Governments Don’t Stand a Chance Against Rich People Who Don’t Like Taxes

After each big financial leak, individuals suffer the brunt of the consequences, but the system remains intact.

Professional golfers and their caddies study the view at a course in Bermuda.
Professional golfers and their caddies study the view at a course in Bermuda. (Mike Ehrmann / Getty)

People and corporations stash an enormous amount of money—an estimated $8.7 trillion—in tax havens around the world. In recent days, the public has gotten a glimpse of the industry that enables such stashing, as media organizations reported on a trove of leaked documents known as “the Paradise Papers.” The documents originate from several tax-haven nations and two law firms that help individuals and organizations keep their money untouched by the long reach of tax authorities, and this leak comes a little more than a year and a half after the first reports on the Panama Papers, a similar batch of files that illuminated other aspects of the same secretive industry.

Leaks like these reveal some of the inner workings of a phenomenon that many economists say perpetuates economic inequality: By parking trillions of dollars offshore—in all, the equivalent of 8 percent of global household wealth, according to the economist Gabriel Zucman—the world’s richest people and companies make their money essentially untaxable, preserving their own wealth and depriving governments of hundreds of billions of dollars of tax revenues each year.

Niels Johannesen, a professor of economics at the University of Copenhagen who has co-authored research with Zucman, explains the consequences of this behavior: “Either a lot of people pay more taxes [to compensate], or there’ll be less public goods—so schools, hospitals, and so on.” He adds, “Given that this offshore wealth is to a large extent owned by the very wealthiest … it’s people who should be paying the highest taxes who are evading the most.”

Media coverage of these leaks tends to carry a whiff of hope that exposure will somehow lead to reform. But, as the new leak makes plain, a year and a half after the last big leak—and multiple years after governments around the world have launched pro-transparency legal initiatives—little has changed in the intricate, hemisphere-spanning networks of lawyers and consultants who specialize in tax avoidance.

This is not to downplay the far-reaching consequences of the Panama Papers. “On the micro level, for individuals, things changed tremendously,” says Jake Bernstein, an investigative reporter who worked on the Panama Papers and has written a forthcoming book about them called Secrecy World. “Things have changed for the prime minister of Pakistan, the prime minister of Iceland, the minister of industry of Spain”—three prominent leaders who stepped down after their names appeared in the leak.

But while some wealthy and powerful individuals suffered personally, the system itself remains perfectly intact. “I don’t know that anything has changed as a result of the Panama Papers, and I don’t really expect anything will change as a result of the Paradise Papers,” says Brooke Harrington, a professor at the Copenhagen Business School who has studied the wealth-management industry (and written about it for The Atlantic).

Harrington notes that governments and organizations have put out a handful of fixes in recent years, but in general she finds them lacking. There is the Foreign Account Tax Compliance Act (FATCA), which kicked in a few years ago and requires foreign banks to tell the IRS about accounts they have that are held by Americans. There is an initiative by the OECD, an organization of developed countries, that asks its members to share information from their financial institutions with each other. And after the Panama Papers, there was talk of requiring American banks to determine the true owners of shell companies, but little headway has been made on that.

The problem, Harrington says, is that wealth-management firms “have 24/7/365 to do nothing but find ways around whatever laws you think up.” (Indeed, Harrington, who trained as a wealth manager as part of her academic study of the profession, has attended a class on how to get around that very OECD initiative.) She says that trying to figure out the right laws to implement misses the point. It’s not just that rich people and companies will sidestep them, but also that, in order to work, they require all countries to cooperate completely, a near impossibility as long as smaller countries can break ranks and build (or at least attempt to build) their economies around being tax havens.

Harrington says there are other, more effective things that governments and politicians could do. Though leaking may not directly lead to systemic change, it can serve to deter some wrongdoing, and to that extent, she says it’s important to make sure potential whistle-blowers feel they can conceal their identities. She described many of the wealth managers she’d interviewed for her research, many of whom felt bad about their work: “They’re middle-aged people. They’re locked into a fairly lucrative career. They have mortgages to pay and kids to support.” Risking their jobs isn’t an attractive option. One important thing that enabled the Panama Papers leaker or leakers, then, was that they felt secure that they would remain anonymous. “[The leaker], for all we know, is still working as a wealth manager somewhere,” Harrington says.

Another thing Harrington thinks would help is changing public opinion about tax avoidance, which currently inspires only passing ire but might be a good focus for a public-relations campaign on the part of a deep-pocketed liberal donor. She believes there is a narrative criticizing tax avoidance that would resonate with lots of people: “If your hospitals are closing and your schools don’t have enough funding to have good programs for kids, look no further than these organizations that ensure that wealthy individuals and corporations don’t pay their fair share of sustaining society.”

At the moment, though, that view is quite far off from the ideas that are shaping the future of American tax policy. Congressional Republicans are eager to pass a piece of tax-reform legislation whose operating premise is not that rich people and corporations are paying too little in taxes, but rather too much.