The Pandora Papers & A Tax Crackdown

That was a crazy week. Facebook servers down, Facebook whistle-blower, a bombshell inquiry into the French Catholic Church, and the Pandora Papers. Picking a topic was tough.

On the 3rd of October 11.9 million documents were leaked by an anonymous source, and subsequently published by the International Consortium of Investigative Journalists (ICIJ), dubbed The Pandora Papers. These documents are yet to be released to the public, but the ICIJ has covered the leak in detail on their website and promised to add it to their online OffShores database, where all the leaks are available to search through.

This leak mainly exposes secret offshore entities belonging to wealthy individuals for the purpose of paying less tax. If your company is based in a country or region that has lower tax rates, you can “officially” run your business from there while still operating across the world, thus avoiding the bigger taxes. Most of this isn’t illegal. Rather, it borders on unethical and selfish. Some of those mentioned in the papers are Tony Blair, King Abdullah II of Jordan, Nike, Apple Inc, and Elton John, to name a few.

But, what does it all mean? It’s easy to again and again hear of the countless cases of tax avoidance and evasion, and feel confused and powerless. You’re not alone in that by any stretch. So what’s being done? How do we solve this problem? How are our governments reacting to the new leak?

Well the answer to those questions is a long, complex and sad one.

The latest attempt to address tax problems in the United States has come in the form of a highly criticised Biden Administration proposal that allows the IRS to mandate financial institutions (banks, credit unions, etc…) to report any transaction of $10,000 or more. That’ll be anyone with a business then. And that was increased post-blowback from a hairbrained $600. This is being suggested at the same time as an 80 billion dollar increase to the IRS budget and an admirable 15% minimum tax on all corporations.

But despite all these proposals (some of which may not even make it into the final bill), and the touting of the US government finally going after the ultra-wealthy, these proposals don’t actually target them at all. Most ultra-wealthy tax avoiders use offshore entities, and/or the many loopholes available to them. Elon Musk is a perfect example. The man paid zero, that’s right, zero federal tax in 2018 by converting stock options into cash without it being classed as income. Essentially, he borrows money from the bank against his stocks as collateral, and pays zero income tax on the transaction since it’s technically a loan, not income.

These loopholes have been dubbed the “Buy, Borrow, Die” strategy, as in: buy assets that increase in value over time, borrow money against those assets, and when you die, pass it all on to your inheritor. That my friends is tax-free living. Biden can pump billions into the IRS all he likes, Elon and those like him seem to be getting yet another free pass. As billionaire hedge fund manager Clifford Asness puts it in his WSJ piece:

“The Biden administration is trying to sell its Build Back Better agenda by demonizing the superwealthy, but that’s just the sales pitch. The actual product is a tax bill sent mostly elsewhere, to the already highly taxed ‘working rich’…

… Under the actual proposal, capital-gains rates would go up, but the step-up rule to avoid them at death would remain. Carried-interest treatment is only slightly altered and current proposals seem to make this advantage even more exclusive to private equity and venture capital. The Internal Revenue Service would get more money for enforcement, but this would be directed, as usual, mostly against easier targets than the super rich. The IRS likely knows that there are few hidden hoards of American-owned offshore wealth. While few Americans were named in the so-called Pandora Papers, which revealed the shady offshore holdings of many prominent foreign politicians, they are nevertheless tacitly being used to justify raising taxes right here in the 50 states.”

Instead of cracking down on the real problematic practices like untaxed inheritance, the carried interest loophole, and the unrealised gains loophole (that’s the Elon tactic mentioned earlier), the Biden Administration has taken this opportunity to encroach on the average citizen and the “working-rich”, leaving the true culprits untouched. Maybe this has got something to do with the extensive lobbying we see by banks in the political system…

Clearly, the US isn’t leading the charge on progressive taxation. And it’s not much better over here in the UK. Similarly, we’re seeing an increase in tax estimated to cost each household an average of £3000 extra per year, while no attention is being paid to the Capital Gains tax loophole.

Thankfully, it’s not all doom and gloom.

In the last few months, a G7 deal was agreed upon that backs a 15% minimum corporation tax across the seven countries, along with a new corporation tax that is based on the profits a company makes, rather than where they are officially based. In the agreement, corporations that have a profit margin of over 10% will have a 20% corporation tax. This clearly targets the behemoth companies that use tax havens like the ones mentioned in the Pandora Papers. Time will tell how this works out, as Amazon actually operates on a profit margin of 6.3%. Will they be completely missed by this? Although this is certainly a step in the right direction, 15% is still low. Ireland, which is essentially treated as a tax haven for companies like Google and Amazon, currently has a corporate tax of just 12.5%.

As you can see, although we are making some progress, the shady practices of the ultra-wealthy are going uncontested even after the bombshell Pandora Papers exposé. Rather, this leak seems to be being used to advance other tax policies that actually have very little to do with the Pandora Papers or the many loopholes discussed above.

So let’s briefly unpack this. The Pandora Papers problem of offshore accounts is an extremely difficult thing to solve. To entirely deal with that problem, you need a global tax system that everyone complies with, or for these tax havens to increase their taxes of their own volition (not likely). Maybe one day we can solve this, but in the meantime, it seems like there are much more important financial loopholes for our governments to be focusing on…