The perverse effects of tax evasion (2)

In my previous article, I referred to a recently published report on tax evasion »»

In my previous article, I referred to a recently published report on tax evasion by well-to-do individuals and businesses and the enormous amounts of money involved. Globally, at least $21 trillion is hidden in tax havens, and that enables the owners and controllers of wealth, as the Tax Justice Network (TJN) put it, “to escape their responsibilities to the societies on which they and their wealth depend.”

A second study, also commissioned by the TJN, showed that by not taking these assets in offshore banks and the income they produce into consideration, all studies on economic inequality fail to present the correct picture. Inequality is even worse than we tend to believe, and these extreme imbalances between the rich and the poor have a very negative effect on social cohesion and the possibilities for economic growth.

At the end of my previous column, I asked the rhetorical question: What is new? Has there not always been enormous inequality in all societies? Is this a fact of life, whether one likes it or not, accepted by most people in the end as an unavoidable side effect of capitalism? Why would this new form of inequality, tax evasion, have a different effect on society than previous tricks by the super rich?

Most probably the impact of this kind of information on the extravagant behavior of the economic elite is smallest in societies where the economy has been growing strongly in the last decade and is expected to do so in the foreseeable future. In emerging economies such as China, Brazil and Turkey, the gap between the rich and the poor has never been as big as it is nowadays. Still, many poor and middle-class people are willing to accept this inequality because, overall, society as a whole has been growing together. It appears that the pie has been growing thanks to the contributions of the rich and therefore also the slices of the pie for the poor and those in the middle are now larger than they were in the past. So, why complain if almost everybody is profiting from the economic boom? Yes, there will be protests from the left and the trade unions against the uneven and often unfair distribution of the new wealth but, especially in conservative societies like Turkey, these will not have a decisive effect on government policies.

On the contrary, in the US and Europe we are talking about a totally different ball game. As Nobel laureate Joseph E. Stiglitz and many others have stated, in the last decade in America all of the benefits of growth have gone to the top. The US has the highest level of inequality of any of the advanced countries and the resistance against it is growing. The Occupy movement may have failed as a social movement because it did not manage to escape from the margins, but their core message was supported by a majority of Americans. They agree that it is not acceptable for the top 1 percent of US income earners to capture 93 percent of income growth and that it is morally and politically indefensible to save big banks with public money but allow them to continue to pay huge bonuses to executives who have failed miserably. It is no coincidence that the presumptive Republican nominee for president, multi-millionaire and notorious tax evader Mitt Romney, has a big problem because he keeps refusing to publicize his tax records.

In most European countries, in order to get out of the euro crisis, people are currently being asked to give up part of their income and their privileges. A growing number of angry citizens have been unwilling to do so when they learn that bankers still get away with rewards paid from tax revenues. How will one convince middle class families to accept wage cuts if they read the TJN report on tax evasion?

After decades of affluence, many Europeans will have to take a step back economically, and most of them realize that it's probably inevitable. However, this will only be accepted by a majority if there are no big exceptions for the elite.

The problem is that, until now, this sentiment has mainly been voiced by populist parties whose solutions don't work (close the borders) or are counter-productive (leave the EU).

The moment has arrived for center-right and center-left politicians to show they understand that stable societies and productive economies cannot be built and maintained when the people and businesses that profit most are unwilling to contribute their fair share. To accept tax evasion and extreme inequality is a political choice that can and should be firmly rejected.