Tax dodging in rich and poor countries alike, wealthy taxpayers often outwit the taxman

It has become a cliché in the international development community that emerging markets need to broaden their tax bases and draw more revenue from the wealthiest segments of their societies in order to fund public services and improve fiscal stability. This is one of the IMF’s most standard pieces of advice to Asian, African, and Latin American governments, together with its consistent mantra of austerity. Now, with the financial strain of the COVID-19 pandemic on the developing world, the issue has once again come to the fore.

This is not to say the IMF, and the industrialized donor governments whose development programmes run in parallel with its efforts, are wrong. The failures of states in less-industrialized parts of the world to capture an adequate share of tax revenue from their richest residents contributes to consistent budget shortfalls and underfunded health, education, infrastructure, transportation, and other services.

It also contributes to a staggering level of wealth inequality. According to data released this week by the United Nations’ Economic and Social Commission for Western Asia (ESCWA), for example, the 31 richest people in the Arab world are collectively worth $92.1 billion, as much as the entire poorest half of adults across the entire region. The richest 10% of Arab adults, meanwhile, control fully 75% of the starkly uneven region’s wealth. Of the $1.3 trillion held by this richest 10%, it would take just $15.6 billion to eradicate poverty across the seven “middle-income” Arab countries.

Tax the rich?

Ironically, however, the imperative of “taxing the rich” is a struggle even the most politically mature countries struggle with. As the 2016 and 2020 presidential campaigns of US Senators Bernie Sanders and Elizabeth Warren have highlighted, a rising groundswell of public dissatisfaction with wealth inequality has helped drive populist anger in the United States and across the West. Indeed, as Western governments and international institutions like the IMF pressure countries like Lebanon over the terms of their financial assistance, they ignore the fact that elites in both developed and developing countries have an expansive toolkit to reduce their own tax obligations, if not avoid them outright.

On an institutional level, that toolkit includes the wealth and influence to shape the tax code itself, both to minimize the general tax burden on these individuals and their businesses but also to create specific loopholes that maximize tax savings. This trend is readily apparent in developing countries like Pakistan, where the tax services consistently fail to collect anywhere near the state’s revenue needs but where powerful vested interests have essentially declared themselves exempt from paying their share.

It is also quite well-known in the United States, where tax rates on top earners have effectively cratered since a high point of over 90% under Presidents Eisenhower and Kennedy in the 1950s and 60s. Growing corporate influence over American politics and the legislative process dovetailed with a philosophy of limited government under the Reagan administration to produce a top tax bracket of no more than 28% by the end of Reagan’s term in 1989, long before the “Citizens United” Supreme Court decision effectively removed limits on how much corporate actors in America could spend on elections and on influencing policy.

Beyond the tax bracket, the wealthiest individuals in both the United States and Europe have brick-and-mortar infrastructure to squirrel away their assets. The global system of tax havens has repeatedly driven press coverage over the past decade, with scandals such as the Panama Papersand Luxembourg Leaks spotlighting how the lax tax and transparency regimes of some jurisdictions undermines global anti-money laundering (AML) efforts.

Freeports: a cautionary tale

Another, less-discussed tool of tax avoidance, sometimes located in these same countries, are freeports. These secretive facilities are designed to store high-value goods like gold, precious artwork, cars, and even expensive wines well away from the prying eyes of tax authorities. In both Europe and Asia, one individual – Swiss art dealer Yves Bouvier – has taken the lead on developing the freeport model into a global network of facilities. Bouvier was formerly the most prominent client of the freeport in Geneva, Switzerland, and since then has spearheaded the development of freeports in Luxembourg and Singapore.

Yves Bouvier’s freeport model has proven to be extremely problematic for European officials, with members of the European Parliament demanding the closure of the Luxembourg Freeport and former European Commission president Jean-Claude Juncker coming under fire for his role in opening it. While the Luxembourg Freeport remains open, Yves Bouvier’s own business activities have gotten him into serious legal trouble with the taxman in his native Switzerland.

In 2015, Switzerland’s Tribune de Genève reported cantonal deputy Remy Pagani had sent an open letter to the authorities asking for the seizure of Yves Bouvier’s assets by the tax authorities. In 2017, the same outlet reported Yves Bouvier was under investigation by the Swiss Federal Tax Administration (FTA). Recent reporting by both the Tribune de Genève and Heidi News has revealed the extraordinary lengths Bouvier has allegedly gone to in derailing this investigation. After news of the enquiry emerged, Bouvier allegedly engaged a female contact and escort to lure an FTA investigator responsible for his case outside of the country, violating the agency’s policies and undermining the case against him.

The alleged gambit did not work, with the escort in question confessing the plan to the FTA. Events nonetheless seem to be turning in Yves Bouvier’s favor. The FTA’s investigation has progressed little since 2017, with significant turnover among the officials responsible and a tight statute of limitations for such financial offenses.

While this example may provide a riveting alleged case of interference in an investigation, the reality is that most wealthy individuals and businesses have no need to resort to such tactics in order to avoid tax liabilities. When corporate interests are effectively capable of dictating tax policy in countries like the United States, it can seem unreasonable for international donors to expect that developing countries, with far weaker institutions, can do a better job of regulating their richest and most powerful constituents.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)