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Pandora Papers Expose Democracy’s Broken Promises | Insight

Documents detailing the extent of political and economic elites’ habitual tax evasion demonstrate the need for—and difficulty of—reform.

Yesterday, the International Consortium of Investigative Journalists (ICIJ) released the Pandora Papers, an exposé detailing the offshore financial dealings of prominent politicians and billionaires around the world.

In broad strokes, the Pandora Papers don’t reveal anything particularly novel. The ICIJ has conducted three previous investigations into offshore financial dealings: LuxLeaks, the Panama Papers, and the Paradise Papers. Beyond that, awareness of corrupt politicians and billionaires exploiting loose international tax regulation is widespread.

But the Pandora Papers are uniquely significant in that they follow a historic agreement between the finance ministers of 130 countries to establish a global minimum corporate tax rate. Ironically, though unsurprisingly, many of the agreeing nations house billionaires and are or were led by politicians implicated in the investigation. Spectacles covered the agreement in an earlier Insight, which can be read here. The long and short of it is that a global minimum tax, if instituted across those 130 countries, could drastically curb international tax evasion. Even some of the worst offending tax havens, such as Panama and Barbados, signed on.

The Pandora Papers indicate both how necessary and difficult such a global policy would be. Like the most important provisions of the Paris Climate Agreement, the tax agreement is not binding. It’s one thing to sign a document nominally committing to undertaking reform and something entirely different to actually undertake it.

In the United States, for example, Congress will need to pass a law implementing the agreed corporate tax rate. President Joe Biden’s administration has proposed that it be wrapped into his $3.5 trillion social policy proposal, but the fate of that legislation is far from secure, as is the place of this provision within it. Leading politicians with the power to enact reform elsewhere in the world often benefit from twisted tax loopholes and thus might not be so eager to take action.

Furthermore, a global minimum tax wouldn’t fix all of the problems that the Pandora Papers highlight. There are countless loopholes in our vague international tax system which produce, as I have written previously, “a free-for-all in which massive advantages are accrued to multinational corporations at the expense of national governments and citizens of nations across the world.” The ubiquitous use of opaque shell corporations as a means of evading taxes and concealing wealth, for example, enables politicians and billionaires to hide their unsavory dealings from the public. A global minimum tax might ameliorate that problem to some extent, but a further international initiative to promote transparency would do a lot more.

As I wrote in our last Insight on the matter, tax evasion prevents governments from raising revenue and contributes to economic inequality within and between nations. But it is also fundamentally a matter of democratic trust and confidence. If the rules for building and maintaining wealth are entirely different for those at the very top echelon than they are for the rest of us, it’s easy to see how trust in the—broken—promises of democracy vanishes. Rule of law requires that politicians and economic elites are held to the same standards as the general population. Even if some—though certainly not all—of the activities exposed in the Pandora Papers are strictly legal, the spirit of equality before the law is clearly being violated.

When practices such as those uncovered by the Pandora Papers are revealed, one tendency among the public is to endorse autarkic policies: an effort to bring all economic activity home and prevent actors from investing or trading beyond their own shores. But international business and trade can be good, offering the potential to spread wealth in a painfully unequal world. Moreover, when all members of society have the chance to build wealth, innovation and economic growth follow. Under the current status quo, however, such opportunity is sparse, and wealth that could be leveraged towards innovation and growth is being hoarded.

The only way that national governments can both restore their capacity to raise revenue and reinvigorate the promises of democracy is through international cooperation. Sovereignty need not be abdicated. In fact, reform would help national governments reassert sovereignty over unaccountable individuals and corporations. Until the nations of the world can work together, international loopholes to evade taxes will remain alive and well.

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