The Panama Papers and inequality

Panama City, April 4, 2016: Office building containing the headquarters of law firm Mossack Fonseca (source: dpa)
Panama City, April 4, 2016: Office building containing the headquarters of law firm Mossack Fonseca (source: dpa)

With the Panama Papers scandal, some commentators have pointed out how the ability of the rich to stash assets in tax havens has contributed to inequality, writes GIS expert Dr. Emmanuel Martin.

This, they say, vindicates French economist Thomas Piketty’s analysis (in his best-selling book, Capital in the Twenty-First Century) of the rise of a rentier class and advocacy of a global wealth tax.

Well, not so fast.

Firstly, there is tax evasion, which is a crime, and tax optimization, which is perfectly legal. The two should not be confused.

Secondly, one should distinguish between entrepreneurs and creative people who legitimately “earn” their assets, and kleptocrats who simply steal them.

Thirdly, given that the rule of law does not apply in many parts of the world, it should be pointed out that providing individuals with safe havens to protect their assets is actually a good thing.

The fact that many resource-rich countries are being looted by their own rulers has nothing to do with tax havens and everything to do with corruption. The answer is not to ban tax havens but to turn up the heat on these officials and their cronies – from below in the form of popular movements, and from abroad in the form of diplomatic pressure.

Unfortunately, for decades the leaders of the democratic world have found many reasons to silence or soften their criticism of kleptocratic regimes. Even worse, they have often worked hard to keep corrupt leaders in power. France’s relations with Francophone Africa bear witness to this, as does the track record of the United States in Latin America and the Middle East.

The responsibility for this state of affairs rests with the politicians, not with the tax havens.

Here inequality does enter the scene. Institutionalized inequality – in the form of cronyism, nepotism or other kinds of privileged access to economic power – is the most dangerous type of inequality. Unequal access to good government and the rule of law on a global scale creates more inequality of income and wealth than any evolution of free-market capitalism.

That is the main message to be read from the Panama papers, if one wishes to link them with the inequality debate.

Tax havens exist thanks to the very policies promoted by intellectuals like Mr. Piketty. The French term for tax haven is “tax heaven,” and they are certainly defined by the contrast with their opposites, “tax hells.” Confiscatory levels of taxation in Western Europe have been caused not just by ideology, but by vast mismanagement of public spending.

While democracies certainly cannot be equated with autocracies, they can also suffer from a lack of accountability. Even in advanced countries, institutionalized inequality in the form of special privileges or status bloats public spending and siphons off public funds – all at taxpayers’ expense.

Instead of blaming the “offshoring” of assets by some rich entrepreneurs, opponents of inequality should redirect their indignation. What they should be demanding is transparency and accountability from politicians, in rich and poor countries alike.

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