Predictably, responses to the release of the Paradise Papers, another leak showcasing the activities of “the offshore world”, has tended to fall onto a familiar continuum.
The legality argument
At one end, there’s the “it’s all about the law” fraction. This group maintains that since the leak reveals seemingly little outright illegal activity, any issues arising from the stories should be taken up with politicians – it’s their job to change the laws, change the system, after all. Most of the people and companies at the centre of revelations have opted for this line of argument. Apple, for instance, said in a statement, “At Apple we follow the laws, and if the system changes we will comply”. Translation: If you want us to change, change what’s lawful. Myself, I had the rather mixed pleasure of being chastised in a major Danish newspaper this week for my comments on the leaks by a tax advisor who suggested that the revelations were a witch hunt given the absence of illegality.
The morality argument
At the other end, there’s the “it’s all about morality” fraction. This group maintains that while few laws seem to have been broken, it is the morality of the revealed affairs that requires scrutiny. The implication here is that the onus of change is upon the taxpayers involved to modify their behaviour. Amongst others, most of the media outlets involved in the Paradise Papers seem to have taken this as their starting point, and that seems to be the line of thought by many in the general public too. Nick Hopkins at the Guardian noted, “Thanks to the Paradise Papers leak, the world will get a chance to scrutinise and pass judgment on the tapestry of schemes and networks politicians say they find so unpalatable – and many ordinary people find offensive and unfair.” Variousacademicshave also highlighted what is, in their view, the positive nature of these morality debates.
A middle ground in the debate
Of course, this is a simplistic representations, and there is inevitably other dimensions and a large middle ground, where discussions are now developing on the interplay of law, morality and other dimensions in the Paradise Papers and beyond.
Unfortunately, it seems from my vantage point, this middle ground remains minuscule compared to the outsized presence at each end of the scale, especially in the popular media discussions.
So I want to strike anotherblow for considering both law and morality in responding to the Paradise Papers.
Why? Because both the “it’s all about the law” and the “it’s all about morality” mantras are letting important issues slip by, and letting those responsible off the hook.
To start, the “it’s all about the law” crowd let taxpayers, companies, celebrities, elites and others involved off the hook. Yes, they may acting in accordance with the law (although lawfulness is usually impossibleto ascertainfrom the documents), but the law is unfortunately not always a fixed and readily identifiable line across which we can easily distribute those in and out of compliance. The letter of the law is one thing, the spirit of the law is another. That is, of course the reason we have legal institutions such as the courts – to make final determinations about legal compliance, and fortunately so.
However, the opportunities to play at the margins of this compliance line are extremely unevenly distributed. For instance, a regular salary-earner (the vast majority of taxpayers in any developed country) has rather limited possibilities to engage in tax evasion and avoidance; most of her taxable income and economic affairs will be subject to third-party or verified reporting, which is hard to abuse. Meanwhile, Nike – a resourceful globally operating corporation with mobile income and fungible assets – has much more scope to engage in such activity. In general, the opportunity for avoidance and evasion is simply highly progressive (the richer, the more opportunity), as illustrated by recent research. As I have also written previously, the legal and institutional framework is the key element in determining whether people comply with tax laws, but other important factors include levels of wealth, tax rates, audit probability, and tax morale – each of which is unevenly distributed across the population of taxpayers.
Moreover, as my ownand others’ research has shown, politicians do not have exclusive authority over the content and nature of national nor international tax rules. A range of stakeholders, including those who use the offshore system, play a role in shaping the political discussions and outcomes that support the offshore system in the first place.
In this context, when commentators claim that Nike’s global tax set-up, or the use of offshore investment vehicles, are entirely unworthy of discussion because of their legality, or compare these to an ordinary taxpayer claiming a regular tax deduction, there are good reasons to be skeptical. This ignores the fuzziness of the law and compliance, and it neglects the role of personal and corporate behaviour, and thus responsibility, in the offshore system.
And it ignores the broader societal imperatives at play, and the contemporary context of widespread condemnation of “the offshore”, of inequality, of public frustration, etc. Utilising the offshore system brings additional risk – financial, but also reputational and legitimacy-wise – because it may look off from the perspective of the general public. As I wrotejust a few days ago, this increased risk brings with it added responsibility “to address the broader societal concerns, to take them into account, not just in communicating actions but also in assessing those actions in the first place”.
