Global Tax Policy: It’s the Law of the Jungle

by Andrew Wainer, Director of Policy Research, Save the Children

“Panama City, Panama, home to the law firm Mossack Fonseca whose internal documents, known as the Panama Papers, revealed rampant tax avoidance in both the developed and developing world.. Photo Credit: f. ermert

The Panama Papers’ revelation of massive global tax malfeasance revived one concept in particular from my days — decades ago — as a political science undergraduate.

According to the realist school of political science, the global political system is essentially anarchic: There is no ultimate global legal authority. “Realists” see a world governed by the law of the jungle. We have the United Nations, but it has limited enforcement power. The United States sometimes assumes the role of global cop, but enforces global norms selectively.

For many of us who grew up in the Western middle-class, the world can seem like a relatively well-ordered environment where the rule-of-law usually prevails. But revelations from the Panama Papers pulled back the curtain on what — even in the 21st century — can be a lawless international tax system, and one in which some Western elites are deeply implicated.

The lack of a cohesive, comprehensive international tax system is an excellent example of the essential lawlessness of the global system. An African Union (AU) report on illicit financial flows (IFFs) states, “There is as yet no global architecture for tackling IFFs. There are a number of commendable initiatives and instruments to deal with the…corrupt activities of IFFs, but they are often disparate and handled in separate processes and forums. There are also different levels of commitment to combating IFFs among countries, regions and groupings, and the use of the existing architecture is challenging even for developed countries.”

Below is an example of some the hodgepodge of initiatives and fora tasked with addressing IFFs:

· The Global Forum for Transparency and Exchange of Information for Tax Purposes (OECD)

· The Multilateral Convention on Mutual Cooperation in Tax Matters (OECD)

· The Extractive Industries Transparency Initiative (EITI)

· Base Erosion and Profit Shifting Project (OECD + G20)

· Sections 1502 and 1504 of the Dodd Frank Act (US)

· The Foreign Account Tax Compliance Act (US)

· Automatic Exchange of Information (OECD, G20, G8)

· Anti-Bribery Convention (OECD)

· Public Registry (UK)

· United Nations Convention Against Corruption (UNCAC)

· The Recommendations of the Financial Action Task Force

· Open Government Partnership

· United Nations Tax Committee

The AU report acknowledges, “An emerging convergence of principles and practices,” while also stating, “Much more needs to be done to promote and achieve this convergence.”

Save the Children is part this convergence — in the developed and developing worlds — committed to addressing IFFs. The recently launched Every Last Child campaign includes fair finance as a central component in reaching the world’s excluded and vulnerable children.

While estimates vary, Global Financial Integrity states that in 2013 developing nations lost $1.1 trillion to illicit financial flows (IFFs). But illegality is only part of the problem. As President Obama said recently, “The problem is that a lot of this stuff is legal, not illegal.”

The lack of a coherent global tax infrastructure allows some global elites to avoid paying taxes, without breaking the law. When there are Panama, Luxembourg, and Nevada-size holes in international tax law, there’s no need to act criminally.

While most of us logon to TurboTax or visit H&R Block during tax season; prime ministers, princes, and presidents in rich and poor nations fortify their off-shore companies and shift money to their preferred tax haven.

The development impacts of IFFs are well-documented, but the Panama Papers further demonstrate their impact on poor and vulnerable people:

· In South Africa, a fund for the widows and orphans of gold miners was looted by a $60 million investment fraud perpetrated by South African businessmen.

· Companies blacklisted by the U.S. government for wrongdoing were able to circumvent restrictions by using offshore tax havens and front companies to supply fuel to Syrian government aircraft that have killed 21,000 civilians during the Syrian Civil War.

Since developing nations are more dependent on tax revenue from the business sector, they suffer greater impacts when companies don’t pay their fair share of taxes. But tax avoidance also impacts developed nations. “It means that we’re not investing as much as we should in schools, in making college more affordable, in putting people back to work rebuilding our roads, our bridges, our infrastructure, creating more opportunities for our children,” President Obama said.

There have been a flurry of recommendations on how to build a more coordinated global tax system. But there is disagreement on where global tax authority should be based. Some civil society organizations call for the United Nations (UN) to be the global tax forum. Others have focused on strengthening existing regional anti-corruption organizations such as the Organization for Economic Cooperation and Development (OECD).

Last month the UN, OECD, International Monetary Fund, and World Bank announced “The Platform for Collaboration on Tax” to build on previous OECD efforts. While it was promptly criticized by some advocates, there’s no doubt that the Panama Papers increased momentum for fairer global tax policy.

For its part, Save the Children is committed to making finance — at multiple levels — fairer so that the world’s vulnerable children are able to survive, thrive, and enjoy secure lives. The Panama Papers revealed that the weakness of the global tax infrastructure, but the outrage it sparked could lead global tax policy to be less like the “Wild West” and more like TurboTax.

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