Thomas Donlan of Barron’s focuses his latest editorial commentary on the reasons underlying concerted efforts to avoid paying taxes.
If you wonder about high taxes in the U.S. and around the world, take a look at some of the lessons of the so-called Panama Papers. The easiest one is that bank- and corporate-secrecy laws make it possible to hide income and wealth—whether earned in criminal enterprises or legitimately—from local tax collectors.
As President Barack Obama observed recently, when some people evade taxes, other taxpayers have to make up the lost revenue, so the rates go up. The president, of course, was not talking about gardeners and housekeepers working for cash, especially not in Beverly Hills, Chicago, or Washington, D.C. His attention was fully focused on international businesses.
“It’s not that they’re breaking the laws; it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by,” Obama said. He should have said that the laws are well designed by politicians and the people who pay them to make taxes easy to evade.
It’s a problem that is worse in poor countries. The Organization for Economic Cooperation and Development has estimated that developing countries lose three times as much to tax evasion as they receive from foreign aid. No matter where it happens, kleptocracy may have a lot to do with it: Tax evasion can be a breeze for a politically connected businessman, a central banker, or a finance-ministry official in a place where bribes take the place of taxes. …
… The fuss over the Panama Papers should underscore the suspicion that underground economies are like icebergs—bigger than they seem. Unfortunately, the president and many others refuse to understand that there’s more to the shadow economy of secret offshore shell corporations than just tax evasion, political corruption, and money laundering.
A lesson of the Panama Papers is that business income-tax rates in many important countries—led by the U.S.—have met the Laffer curve. Rates that are too high are providing powerful incentives to do business under the table to evade tax collection.
