Law-abiding taxpayers watch with disappointment and disdain the details of the super-rich surface’s illicit financial arrangements – again. The latest leak of nearly 12 million offshore financial records – the so-called Pandora Papers – provides clues about how the rich avoid paying their fair share of taxes.
Sports stars Jacques Villeneuve, a former Formula 1 racer and figure skating legend Elvis Stojko are among the Canadians who have been named in the Pandora Papers.
This is not the first time the public has learned about how the rich evade taxes and protect their wealth. The Panama Papers, Paradise Papers and Luxembourg Leaks discovered aggressive tax planning and tax evasion undertaken by the global elite.
When the rich, famous and infamous fail to pay their fair share of taxes, the public turns to the authorities to enforce tax laws and punish violators. Punishment creates a feeling of punitive justice and recalls that tax compliance laws must be respected for the collective good of society. However, authorities often do not deliver, perpetuating the cycle of injustice.
Does Punishment Discourage Tax Evasion?
What we don’t know for sure is whether punishing offenders involved in global tax scandals benefits observers’ reported income respect and deters tax evaders. My preliminary research suggests that the answer is ‘yes’, but only if observers perceive the tax offender to be fully to blame or responsible.
If the punishment of culpable violators can improve compliance, it would seem logical that the tax authorities actively prosecute all suspected violators. But this is hardly the case.
With limited resources and the risk of losing costly legal battles, not everybody who evades taxes and protects wealth is punished. Worse yet, if prosecutors’ cases do not go to court, it can encourage aggressive tax planning or tax evasion, as a precedent is set that undermines tax authorities.
Why does compliance increase when tax evaders are punished? The results of my research show that compliance improves when offenders seem to deserve more prosecution and are ultimately punished. Observers find satisfaction when authorities enforce justice, especially for the wealthy.
When justice is applied equally, authorities increase their demand for obedience, signaling both their competence and that tax evaders will be found and held accountable.
Point the finger at advisers
Being perceived as guilty increases the perception that an offender deserves punishment. As such, a strategic course of action for those exposed to global tax scandals is to deny responsibility. Ultra-rich people named in Pandora Papers and other tax scandals often blame lawyers or advisers.
Stojko denied responsibility and said he trusted his lawyer to handle his financial details.
In the same way, the wealthy Cooper family of British Columbia – named in the Panama Papers – denied responsibility. Marshall Cooper, who grew up in South Africa, stated that he was not aware of Canadian tax laws and simply hired the best advisers to handle the family’s finances.
With blame being thrown both ways, perhaps the authorities should sue lawyers and advisers of the rich rather than just punishing tax evaders.
The media can shame on the rich, but lawyers, accountants and other advisers act as facilitators who facilitate aggressive tax planning, and possibly in some cases tax evasion. If the facilitators share the responsibility, they should also be punished. It is possible that punishing facilitators could also force taxpayers to comply with tax laws.
Applying sanctions to proven tax evaders could offer additional benefits beyond improving compliance with tax laws. Once offenders pay, billions lost to offshore scandals could be recovered and the tax burden more equitably distributed among taxpayers.
Yet in the aftermath of the Pandora Papers, taxpayers are likely wondering what authorities will do this time around and whether tax offenders will get the penalties they deserve. Global tax transparency efforts increase, perhaps offering a glimmer of hope that justice will prevail. But even with that silver lining, some remain pessimistic.
With proof that punishment can restore a sense of justice, authorities should use their resources to ensure that culpable offenders are held accountable. Maintaining justice, especially for the rich and privileged, serves the collective good of society.