Image Credit: Christophe Vorlet
By Jason Zweig | Apr. 1, 2016 1:02 pm ET
The “Panama Papers” didn’t come out of nowhere. Ever since ancient Rome imposed tax burdens on the wealthy, the wealthy have been trying to squirrel assets away from the reach of local law.
The more than 11 million emails, corporate records and financial spreadsheets leaked this week are a reminder that prominent politicians, executives and celebrities regularly hide their wealth in tax havens scattered around the world from the British Virgin Islands to Luxembourg and the Seychelles.
By some estimates, at least $20 trillion in financial assets — not counting art, real estate, precious metals and other physical wealth — is invested in the dozens of countries that offer secrecy and tax avoidance to anyone with a bank account.
Around the time of Bastille Day in 1789, Swiss banks were already offering confidentiality — for a fee — to nobles seeking to shelter their assets from the ravages of the French Revolution.
Monaco became a haven after its Monte Carlo casino generated so much cash that Prince Charles III was able to abolish all income tax in 1869. Liechtenstein has had a reputation as a tax haven since at least 1926, Luxembourg since 1929 and Bermuda since the 1930s, says Ronen Palan, a professor of international politics at City University London in the U.K., who studies offshore finance.
In 1934, it became a crime for bank executives in Switzerland to disclose a customer’s identity. At first, other countries viewed that as heretical, with some threatening to imprison any of their own citizens who held a Swiss bank account. But assets of the wealthy flocked to Switzerland, soon setting off a “race to the bottom,” with such other venues as Liechtenstein and Uruguay offering their own assurances of secrecy.
And back in the 1880s, at the prompting of prominent corporate lawyer James Dill, the state of New Jersey slackened its standards for corporate disclosures and regulation. Before long, giant trusts like the Standard Oil had relocated there, creating the potential for “transfer pricing,” in which subsidiaries sell goods to parent companies — a technique that can enable firms to minimize tax burdens across borders.
You don’t have to go to British Anguilla or the Isle of Man to stash your assets in secrecy. Among the top 21 tax havens identified in the Panama Papers are Nevada and Wyoming.
In some U.S. states, such as Oregon, you can be a director of a company without having to disclose your name. That cloak of invisibility can serve many purposes. A resident of the state of Washington, as a director, could launch an Oregon company to buy a yacht — thereby side-stepping Washington’s 10% sales tax with no easy way for the state to detect the dodge, says Lewis Horowitz, an attorney at Lane Powell in Seattle.
“Shell companies,” which are often registered in states with minimal disclosure requirements, generally have no assets or operations of their own. The U.S. Treasury said in 2006 that shell companies were being used “to hide the ownership and purpose of billions of dollars in international wire transfers.”
“The tax avoidance going on is so massive that no one can even estimate how much is being lost,” says Prof. Palan, although the number surely runs into the tens of billions of dollars annually.
The ability to evade tax, largely with impunity, gives the richest taxpayers little incentive to pay more than lip service to tax reform — and is likely to stoke further anger over income inequality and deeper distrust of financial markets.
No one has ever loved forking money over to the government. Amid an atmosphere of rebellion against the taxes imposed by Rome, Jesus had to remind his followers, “Render therefore unto Caesar the things which are Caesar’s.”
Source: The Wall Street Journal