Abishek Shetty: Panama Papers shed light on problems of tax evasion within the US
Elk aren’t the only ones finding refuge in Wyoming – the equality state also shelters wealthy individuals eager to evade income taxes. (Creative Commons by Charles Peterson via Flickr)
By Abhishek Shetty
April 12, 2016 12:00 a.m.
Mention tax evasion and immediately a number of small countries spring to mind – Panama, Switzerland, Bermuda and other island countries. You’d be forgiven for not including locations closer to home, such as Delaware and Wyoming, in that list.
In the largest leak of all time, the Panama Papers consist of 11.5 million documents on offshore companies connected with Panamanian law firm Mossack Fonseca. Individuals anonymously set up companies, known as shell companies, created for the sole purpose of storing money and not for business. Only a few Americans have been implicated in the papers, including UCLA’s generous benefactor David Geffen. In spite of that, the Panama Papers have become a major story in the U.S., with even Democratic presidential candidate Bernie Sanders railing against the Panama-United States Trade Promotion Agreement passed in 2011, claiming that it helped U.S. taxpayers set up offshore shell companies.
The size of the Panama Papers leak is eye-grabbing, and the flashy details on foreign heads of state have caught the attention of many. The conversation shouldn’t stop there. The problem isn’t confined to Panama, or exotic locations such as the Cayman Islands, the Bahamas and the British Virgin Islands. The U.S. is currently considered one of the largest tax havens in the world, with individual state laws attracting both domestic and foreign nationals.
To grasp the the pervasiveness of tax evasion within the U.S., it is important to look at tax havens such as Delaware, Nevada, South Dakota and Wyoming. Locations designated as tax havens have a few distinguishing features: They have a low or zero tax rate and a high degree of financial privacy. Tax evasions, both domestic and offshore, cost the U.S. government more than 3 trillion dollars between 2001 and 2010. As the average taxpayer is forced to compensate for these lost revenues through higher taxes, the stakes are high enough for U.S. voters to care about this issue.
One of the tax havens within the U.S. is Wyoming; the state has low tax rates and doesn’t require shell company owners to provide personal information while filing for incorporation. While agents acting on behalf of shell companies must reside in Wyoming, the state has audited less than 5 percent of all agents since 2009. Change is distant, considering that Wyoming Senate President Phil Nicholas, a staunch supporter of the state’s tax laws, is an agent for a shell company.
Similar laws are present in Delaware and Nevada. Companies not operating in the state of Delaware don’t pay any income tax on their funds there and are allowed to remain anonymous from authorities, enabling easy incorporation of shell companies. Nevada, with more than 1,200 incorporated companies, is now a more popular tax haven than Hong Kong or the UK.
The most common argument that comes up in defense of tax laws is the need for a business-friendly climate. However, this kind of economic freedom and anonymity should not give individuals ultimate freedom to exploit tax havens and live by a different set of standards than the rest of the taxpayers. When these laws end up hurting governments by acting as a protective shield for richer individuals, it’s an indication for urgent re-evaluations.
Measures to curb this sort of tax evasion can only start at the top. One of the measures the federal government has taken is the Foreign Account Tax Compliance Act, passed in 2010 in order to ensure firms report offshore holdings of U.S. taxpayers. Following up on this law, the Organisation for Economic Co-operation and Development established a Common Reporting Standard for countries to share financial information with each other. The U.S. endorsed the standard, but refused to be a part of it.
Unfortunately, joining the standard isn’t easy for the U.S. Current federal law does not require firms to report on the dealings of their clients. President Obama introduced a proposal in the 2014 budget to help the U.S. government coordinate with other countries on information sharing. Unsurprisingly, Congress didn’t pass the measure. As a result, the Treasury has its hands tied by the Congress when it comes to cooperating with other countries on tax evasion.
Jonathan Jackel from Burt, Staples & Maner, LLP told Tax Analysts, “Maybe the election will change the landscape in some way that opens the path to getting the kinds of changes that we need for the CRS and FATCA.”
With the surprising success of Bernie Sanders and Donald Trump in the presidential primaries, the landscape has definitely changed. Sanders is running on the platform of income inequality, while one of Trump’s platforms is cutting the national debt, both of which are linked with tax evasion. In due time, Congress might just hear the message from their voters.