In a similar manner, the “it’s all about morality” crowd is letting politicians, political institutions, international organisations, and also the media and the public off the hook. On the former, it is, after all, indeed the political system which is ultimately responsible and accountable for crafting laws which make it possible to utilise the offshore system. “Tax havens” are notoriously difficult to regulate because of fundamental principles of the international tax order, such as fiscal sovereignty and the collective action problem – but that doesn’t mean we should give up and shift the blame.
Moreover, the “it’s all about morality” crowd is unfortunately also guilty of letting the worst offenders involved in the leaks somewhat off the hook. When the court of public opinion becomes “all about morality”, we risk pooling the very bad with the not-so-bad. The mere use of investment vehicles in the Cayman Islands is chugged in with regulatory arbitrage, tax avoidance, money laundering and outright corruption. Is Queen Elizabeth’s offshore investment as bad as Glencore’s secret loans, in terms of the law or in terms of morality? If so, then by extension almost any cross-border activity involving “offshore” site becomes a no-go. As I wrotethe other day, I do not think encouraging a total shutdown of the Bermudan economy is advisable. That does not mean we should not discuss the impact of such activities but rather that we should not support outright bans of whole countries. I do recognise that many smart people have sought to distinguish between these shades of offshore activity, but my perception is it still does not have sufficient impact to really translate in to the public domain.
We also risk conflating a range of issues when saying “it’s all about morality”. In the case of Queen Elizabeth’s fund, the combination of personal wealth, investments unfamiliar to the general public, and offshore structuring has made for widespread condemnation. Each of these elements are issues that are open for discussion, e.g. in terms of inequality, but to mix them all up creates an unnecessarily neatly pooled picture of what is going on and what is at stake.
Finally, “it’s all about morality” provides a neat excuse for actors to call for rash, politically satisfying initatives, rather than deliberated, effective reform. As Shu-Yi Oei and Diane Ring have argued, recent years’ tax haven leaks have given rise to non-rational responses by political actors. “Quick fix” unilateral action by politicians under pressure, for instance, can undermine broader global progress. The need to do something can overshadow the need to do right. There is also the risk of undermining existing reforms. The recent progress on automatic exchange of tax information, which only started this past September, has rarely been mentioned in the wake of the leaks although it is likely to have a significant effect upon the practices showcased in the media.
Thus, when commentators lump all practices revealed in the Paradise Papers together as equally problematic, there are similarly good reasons to be skeptical. This neglects political responsibility, the very real effects of political (in)action, and the varying relationships of varying offshore practices to law. It also risks undermining actually effective and meaningful political reforms, including those already in place but which we are yet to see the full effect of.
An opportunity for real transformative change
All of this is unfortunate because the Paradise Papers, as with previous leaks, provide unique momentum for real transformative change, which is needed if we are to really get at the issues underlying the revelations. One of the key messages I have tried to convey in the wake of the leaks is that we have still not genuinely tackled crucial questions about how to tax multinational firms in a modern global economy, how to regulate fiscal sovereignty in an age of harmful tax competition, or how to ensure the global legitimacy of tax governance and cooperation.
These are questions that go to the heart of the Paradise Papers revelations, as well as revelations from prior leaks. And these are questions we should be asking these days, while the momentum is there. It becomes difficult to do so if we do not recognise the role of both law and morality because we let those responsible off the hook and we let important issues slip by.
Instead, I think that the best way forward is to genuinely consider the role of both law and morality. And that we consider the fundamental underlying questions that lead to outrage and leaks and political trouble in the first place. That includes paying attention to both political action and behavioural change on the part of taxpayers. It is not possible to bring about meaningful transformative change, I believe, without addressing both norms and politics. And the issues at stake are too important to let those with the power to change the state of affairs off the hook.
So what does that kind of way forward look in practice? I have some ideas. Stay tuned...
by Rasmus Christensen
Rasmus researches processes of international tax governance and policy, identifying dynamics of change and stability, and how and why global economic and fiscal governance emerges and transforms. His specific area of expertise is competition and cooperation among different actors, including professionals, in changing tax rules and norms at the European and international levels with a focus on the BEPS project,...