EconoMatters, Richter Scale

The Transatlantic Battle Against Tax Evasion

Why is combating tax evasion so important in the globalization debate?

Credit: Gunnar Pippel - Shutterstock

Takeaways


  • Combating tax evasion promotes a sense of fairness: that all citizens operate under the same rules.
  • Due to two investigative accidents, an epoch-making transatlantic battle against tax evasion has been joined.
  • Public policy must take measures to ensure a clear sense of tax fairness and equity in domestic society.
  • The law is never absolute. It is the codification of a set of moral choices within conflict situations.
  • Combating tax evasion gives the abstract-sounding goal of advancing global governance its real-life meaning.

Atlanticists have been looking far and wide for ways to resuscitate the transatlantic relationship and give it a much-needed energy boost. They have looked at ganging up against China or at coalescing over the shale gas revolution.

And yet, for all the intensity of their search, they only stumbled upon what, in this age of globalization, may easily prove to be the most effective ways to underline the ongoing relevance of intensive policy cooperation between Europe and the United States in the eyes of the public at large.

As the result of what are two investigative accidents of history, an epoch-making transatlantic (if not yet global) battle against tax evasion has been joined.

Better yet, unlike what happens so often on such a controversial issue, this is not a transatlantic battle over tax evasion (where both sides find themselves at diametrically opposed ends), but a common one against tax evasion.

The two dots in the global landscape were, first, the Bradley Birkenfeld whistleblower case. The former UBS private banker started to tell on his bank’s illegal practices regarding its U.S. clients by providing the IRS in the United States with disks that contained their names.

The second “dot” was a series of CDs with banking customer data detailing tax evasion cases, mainly in Switzerland, Luxembourg and Liechtenstein. These data sets were offered for sale to the proper authorities in Europe, predominantly in Germany.

Legally dubious or self-interested as these data sharers’ actions may have been, they did lead to the desired public policy result.

They caused many more wealthy people, ex post facto, to comply speedily with U.S., German and other nations’ tax laws under the amnesty terms offered. And they may have turned the tide against the shady practice as such.

Tax evasion is no longer considered a “gentleman’s crime,” worthy of no more than a slap on the wrist, if that.

The people that triggered this budding revolution were not exactly Robin Hoods. But they did bring about a crucial — and much-needed — element of creating economic and social justice.

If someone brings to account thousands of people who are wealthy enough to avail themselves of what at best are artful tax “circumvention” services, that is to be welcomed.

A Set of Rules for Everyone

After all, we live in an era when the rapid integration of the global economy causes great stresses in the lives of many people.

Manufacturing workers, regardless of location and nationality, can lose their jobs in large numbers if the facility where they are employed is no longer productive enough. And in many a country, social benefits are being trimmed constantly, in an effort to make the welfare state sustainable during conditions of rapid population aging.

Under such circumstances, it is politically explosive — and in a democracy ultimately self-defeating — to let some individuals go on in their belief that they, unlike most regular tax-paying citizens, do not really have to play by the rules.

In such a world, it is pivotal that people live and operate under the same set of rules. There cannot be one set for all regular wage earners, who have their taxes and other charges automatically withdrawn from their monthly wages, and another set for people who enjoy great “flexibility.”

True enough, there is a whole raft of prominent banking institutions, accounting firms and law firms — never mind the myriads of shady operators in this field with much lesser names and completely dubious reputations — who make a rich living indeed from setting up and operating this netherworld of tax evasion.

But their activities do not happen in a social and political vacuum. Economic globalization has brought about a significant increase in terms of income inequality in most Western societies. That is even true in countries which traditionally put much more emphasis on equality and solidarity, as is the case throughout Scandinavia.

When that happens, public policy must take appropriate measures to ensure a clear sense of tax fairness and equity in domestic society. And if the effort to ensure that requires resorting to extraordinary and, yes, in the minds of some, illegal measures, then that is what is required.

The law is never an absolute category. It is ultimately the codification of a set of moral choices between various layers of conflict situations, as they are either known or anticipated to exist.

Tax Evasion as a Moral Failure

When tax authorities can obtain information that penetrates the otherwise impenetrable world of tax evasion, then clearly any government acts within its proper rights if it chooses to enforce against the truly immoral choice.

That truly immoral choice is not paying one’s proper tax obligations, as required under the public laws of the land, no matter how clever, conniving and reassuring one’s bankers, lawyers and accountants are.

