Panama Papers: Act Now. Don’t Wait for another Crisis

By Thomas Piketty, The Guardian, April 9, 2016

The question of tax havens and financial opacity has been headline news for years now. Unfortunately, in this area there is a huge gap between the triumphant declarations of governments and the reality of what they actually do.

In 2014, the LuxLeaks investigation revealed that multinationals paid almost no tax in Europe, thanks to their subsidiaries in Luxembourg. In 2016, the Panama Papers have shown the extent to which financial and political elites in the north and the south conceal their assets. We can be glad to see that the journalists are doing their job. The problem is that the governments are not doing theirs. The truth is that almost nothing has been done since the crisis in 2008. In some ways, things have even got worse.

Let’s take each topic in turn. Exacerbated fiscal competition on the taxing of profits of big companies has reached new heights in Europe. The United Kingdom is going to reduce its rate to 17%, something unheard of for a major country, while continuing to protect the predatory practices of the Virgin Islands and other offshore centres under the British Crown. If nothing is done, we will all ultimately align ourselves on the 12% of Ireland, or possibly on 0%, or even on grants to investments, as is already sometimes the case. In the meantime, in the United States where there is a federal tax on profits, that rate is 35% (not including the taxes levelled by states, ranging between 5% and 10%).

It is the political fragmentation of Europe and the lack of a strong public authority which puts us at the mercy of private interests. The good news is that there is a way out of the current political impasse. If four countries, France, Germany, Italy and Spain, who together account for over 75% of the GDP and the population in the eurozone put forward a new treaty based on democracy and fiscal justice, with as a strong measure the adoption of a common tax system for large corporations, then the other countries would be forced to follow them. If they did not do so they would not be in compliance with the improvement in transparency which public opinions have been demanding for years and would be open to sanctions.

There is still a complete lack of transparency as far as private assets held in tax havens are concerned. In many areas of the world, the biggest fortunes have continued to grow since 2008 much more quickly than the size of the economy, partly because they pay less tax than the others. In France in 2013 a junior minister for the budget calmly explained that he did not have an account in Switzerland, with no fear that his ministry might find out about it. Once again, it took journalists to reveal the truth.

Automatic transmission of information about financial assets, which is officially accepted in Switzerland and is still refused in Panama, is meant to deal with the question in the future. The only drawback is that this will only begin to be applied, somewhat cautiously, from 2018, with glaring exceptions, for example for the shares held in trusts and foundations. All this has been set up without the slightest sanction being laid down for countries which default. In other words, we continue to live under the illusion that the problem will be resolved on a voluntary basis, by politely requesting tax havens to stop behaving badly. It is urgent to speed up the process and impose heavy trade and financial sanctions on countries which do not comply with strict rules.

Let there be no mistake: only repeated application of sanctions of this type, at the slightest non-compliance (and there will be some, including by our dear neighbours in Switzerland and Luxembourg), will enable the credibility of the system to be established and an end seen to this climate of lack of transparency and widespread practice of impunity for many decades.

At the same time, a unified register of financial securities must be established; this involves putting Central Depositories under public control (Clearstream and Eurostream in Europe, Depository Trust Corporation in the United States) as Gabriel Zucman has clearly shown. In support of this approach, a common registration fee for these assets could also be envisaged, with the revenue used to finance a global public good (for example, the climate).

There is still one question outstanding: why have governments done so little since 2008 to combat financial opacity? The simple answer is that they were under the illusion that there was no need to act. Their central banks had printed enough currency to avoid the complete collapse of the financial system, thus avoiding the mistakes which post-1929 led the world to the brink of complete collapse. The outcome is that we have indeed avoided a widespread depression but in so doing we have refrained from the necessary structural, regulatory and fiscal reforms.

We could reassure ourselves by noting that the balance sheet of the major central banks (which has risen from 10% to 25% of GDP) remains low in comparison with the total financial assets held by public and private actors over each other (approximately 1,000% of GDP or even 2,000% in the United Kingdom) and could rise further in case of need. In reality, this mainly reveals the persistent hypertrophy of private-sector balance sheets and the extreme fragility of the system as a whole. It is to be hoped that the world will learn from the lessons of the Panama Papers and at long last combat financial opacity without waiting for a further crisis.