Avi-Yonah, Reuven S.

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The Panama Papers: What Should Be Done? verfassungsblog.de /the-panama-papers-what-should-be-done/Reuven S. Avi-Yonah Mo 4 Apr 2016The Panama Papers are the latest major leak revealing the extent of tax avoidance among the world’s rich andfamous. How big is the tax evasion problem? Since it involves illegal behavior, it is hard to know. A recentestimate of the annual global costs of illegal tax evasion by the economist Gabriel Zucman was $200 billion, butthis is probably too low since estimates for the U.S. alone range from $20 billion to $70 billion.What might be done to reform this massive loss of revenue? In the case of the US, Congress has acteddecisively. In 2010, it enacted the Foreign Account Tax Compliance Act (FATCA). Under FATCA, any foreignbank or other financial institution has to report to the IRS accounts held by American citizens and residents. Thepenalty for failure to comply is a hefty 30 percent tax on the foreign bank’s U.S. income.FATCA has real teeth, as the chorus of complaints by foreign banks and their governments shows. It also led toreal developments. The IRS Offshore Voluntary Disclosure Program, which has netted more than $6 billion intaxes, is a child of FATCA. So are more than 100 “intergovernmental agreements” (IGAs) that the U.S. Treasuryhas negotiated with various countries. Under the IGAs, the foreign banks can disclose the information about U.S.account holders to their government, which can turn it over to the IRS. This avoids legal problems from thebanks dealing directly with the IRS, which is illegal in most countries. Even Switzerland has signed an IGA.In addition, more than 80 countries (including the U.S.) have signed a Multilateral Agreement on AdministrativeAssistance in Tax Matters (MAATM), which envisages automatic exchange of tax information among thesignatories, using a common reporting standard developed under FATCA.But problems remain. First, FATCA itself is vulnerable because it can be avoided by using a foreign bank with noU.S. exposure. In addition, its disclosure obligations apply only to larger accounts and can be avoided by taxcheats opening smaller accounts at multiple banks. So secret offshore accounts are still possible, although thecost of tax evasion and the risk of discovery have increased. Second, these agreements depend on complianceby long-standing tax havens, an outcome that is far from certain. In addition, the IGAs require reciprocity fromthe U.S., and while U.S. regulations that require U.S. banks to collect the information for reciprocal exchangeshave prevailed in initial court proceedings, they are still subject to vigorous judicial challenges.Third, the U.S. has signed, but not ratified, MAATM, and it seems unlikely that it can be ratified in a Republican-controlled Senate.Finally, the entire edifice rests on an uncertain foundation. For exchange of information to work, every single taxhaven needs to cooperate, because otherwise the funds will flow to the non-cooperating havens. Total tax havencooperation seems unlikely, to say the least, absent stiff sanctions that go beyond the U.S. 30 percent FATCAtax, such as a mechanism to cut off an offending tax haven’s banks from the international wire-transfer system. Inthe past, world leaders have threatened sanctions against uncooperative tax havens, but never actually imposedthem. Economists like to imagine universal solutions to the tax-evasion problem (such as the global tax onwealth proposed by Thomas Piketty, or the universal registry of financial assets advocated by Gabriel Zucman),but in the world we have, such solutions are utopian. Automatic universal exchange of information is likewise anice ideal that may be implausible in practice.There is an easier solution. The key observation is that funds cannot be invested in tax havens because they aretoo small (even Switzerland is a small economy if one ignores the banking sector). And they must be invested inthe U.S., the EU, or Japan to avoid undue risk since most portfolio investors do not invest directly in emergingmarkets because of the political and economic risk.Therefore, if the U.S., the European Union, and Japan were to agree to impose a tax on income flows to taxhavens, the tax-evasion problem would largely be solved without the need for cooperation from the havens.1/2Using a 30 percent tax (the U.S. rate under FATCA) will do the trick. Investors will be faced with the choice ofpaying 30 percent on their gross interest, dividends, or capital gains, or declaring the income to their homejurisdictions and paying a net tax at that jurisdiction’s rates.What prevents this obvious solution from happening is that the U.S. is willing to aid and abet tax evasion byEuropeans, while the EU is willing to aid and abet tax evasion by Americans. This reflects the political power ofthe rich on both sides of the Atlantic. (In contrast, Japan already imposes such a tax, demonstrating itsfeasibility.) What may change the status quo is that both sides have come to realize that U.S. residents canpretend to be Europeans, and EU residents can pretend to be Americans, widening the incidence of tax evasionin both. To stop the tax cheating, the EU is willing to impose anonymous withholding taxes on foreign account-holders; even Switzerland entered into such an agreement with the U.K. The U.S. should go along. Importantly,given likely Republican control of Congress, no change in law is necessary: The U.S. tax code already providesthat withholding taxes can be imposed on payments to countries that do not have effective exchange ofinformation. The Obama administration could apply this provision tomorrow if it had the political courage to dosomething about tax evasion.If nothing is done about the tax evasion problem, the rich will continue to evade the progressive income tax. Ifthat happens, ordinary middle-class taxpayers in the US and in Europe will be reluctant to pay their taxes. Theincome tax system is built around voluntary cooperation; if most citizens refused to cooperate, the tax authoritiescould not force them to do so. As the Greek experience has recently demonstrated, once a tax culture of non-payment is established, it is very hard to change. We need to do something about tax evasion before it is toolate.LICENSED UNDER CC BY NC NDSUGGESTED CITATION  Avi-Yonah, Reuven S.: The Panama Papers: What Should Be Done?, VerfBlog,2016/4/04, http://verfassungsblog.de/the-panama-papers-what-should-be-done/.2/2

The Panama Papers: What Should Be Done?

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The Panama Papers: What Should Be Done?

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