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Global Affairs

The Paradise Papers: The Impact of Large-Scale Tax Avoidance

 3 min read / 

The Paradise Papers are the next instalment of the Panama Papers. The Panama Papers were a leak from Mossack Fonseca, an offshore service provider, surmounting to 300,000 shell companies for individuals from all over the world. these included the current Ukrainian President, the king of Saudi Arabia and the daughter of the former Chinese premier Li Peng.

The Paradise Papers

The most recent instalment follows a year-long investigation by the ICIG and reveals 13.4m leaked files from 19 secrecy jurisdictions and two offshore providers. These files pick up where the Panama Papers left off. US universities such as Stanford, Columbia, Princeton and Penn (share endowments in excess of $73.7bn), Glencore, Justin Trudeau’s top aide and the Duchy of Lancaster (the UK Queen’s private estate) are just some of the high-profile instances exposed for tax avoidance. Notably, Apple is reported to be holding untaxed offshore cash, an astonishing $252bn, on the Channel Island of Jersey.

Taxes are used to fund the institutions the public relies on for justice, liberty and promote a minimum standard of living. The opportunity cost of not paying that tax is detrimental. If the shell companies in the Channel Islands or Panama seem too distant to illustrate this point, just this morning Transparency International revealed that British shell companies have been linked to 52 money laundering scandals involving £80bn – so vast sum of money that few will ever come across, let alone be able to imagine. £80bn can threaten the financial stability of whole countries – it is the GDP of the Baltic states.

The extent and scale of this modus operandi need to be considered; the 300,000 shells exposed by the Panama Papers were a partial leak from a single off-shore provider. There are hundreds of such providers. Hundreds of providers servicing thousands of shell companies whose sole purpose is to minimise tax obligations on millions of dollars are creating a dangerous shadow economy.

Measuring the Damage

It is estimated by Joseph Guttentag that the use of shells has an economical reduction of over $70bn annually. A Demos study in 2011 had a much larger estimate of $3.09trn, to Federal Revenue alone, from 2000-2010. Tax evasion on this scale has a detrimental effect on matters that concern everyone: economic stimulus packages, defence spending, and social security.

At the core of the consequences is the effect of tax evasion on the national debt. With a growing national debt, the capacity of a state to provide jobs, healthcare, unemployment relief and manage international relations is significantly hindered. This is not limited to any single country; a butterfly effect can ensue if just one country falls victim to a wide enough tax gap.

It is concerning to see that whilst large companies endorse various philanthropic causes and every democratic politician pledges to fight corruption, prominent names continue to appear in the tax evasion spotlight. Accountability must begin with large institutions and permeate through society to the average individual. If the economic incentives of tax contributions are not enough, one must only consider the social opportunity cost: the indirect effects of undisclosed amounts held passively in offshore accounts can be traced as far as inflicting abject poverty upon millions.

This discerning trend of elites and leaders acting contradictory to the rhetoric they so vehemently advocate deserves greater attention. The Paradise Papers leak is not the first of its kind and certainly not the last in what is becoming a crusade to shed light on an entrenched web of unethical practices.

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