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Tax Secrecy, Biases Enable Wealth Inequality, Academics Say

By Kevin Pinner · 2022-05-10 19:44:17 -0400 ·

Financial secrecy helps rich, powerful people from around the world, including Vladimir Putin, avoid and evade taxes, so countries should use the war in Ukraine to push for changes to end tax havens, European academics said during a conference Tuesday.

Journalists' work exposing tax dodging by wealthy and powerful individuals helped direct politicians' attention to the economic scourge wrought by tax havens, especially on developing countries, panelists said at an EU Tax Observatory conference broadcast from the University of Copenhagen in Denmark. When efforts by governments in the U.S. and European Union to sanction Russian oligarchs stalled against financial secrecy jurisdictions, Western politicians were again forced to reckon with a world they built, where competing over financial secrecy is normal, the academics and activists said.

"I think one of the issues is it's always all about them — the bad tax havens, the others — it's not about us," said Annette Alstadsæter, professor at the Norwegian University of Science's school of economics and business.

Alstadsæter said researchers who participated in the conference also co-hosted by Oxfam's Danish office and the Center of Economic Behavior and Inequality have discussed the myriad problems tax havens cause for years, but have mostly been ignored by media outlets.

"We need basically sanctions [on tax havens], like a cost for not following the rules," Alstadsæter said.

A paper Alstadsæter co-authored and discussed, published by the EU Tax Observatory on May 2, used evidence from journalists' leaks to show that the property market in Dubai holds at least $146 billion in foreign wealth from taxpayers in India, Pakistan, Saudi Arabia, Iran and Russia. The United Arab Emirates is among the United States' top military allies in the Middle East, where it cooperates to fight forces in the region often supported by wealthy benefactors in Iran, Russia and Pakistan, according to information on the U.S. Department of State's website.

The ineffectiveness of Western states' sanctions against Russian oligarchs drew officials' attention, once again, to the contradiction between defense policy and trade policy on the topic of financial secrecy. 

The paper argues that to address wealth hidden offshore, the EU should focus on creating registries of beneficial ownership information across asset classes, including financial wealth and real estate, which could theoretically be interlinked across cities, states, regions and countries.

Panayiotis Nicolaides, director of research at the EU Tax Observatory, said the failure of Western sanctions against Russian oligarchs is "basically a testament to the world we have built," marked by states competing to benefit businesses that enable financial secrecy.

"Offshore structures are used predominantly by the very wealthy," Nicolaides said. "So whenever we're able to kind of choose to look into the microeconomics of this, we see that there is … a very, very steep kind of wealth gradient or income gradient in the use of these structures."

Most information about wealth is hidden from the public and academics, so journalists play a key role in providing researchers with the information to study, Nicolaides said.

Lars Koch, secretary general of Oxfam IBIS, which co-hosted the conference, emphasized that debates about how to address wealth inequality are aided by the information made available by researchers and journalists who receive funding.

"It's much easier to get funding for think tanks and [nongovernment organizations] that are anti-tax, rather than pro-tax," Koch said.

Whether it's secret bank accounts in Switzerland or real estate in Dubai, hiding wealth offshore is something "the very wealthy do," regardless of their nationality, said Niels Johannesen, a professor at the University of Copenhagen.

"If I buy a Microsoft share, then it's going to be recorded in the U.S. as a liability of the U.S. against their market, and in Denmark as an asset against America, so in global investment statistics they'll be balanced," Johannesen said. "But if I buy that Microsoft share through my hidden Swiss account, well, then the U.S. is going to record that liability against Switzerland, but Switzerland will know there is no one Swiss involved in this scheme."

Unless he reported that share purchase to Denmark's tax authorities, nobody in Denmark would know that he owned that Microsoft share in the U.S., he said. Households worldwide hold around $6 trillion to $7 trillion that goes undetected in balance sheets of financial institutions in countries where the beneficial owner resides, he said.

Even when tax authorities do automatically exchange information about which taxpayers owe what, some states lack the bureaucratic capacity or political will to reap the potential revenue gains. Johannes said that during a conference about 10 years ago, "a bureaucrat from the Isle of Man" told the Danish professor, "I know for a fact that Greece does not use the information" sent to the Isle of Man annually on encrypted CD-ROMs because the Isle of Man never reached out for the encryption keys.

"It's really, really difficult to use the data," Johannesen said, offering a counterpoint to the effectiveness of automatic exchanges of information, an area of global tax reform that has seen progress in recent years.

Chenai Mukumba of Tax Justice Network Africa said recent evidence shows about $90 billion leaves her continent annually in the direction of offshore tax havens, where governments often compete to attract the industries enabling capital flight.

"The resources that leave the continent essentially go to these other countries that are creating the demand for the resources to leave the continent," Mukumba said.

Mukumba said her group advocates for beneficial ownership transparency to help stop capital flight offshore in amounts that exceed what the continent receives in foreign direct investment and humanitarian aid, but tax havens worldwide impede their efforts.

Alstadsæter said this is not surprising.

"There's a whole industry of advisers out there [whose] point is to utilize loopholes, [including] inconsistencies in laws between countries, and to also set up companies to hide ownership," she said. "Why should some states benefit from providing secrecy that hurts other states?"

Johannesen said information about wealthy and powerful individuals and corporations evading taxes doesn't necessarily filter into the public consciousness when it comes time for citizens in democracies to vote, especially in America, where he said polled perceptions of inequality differ vastly from reality.

The COVID-19 pandemic led governments to spend around $16 trillion on programs, much of which came in the form of interest-free loans to corporations, the outcome of which has been, in part, a "historic redistribution from poor people to rich people," according to Koch.

Koch said asset registries wouldn't necessarily create transparency about wealth while secrecy jurisdictions prevail offshore, but it would offer data for governments to explore how to tax wealth.

According to Rasmus Corlin Christensen, a researcher at Copenhagen Business School, the world has seen waves of transparency since the 1990s where ideas that once appeared radical became commonplace.

"We have, certainly, secrecy industries in the United States and several countries in Europe, in the city of London in the U.K., that thrive on their status as well-developed economies with stable political systems," Christensen said.

Christensen said tax havens thrive in rich Western countries, including their territories, because they offer "the ability to bring money in and out easily," provide "favorable advantages in terms of secrecy" and impose low transaction costs for moving financial assets.

"I think the 2020s could provide a setting where there's a new wave — a new radical, groundbreaking wave — of transparency that is emerging," he said. "We're talking about wealth registers, asset registration and pretty powerful ideas motivated by these geopolitical fractures, most recently illustrated by Russia's invasion of Ukraine." 

--Editing by Neil Cohen.

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