During the high-profile trial of Paul Manafort, the former chairman of Donald Trump’s presidential campaign, his protege Rick Gates mapped out an underground world of tax evasion and corruption, the New Yorker reports.
He explained how Manafort allegedly funneled illicit payments from Ukrainian oligarchs into shell companies in tax shelters (countries or states that allow individuals and companies to park wealth) and then engaged in money laundering and bank fraud.
Considering the vast array of charges facing both Manafort and Gates, it would be easy to think this was unusual. But these efforts — allegedly comprising several million dollars — are minor in the face of a staggering, global problem.
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Tax shelters hold an estimated $7.6 trillion worldwide, and while some of this wealth is legally shielded, a lot of it is not. All of this money, however, comes at the expense of countries trying to collect taxes and the billions of people living in poverty around the world.
Sprawling, hard-to-trace legal and banking companies have emerged over the years to facilitate the transnational movement of money. And the system’s ongoing ability to flourish in the shadows has enormous consequences for governments and citizens around the world, according to Oxfam.
Tax evasion deprives governments of trillions of dollars in revenue, leading to budget shortfalls and the inability to fund essential programs. It deepens poverty by undermining both governments and economies. And it fuels corruption, compromising officials and building patronage networks.
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“The top 10% of the world’s wealthy own around 90% of the world’s wealth,” Jake Bernstein, author of Secrecy World and an expert on tax shelters, told Global Citizen. ”You have this chasm that has grown between the uber-wealthy and the rest of the population.
“At the same time, governments don’t have enough money for social security, they don’t have enough money to provide health care,” he added. “There’s a direct line between ‘we don’t have enough money’ and ‘well, we’re no longer taxing the uber wealthy in part because they’re pushing their money beyond the ability of our systems to capture that money because they’re using tax havens.’”
The Costs of Hidden Bank Accounts
After the Panama Papers, the scandal following the leak of millions of legal documents in 2016, revealed global tax evasion through the law firm Mossack Fonseca, governments recouped around $700 million in fines and back taxes.
That money likely went on to provide ordinary government programs like building roads and funding emergency services.
But the Panama Papers implicated just one law firm, while there are scores of others facilitating the same kind of tax evasion. Collectively, these organizations cause countries to miss out on critical sources of revenue. They also harm economies by pulling large sums of money out of circulation.
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“The things we need and take for granted are being shortchanged because the new and uber-wealthy are not paying their fair share in taxes,” Bernstein said.
When it comes to sheer volume, the United States sheds the most revenue each year, with an estimated $188.8 billion being lost to tax evasion, according to the World Economic Forum. China, Japan, India, and France round out the top five in annual tax loss.
The US, meanwhile, has lately become the second-biggest tax shelter, and the recent tax bill signed by President Donald Trump sent the signal that tax enforcement is not a priority after it gave corporations a major discount on profits shielded overseas.
The countries most affected by tax evasion, as a percentage of gross domestic product (GDP), are primarily developing nations. Guyana and Chad, which have poverty rates of 36% and 47%, respectively, both lose nearly 7% of their GDP to tax evasion annually.
The newly elected prime minister of Pakistan, Imran Khan, has vowed to improve tax collection in his country, which loses roughly 4.42% of its GDP each year.
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Collecting this revenue helps governments fund schools, improve access to clean water, modernize health care systems, and more, according to the Guardian.
A Different Set of Rules
The Panama Papers also highlighted how the global elite often play by a different set of rules than everyone else, Bernstein said, and this realization has eroded faith in governments.
“Let’s say you live in Ecuador — you’re a medium-sized businessman, everyone around you is using this offshore system to avoid paying taxes, and your government is corrupt,” he said. “You’re kind of going to feel like a chump if you’re the only one paying taxes.
“That kind of thinking dooms the whole possibility of governments functioning properly and helping the citizens that need them,” he added.
All around the world, Bernstein said, governments have been imposing austerity programs that involve harsh cuts to welfare benefits because of a lack of tax revenue. When news like the Panama Papers comes out, the link between these efforts and tax evasion becomes painfully obvious.
But this pattern isn’t inevitable, Bernstein explained, and there are two main ways to limit tax evasion. The first is to increase transparency in tax shelters.
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“The big push has been for registries of owners of these companies, so you can see who actually owns the company and you can better ferret out illegal activity,” he said.
Automatic information sharing is another way to make tax shelters more transparent, he said, because it would mean countries would be able to see what their citizens are doing with their money in tax shelters and identify illegal activity.
The next way to crack down on tax shelters is to enact tougher penalties, Bernstein said, either through prison sentences for those guilty of crimes or by restricting the licenses of banks enabling tax evasion.
But efforts to rein in tax shelters have mostly come up short around the world, partly because of widespread corruption.
Sometimes, people exploiting tax laws outright bribe public officials. Other times, public officials engage in tax evasion, normalizing it throughout the country. And in other cases, kickback systems and patronage networks so erode the capacity of regulatory bodies that tax evasion becomes difficult to stop.
Globally, the world loses around $2 trillion because of bribery each year and the actual economic impact of corruption is much larger, according to the WEF.
“It’s completely interconnected,” Bernstein said. “[Tax evasion] completely fuels the inequality we’re seeing, and it’s behind the fact that governments are retreating.
“The wealthy have gotten out of the reach of governments and there are direct consequences for the rest of us.”