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The Panama Papers: How much financial privacy should the super rich be allowed to enjoy?

The Panama Papers comprise a leak of 11.5 million files from Mossack Fonseca, the world’s fourth biggest offshore law firm. The leak has tainted the reputations of many celebrities, and some public officials have been forced to resign, including Icelandic Prime Minister Sigmundur Davíð Gunnlaugsoon, and Spanish Industry Minister José Manuel Soria.

Ramón Fonseca, Director of Mossack Fonseca, complained that his firm was the victim of “an international campaign against privacy.” At a time where privacy does seem to be under attack on all fronts, it is relevant to ask whether the super rich ought to be able to enjoy financial privacy with respect to their offshore accounts.

Most people in Western societies value both privacy and transparency. Privacy allows us to guard what is none of other people’s business. By shielding us from other people’s gazes and judgments, it enables freedom of thought and action, creativity, relaxation, and intimacy, among other benefits. In turn, transparency is one of the marks of advanced democratic societies, as it fosters fairness and accountability.

Privacy and transparency, however, can conflict, as in this case, and there can be such a thing as too much of both. A world with too much privacy would be one where people would be isolated, not sharing any information about themselves with others, and where criminals would never be found out. A world with too much transparency would be a stressful, shallow, and conformist one—with every act being publicly scrutinized, people would be afraid to think or act in ways that are not mainstream, stigmas and past mistakes would stick to people for the rest of their lives, and being a political or social dissenter would be extremely costly or impossible. For us to build the best possible world we can, then, the challenge is to wisely decide what ought to be allowed to remain private and what ought to be held up to the scrutiny of transparency. There are no easy answers, but making explicit what is at stake can hopefully help in furthering the debate.

The case for financial privacy about offshore accounts goes something as follows. Financial information is personal information, as it can tell much about oneself that one would not want to share with just anyone. The rich may have a desire to hide their wealth in order to avoid the envy of others, to make sure that their friends are true friends and not just people who are after their money, or to hide their social class. The less people know about one’s assets (particularly one’s inherited assets), the more it is likely that they will judge one for what one does and who one is, rather than where one comes from. In countries where the state fails to guarantee the safety of its citizenry, the rich might also want to hide their wealth to protect themselves from kidnap and extortion (though they can typically afford to buy security to protect them at least from the former).

What is the best case for transparency? Most importantly, transparency helps ensure the rich pay their fair share of taxes. The main reason for the public outrage in reaction to the Panama Papers seems to be the perception that the rich can get away with not paying taxes; that money not only buys all the beautiful things that only the rich can own—it can also buy impunity. Impunity can result from getting away with what is illegal (tax evasion), from paying money to professionals for them to find legal loopholes (tax avoidance), and from the powerful not making illegal what is clearly unacceptable (as legislators who are super rich may have no motivation to create appropriate financial regulation). Moral outrage at the super rich who attempt to dodge contributing their fair share to the common good (be it through legal or illegal means) is well placed, and calls for more transparency to prevent taxes going unpaid are appropriate. Strictly speaking, however, and assuming satisfactory regulation (which is a lot to assume, and probably where most focus is needed) it would be enough for governments to be able to access the financial information of the super rich. Full transparency—where all citizens can access that information—would be unnecessary, as long as the government in question is trustworthy and competent enough to collect taxes.

Are there cases where full transparency is required? At the very least, when it comes to highly ranked public officials who can influence financial policies. These public officials shape tax policies—they are in charge of making sure the super rich pay what they owe society. If they hold secret offshore funds, they are hiding a relevant conflict of interests that voters must know about if they are to be well informed. What was most scandalous about the fact that the wife of the Icelandic Prime Minister had an offshore account worth millions of dollars was that it was housed in a shell corporation to which Icelandic banks owed money during the financial crisis. Indeed, it seems that of all the privacy claims public officials may hold, that of financial privacy is the weakest, both because their salary comes from taxpayers and because they are vulnerable to conflicts of interests.

What about celebrities who are not public officials? Someone could argue that even they should be held to high standards of transparency in order to educate the public. Studies suggest that people underestimate inequality, and how rich the super rich are. It is crucial for citizens to have good knowledge of the present state of affairs so they can act accordingly in order to build the kind of society they want to live in. But perhaps it would not be necessary to name rich celebrities. It is an empirical question whether numbers and facts are enough, or whether people need to identify super rich celebrities and their assets in order to better process the relevant information.

Arguably, perhaps the super rich ought to be held to higher standards of transparency than the rest of the population—above and beyond the reasons explored, this might be the case on account of their greater power to avoid paying taxes and, in progressive tax systems, their greater responsibility to contribute to the common pot. What seems unquestionable, in any case, is that at the very least they should not be allowed to enjoy more financial privacy than the rest of the population. People on welfare, for instance, get asked extremely invasive personal questions. Either we should be willing to have more respect for the financial privacy of ordinary citizens (especially the poorest), or we ought to submit the rich to (at least) the same level of scrutiny. Financial privacy should be one of those few things that money can’t buy.


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3 Comment on this post

  1. Reducing privacy to deploy stricter taxation of the rich runs into ethical problems, as you have explored yourself, and it would be likely to be expensive for the government. Meanwhile, the most wildly excessive estimates argue there is currently 200 billion USD of tax losses due to tax evasion in offshore assets. That’s just under 1% of governments’ tax revenue (21 trillion). I think harder scrutinization of the wealthy’s finances will barely pay off in increased tax revenue and infringe their privacy. There seems to be a huge list of things the government should be rather doing, and which do not raise ethical issues, than over investigating offshore money.

  2. My thoughts on tax evasion and offshore accounts are as follows:

    – In a constrained fiscal environment, the additional taxation funds which are being lost through these grey areas could be very significant in funding social security, education and other relatively low-cost programs which assist in societal equalisation (which appears to be good for everyone, based on the studies I’ve read). I take a consequentialist point of view on privacy when it comes to this sort of situation – the ends more than justify the means if the funds involved are significant, in my opinion.

    – The rich in question have largely made their money from the societies which they’ve then avoided taxes from – this money has effectively, then, been robbed from the common purse. Recovery of stolen funds seems easily justifiable.

    – In the case of parliamentarians, dodging taxes appears uncomfortably close to taking action against their own country, and is certainly a refutation of their own electoral programs. Embarrassing, at the very least, and an argument could be made that such actions should be disqualifying when it comes to holding public office.

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