that discreetly make tax evasion dreams come true – and to impose sanctions for non-compliance with the new rules (some of Gabriel Zucman’s excellent proposals are summarised here).
Historically, anticorruption measures have been motivated not only by pragmatic reasons of political and economic expediency but also by a reflection on the meaning of public interest and social justice in relation to personal interest and privilege which then infused and structured political dialogue. As wider sections of the public joined in that reflection, the pressure on public powers to address the problem of corruption grew. One can only hope that the Panama Papers scandal will mark the beginning of a profound reexamination of the relationship between public and private interest, and of the place and equitable use of wealth in a modern democracy.
This article was written by ANTICORRP researchers André Vitória and Ronald Kroeze (University of Amsterdam).
It originally appeared in History & Policy.