In such cases, it is immoral, and ultimately illegal, to protect the tax offenders for their claimed right to “privacy” or, more stupefying yet, protection under the “rule of law.”

Anybody seriously considering the alternative just needs to ask this question: What happens to the internal fabric and moral fiber of a society where the vast majority plays by the rules (if only because they have no other choice), but a very small minority, already privileged with its high level of economic success, does not?

Under those circumstances, how can even the most basic notions of social and economic equity and fairness be upheld? Is it desirable in any conceivable way to have such an unfortunate separation — between the law-abiding “losers” and those who are merely treading in place (i.e., the many) and those who consider themselves above the law (i.e., the few)?

If the answer to any of those questions is no, then one must act accordingly.

It is issues such as combating tax evasion that give the all-important, but abstract sounding goal of advancing the broader cause of global governance their real-life meaning.

Proper governance in the fields of global finance and the global economy means more than just rectifying the voting right in international financial institutions such as the World Bank and IMF, overdue as that is. For this important endeavor to find resonance among the wider public, the reform efforts must yield effects in daily life.

Combating tax evasion is precisely such an issue and a cause. It promotes the sense of fairness and a lived practice by all citizens to operate under the same rules and be wedded to advancing the life opportunities of all citizens and not just the most fortunate ones. Few things are more vital to promoting and sustaining democracy over the long haul.

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About Stephan Richter

Stephan Richter, from Berlin, is the publisher and editor-in-chief of The Globalist. [Berlin/Germany]

Responses to “The Transatlantic Battle Against Tax Evasion”

Archived Comments.

  1. On September 4, 2013 at 4:58 pm Jason Brown responded with... #

    Good article, valid points, well made.

    Little jaw dropped though that the entire ICIJ bombshell seems to have escaped your attention. Along with the fact that the same data was subsequently also leaked to tax authorities in US, UK and Australia.

    In terms of tax evasion, these were less bombshells, actually, than a nuclear holocaust.

    Is there a reason they are not being mentioned?

  2. On September 4, 2013 at 5:39 pm slackdammit responded with... #

    Useless pontification

  3. On September 6, 2013 at 5:23 pm Alex Cobham responded with... #

    Really great piece. Of the many articles that have addressed
    the higher profile of large-scale tax evasion since the financial crisis, few have
    put such emphasis on the social erosion that results. It’s easier, perhaps, to
    focus on the potential scale of revenue loss; or on (lurid) individual cases of
    wrongdoing – but the real issue may be social. Financial secrecy offered by
    Switzerland and many other jurisdictions allows people and companies to hide
    assets and income streams from their domestic authorities, and in so doing
    makes direct taxation increasingly difficult – with potentially dangerous social
    and political impacts.

    People are much more tax-compliant in general than any narrowly
    economic maximization model would suggest, given the penalties for abuse and
    the chances of being audited. Important findings in the experimental economics
    literature imply that this is because paying tax is a social act. Two main
    determinants of tax compliance emerge: people’s perceptions of compliance by
    others, and the extent of redistribution. You can see how multiple equilibria
    could emerge.

    Think of two extremes. One in which the elite are (perceived
    to be) able to fairly blatantly ensure minimal taxation for themselves, and
    minimal redistribution for others. Here, you’d expect a collapse in tax compliance
    all the way down the income distribution (why pay tax if no-one else does?),
    and eventually the same in social capital, resulting in an almost impossible
    situation – even were a determined government somehow to be elected. Guatemala may spring to mind, or elements of Putnam’s Italy. The other extreme is perhaps
    Scandinavian, where powerfully redistributive taxation is effectively administered
    with an emphasis on transparency, tax compliance is consistent and the result
    is a globally high level of social capital (proxied, for example, by trust in fellow
    citizens).

    The revenue losses and the individual cases do matter – but possibly
    as much for the erosion of social capital that follows as for the immediate
    effects. When austerity measures may be undermining citizens’ perceptions of
    effective redistribution to those in need, perceptions of elite tax compliance
    may be the pillar on which social cohesion rests. With leading politicians accused
    of evasion in at least three western European countries (France, Spain,
    Greece), and with major multinationals seen as leaders in avoiding their tax (read:
    social) responsibilities, it’s no coincidence that governments of all stripes
    are prioritising the challenge of financial secrecy at the G8, G20 and OECD.

    As the article concludes: “Few things are more vital to promoting and sustaining
    democracy over the long haul.”