Why the ‘Panama Papers’ have everything to do with austerity

After the mass anger caused by tax avoidance revelations we need a wide public debate about tax, better financial regulation and, above all, about austerity

kranke100We should absolutely love this leak.  The Panama Papers, which have sensationally revealed the extent of clandestine and unabashed tax avoidance orchestrated by the law firm Mossack Fonseca on behalf of its wealthy and well-connected clients, have invoked anger and exasperation. But once our tempers have cooled, we should seize the opportunity for initiating and sustaining a wide public debate: about tax and how to prevent tax avoidance; about the financial system and how to – yet again – better regulate it; but also about austerity and how to overcome the alleged economic imperative for it.

Indeed, when it comes to what the Panama Papers have revealed, anger has been provoked for at least three reasons, but we should recognise that austerity is the elephant in the room that links them all.

  1. Double standards: While Greek pensions and British disability allowances have been cut in the name of austerity, the rich and well-connected have been allowed to exploit gaping holes in financial regulation, often legally, through offshore activities. Some governments, including the British, have committed themselves to not spending more than they collect in revenue in a given period. Germany’s legal adoption of the balanced budget stipulation (‘Schuldenbremse’) has made good on the ‘Swabian housewife’ principle, long touted by Angela Merkel, as sound economics for both the household and state finances. Were John M. Keynes still alive, the great economist would be appalled by this penchant for permanent fiscal rectitude, not least because much of the money in the pockets of the super-rich is likely to be saved, not invested, at exactly the time when economies need greater demand.
  2. Loss of trust: Fixing the mess that this latest leak has exposed requires politicians with the will to do so. However, many policymakers, including those who have most vigorously defended the alleged virtues of austerity politics, have aided and abetted in the setup and use of schemes for tax avoidance; some have been involved in such schemes themselves. No one should gleefully point the finger at the political elites in Iceland, where prime minister Sigmundur David Gunnlaugsson was forced to leave office in light of compromising details about private offshore investments; or in the UK, where prime minister David Cameron has faced significant pressure to come clean about similar financial activities. Your head of government might be exposed next. And politicians at lower echelons of power can be implicated, too. In Germany, BayernLB, a public-sector bank overseen by the Bavarian ministry of finance, is alleged to have colluded in shady operations. The revelations therefore cast doubt on the sincerity of the recent initiative launched by the five biggest EU members to better monitor offshore financial activities, especially as long as whistleblowers are prosecuted, rather than protected, under the law.
  3. Lack of institutional capacity: Sustained austerity treatment has severely undermined the tax collection capacities of even some of the wealthiest countries. More generally, large-scale tax avoidance saps countries’ means to finance critical public infrastructure (hospitals, libraries, roads, schools, etc.) and social welfare (pensions and disability allowance among many other items). These cuts disproportionately hit lower-income groups, whose everyday lives depend more on the provision of such services. Where tax collection from wealthy individuals and groups is weakly enforced by the state, claims about having lived ‘beyond one’s means’ can easily become self-imposed self-fulfilling prophecies.

After the previous ‘Luxembourg Leaks’, for which three whistleblowers are currently on trial, and the ‘Swiss Leaks’ (or ‘HSBC files’), a political debate about the institutional architecture of taxation at both the domestic and international levels is surely more than warranted. But to really understand the current level of public anger, vented most openly in recent weeks on the streets of Reykjavik, we need to look beyond the Panama Papers.  Above all, it is appropriate to connect the choices for austerity politics that political elites in many OECD countries have made, with the level of tax avoidance that has been exposed.  That is not to say that austerity is a direct result of lax financial regulation, or vice versa.  But at this historical conjecture, the two are intimately related, pointing to an issue much bigger than budgets and taxes: fairness.

Fairness is an old idea with considerable longevity. It derives its political appeal chiefly from the promise to organise individuals – of disparate social backgrounds and with unequal material resources – into something durable called society.  The occurrence of three major leaks about tax avoidance within the space of just eighteen months amidst the continuation of austerity politics further weakens social cohesion, which is already heavily tested by rising levels of inequality within and arguably also across societies. As Jason Hickel rightly concludes, ‘there’s nothing natural about extreme inequality.’

Nor is there anything natural about tax avoidance or evasion, or about how the difference between the two is legally established, as Rowland Atkinson highlights. It is not because an impartial and impersonal market (in the singular) rewards the smart and industrious, as well as punishes the stupid and lazy, that some people are immensely rich while others are depressingly poor.  It is not just because ‘market incentives’ are ‘misaligned’ that individuals choose to avoid or evade taxation.  Institutional design and social norms matter in both contexts.  What the Panama Papers again demonstrate is the extent to which national and international institutional arrangements unequally distribute individuals’ capacities, and opportunities, to not pay one’s taxes.

Worryingly, as Liam Stanley has shown in the British context, those suffering the most from austerity politics often seem to believe they have ‘earned’ it because of their own consumption patterns in a heavily financialised economy. It is absurd that their individual guilt for fiscal imbalances should exceed that of those trying their best to minimise their tax payments.  It becomes even more absurd when we recognise that legal tax avoidance (estimated to be of a similar volume as illegal tax evasion) drains the British state coffers much more than does welfare fraud.

In this view, the Panama Papers are more than an inventory of the sophisticated methods utilised by many members of the political and business establishment for self-interested reasons. They are testament to a problematic gap between the ‘exigencies’ of these elites and the actual sacrifices of those struggling to make a living under the contemporary conditions of austerity and more severe forms of avoidable socioeconomic scarcity. It is this gap that needs to be addressed now through a debate on the broader question of fairness.