Releases of secret documents, like the whopping 11.5 million Panama Papers, are designed to result in a cascade of scandals. Since Sunday's revelations, Iceland's prime minister has stepped down, and Britain's prime minister, David Cameron, admitted on Thursday that he had profited from his father's offshore account. Leaders in Russia, China and other parts of the world have come forward to either claim the leak is a conspiracy, censor online speculation, or simply deny any illicit dealings or tax impropriety.
As journalists take a fine comb through the 2.6 terabytes of data obtained from the servers of Mossack Fonseca, the world's fourth biggest "offshore law" firm, they are sure to uncover more and more of the web of dealings that tie politicians, businesspeople, celebrities and their kin to that tax haven and others.
But what's so scandalous about the Panama Papers isn't just that there's a nexus of rich people, some elected, who make profits by evading taxes. It's that so much of the money moved through tax havens would otherwise be taxed by some of the world's poorest, most revenue-hungry governments.
That tax evasion disproportionately affects the poor shouldn't come as a surprise, and it certainly isn't a secret. Angel Gurría, the secretary general of the Organization for Economic Cooperation and Development, or OECD, an economic organization consisting of the world's richest nations, once estimated that developing countries lose three times as much to tax evasion as they receive in foreign aid. The Tax Justice Network, pointing out that data on tax evasion is murky at best, says the real figure may be closer to 10 times.
There's a vicious cycle at work here. Tax revenue is one of the strongest indicators of an economy's health. In many developing countries, with poor and/or rural populations, collecting tax is expensive for the government, and unaffordable for the majority of citizens, who may work in the "informal economy" anyway. Therefore, much of the tax revenue is expected to come from commercial transactions and foreign investment. But a report by ActionAid, released in 2013, shows how almost half of all investment in developing countries is funneled through tax havens.
Here's an example of how it works (pdf, pg. 10): In 2007, Vodafone, one of the world's biggest telecom providers, moved to buy Hutchison Essar Ltd, an Indian subsidiary of a Hong-Kong based company. But Hutchison Essar, despite only operating in India, was not based there -- rather, it was registered as a business in the Cayman and British Virgin Islands, tax havens in the Caribbean, and Mauritius, another, this time in the Indian Ocean. Vodafone bought the company through a subsidiary of its own -- registered in the Netherlands, also a tax haven. None of those places levy a capital gains tax, and so India was not able to claim the $2.2 billion it otherwise would've earned had tax havens not been an option for the companies. That sum is worth almost the entire annual budget for subsidized meals for school-going children in India.
Vodafone responded to questions from ActionAid, in part, by saying, "No tax was due on an offshore to offshore transaction."
Here's one more, this time on a larger geographic scale, across the African continent: As of ActionAid's 2013 investigation, a company called Tullow Oil -- which now markets itself as "Africa's Leading Independent Oil Company" -- derived 84 percent of its sales revenues from Africa, yet just four of its 81 subsidiary companies were registered in African countries (and all of those in South Africa and Gabon, two of Africa's richest). On the other hand, 47 were registered in tax havens. Tullow Oil told ActionAid that it doesn't use tax havens for tax evasion, but later also announced that it was "considering the migration of the remaining haven companies to the UK."
It is worth noting that in neither case were the companies acting in violation of laws at the time.
The United Nations Economic Commission for Africa estimates, in a recent report, that African governments lose between $30 billion and $60 billion per year to tax evasion, or other forms of what they call "illicit financial flows." But that figure doesn't account for examples like that of Tullow Oil above. Matt Salomon, chief economist at the Global Financial Integrity, told the Canadian Broadcasting Corp. that he thinks the amount siphoned, mostly legally, from developing economies into tax havens is around $1 trillion.
That loss of tax revenue is a destabilizing force in poorer countries, as well as a challenge to their sovereignty. For most low-income countries, tax revenue represents less than 20 percent of their GDP, whereas the average among richer countries is above 30 percent. Without tax revenue, less savory options present themselves -- think foreign aid with strings attached, or resource extraction at the expense of people and the environment.
When the United Nations Financing for Development conference was held in Ethiopia's capital Addis Ababa last July, African nations in particular pushed Western countries to close tax loopholes and shut tax havens. Many countries offered to forgo aid if their Western counterparts would oblige. Under heavy pressure from governments like David Cameron's in Britain, the major tax reform breakthrough of that conference was the Addis Tax Initiative, in which donor countries pledged to double their levels of aid, so as to strengthen tax systems in developing countries, without so much of a word about their own systems.