Five political lessons of the #PanamaPapers

1.) The size of the problem and why they cheat:
The Panama Papers are hard to quantify given the complexity and size of information. However, they reveal fascinating insights into the reasons for evading and avoiding taxation. This has deeper implications for the overall size of the problem. Some economists like Gabriel Zucman (@gabriel_zucman) estimate the size of informal/ illegal assets held in tax havens close to 10 percent of all global wealth. This is a ballpark estimate and hinges on many assumptions. For instance, as an economist Zucman is mainly concerned about the economic reasons of tax evasion, i.e. not to pay taxation. But there is a political story to it: Many prominent politicians, business people, celebrities need to conceal their true wealth levels. And they do so for other reasons than tax evasion (social pressure, political regulations/ corruption and higher morality standards applied to politicians). This leads to much more under-reporting, and so arguably the issue at stake is even larger.

2.) International Relations and who is to blame:
Panama and similar tax havens can only operate in the shadow of its big brother: the U.S., the UK etc (see a previous blog post). No tiny tax haven can survive and attract money without the legal backing of a large and sovereign state. Otherwise financial investors would fear the lack of legal security in these countries and would avoid them. (The exceptions are larger, sovereign tax havens such as Switzerland.) Hence, the problem is on the international level not only isolated in tax havens themselves. Larger, sovereign countries profit from smaller tax havens in a symbiotic relationship. After all, the money rarely stays in Panama or Guernsey Island, it flows back to the financial centers.

3.) What will the public think?
The real political problem goes far beyond the material damage in lost tax income. If people think other people don’t pay taxes they are also more likely to cheat! Unfair tax behavior leads to large scale erosion in the legitimacy to pay taxes. And tax compliance in recent years already took a serious hit in many countries. For instance, here is data on two different waves of the World Value Survey. The question asked is whether it is justifiable to cheat on paying taxes. The average over a group of 50 plus countries has considerably increased over the period, i.e. people become more cynical about paying taxes.

4.) Populist response?
If both the current and past presidents of Argentina are involved in these practices, as the PanamaPapers imply, what will the Argentine public make of this? Beyond Argentina, what happens if people see their politicians cheating? Once the public thinks that all types of politicians, irrespective of their ideology, background or political program, are involved in illegal practices the reaction is likely populist, anti-elitist. Paradoxically, this could mean that anti-government ideologies piggy-bag on these scandals. Isn’t the real problem big, bureaucratic government trying to steal our money? A Leviathan so big and yet so incompetent in levying taxes deserves to be cheated on. Of course, such an argument is like saying I robbed a bank, because the security guards seemed so weak. Yet, the inconsistency is not easy to observe for everyone. Political cynicism might well play into the hands of those who produce the problem of tax evasion in the first place (The Trumps etc. of this world).

5.) Football is the perfect micro cosmos to study problems of global political economy
As if further evidence was needed, FIFA’s involvement in the PanamaPapers shows how much one can learn from the world of football for the larger issues of regulating capitalism. FIFA does not need to avoid taxes, it needs to avoid transparency. Especially, when it needs to exchange bribes. Again, this implies that the issue is much larger than we think. In this sense studying FIFA is not only interesting for those who are fanatic about football.


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