by T. R. Reid
So much for solemn pledges. When no party won a majority in the election, Gillard decided to cut a deal with the Green Party to form a coalition government that would make her prime minister. The price was straightforward: to get the Greens’ support, Gillard agreed to pass a carbon tax, to be imposed on mines, power plants, factories, and airlines. This new tax took effect in July 2012 and had one immediate impact: everybody’s electric bill went up. The monthly bills went up roughly 11% on average, and the electric companies thoughtfully noted on each bill that this increase was due to the new tax they had to pay. By some estimates, a typical Aussie family had to pay about $500 more per year for electricity. With that, cutting carbon emissions became a far less popular policy in Australia.
The opposition parties pounced. Because every home and business used electricity, they called the carbon tax “a great big new tax on everything.” They labeled Julia Gillard “Ju-Liar Gillard” for going back on her no-tax promise. The media magnate Rupert Murdoch, whose newspapers reach 70% of the nation’s households, mounted a fierce editorial crusade against the tax. The coal and electric companies threw their support to the political opposition, which is called the Liberal Party but is, in fact, Australia’s equivalent of our Republicans. The Liberal leader, Tony Abbott, based his entire campaign on a promise to “axe the tax.” The backlash against the carbon tax was so intense that Gillard’s own Labor Party dumped her in 2013 and replaced her with a more popular former Labor prime minister. But it was too late. Abbott’s party won the election, and the new conservative Parliament repealed the carbon tax just two years after it took effect.
The Wall Street Journal (another Murdoch property) warned that Australia’s action “could highlight the difficulty in implementing additional measures to reduce carbon emissions.” Many Australians agreed, including those who had supported the carbon tax.
“What we have learned,” said Professor Bill Butcher, a tax expert at the University of New South Wales in Sydney, “is that people are enthusiastic about environmental protection, but are not enthusiastic about paying for it.”
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BENJAMIN FRANKLIN’S FAMOUS OBSERVATION that “nothing is certain except death and taxes” has not entirely proven true. While no nation has yet managed to eradicate death, there are a few countries that have managed to operate without taxes, or at least with very few forms of tax. Of the planet’s two hundred sovereign nations, about a dozen run their governments with almost no imposition of tax on their citizens. These tax-free states fall into two categories: oil-rich kingdoms, primarily in the Middle East, and vacation meccas that can get away with sticking the burden of taxation on their tourists.
Probably the least taxed nation on earth is the United Arab Emirates, a federation of seven sheikhdoms near the southeastern corner of the Arabian Peninsula. The U.A.E. is best known for its biggest cities, Abu Dhabi and Dubai (the site of the world’s tallest building). It has five million residents, tens of thousands of square miles of sand, and some of the earth’s richest deposits of oil. The income from this natural resource has meant the U.A.E. doesn’t have to worry about the kinds of government revenues that have proven as inevitable as death almost everywhere else. The International Tax Handbook, an authoritative source on the different types of taxes found in every nation, lists the following for the U.A.E.:
Personal Income Tax: none
Corporate Income Tax: none
Property Tax: none
Capital Gains Tax: none
Sales Tax: none
Estate Tax: none
Wealth Tax: none
The Emirates’ equally lucky Middle Eastern neighbors, Saudi Arabia (population 26.5 million), Oman (3.1 million), Qatar (1.95 million), Kuwait (1.5 million), and Bahrain (1.25 million), also get by with almost no taxes, as does the tiny sultanate of Brunei, a sliver of land on the northern coast of Borneo that is also blessed with petroleum deposits. None of these nations have personal or corporate income taxes or sales taxes. But several of them do have a form of Social Security tax, a levy that is withheld from wages to pay for the government-run health-care and pension systems. Because the Middle Eastern oil companies rely heavily on temporary immigrant labor, these payroll taxes are paid in large part by foreign workers.
There’s one jurisdiction in the United States that has set up a tax regime something like those in the oil-rich Middle East. That would be oil-rich Alaska. In the 1970s, when it became clear that the frozen northern tundra of the forty-ninth state was situated over an enormous underground lake of crude oil, the state government had a long shopping list of ways to spend the severance tax revenue that began pouring in. But some farsighted political leaders decided—over loud opposition—to set aside a portion of the oil tax, invest the money, and save it for the future. This kind of rainy-day fund is formally known as a “sovereign wealth fund.” But the one in Alaska bears an optimistic name—the “Permanent Fund”—on the theory that the money will always be there in time of need. In 1977, its first full year of operation, the Alaska Permanent Fund took in $734,000. By 2016, the fund totaled $53.7 billion and was making more each year on investment income than from oil revenues.
As the Permanent Fund began to grow in the late 1970s, Alaskans came to realize that oil revenues, and the income from investing the fund’s assets, were big enough to replace the revenue from most state taxes. Alaska repealed its income tax in 1980 and has also eschewed, for the most part, sales and property taxes. Indeed, Alaska’s oil fund works as a reverse income tax; each year, the government sends each resident a check, which is called the Permanent Fund Dividend, or PFD. (To qualify, you have to have lived in the state for an entire calendar year, January 1 to December 31. Every year a few people with bad luck or bad timing move to Alaska on January 2 or 3, only to discover that they’ll have to wait two years to get the reverse income tax payment.) In 2015, the PFD payout came to $2,072 per person, or about $10,400 for a family of five. For many low-income Alaskans, the annual PFD check is a major portion of their annual income. Of course, Alaskans still have to pay federal income tax, and many use the Permanent Fund Dividend to pay what they owe Uncle Sam.
These tax-free arrangements can dry up rapidly if the oil runs out or if the price of oil plummets on world markets, as it did in 2014. The extended swoon in the price of crude oil over the next two years badly stretched government coffers in the Middle East, even among those farsighted countries that had set aside a chunk of their annual oil earnings in sovereign wealth funds, which act like national rainy-day funds. By 2015, several of the Middle East’s no-tax territories were considering, or enacting, sales taxes, capital gains taxes, and tariffs on imported goods. In 2016, facing a severe budget deficit, Alaska cut its cherished Permanent Fund Dividend by 50%, setting a cap of $1,000 for each recipient; even more shocking, there was growing pressure to bring back a state income tax.
A few nations that lack oil but are blessed with swaying palms on sandy beaches or ski resorts amid snowcapped mountains have also managed for the most part to avoid taxing their citizens. Tropical escapes like the Bahamas, Bermuda, and the Cayman Islands have no corporate or personal income tax, no wealth tax, no property tax. Rather, they collect revenue from restaurant diners, hotel guests, Jet Ski riders, beach umbrella renters—that is, from foreign tourists. Andorra, a no-tax smidgen of a nation (population 70,000) high atop the Pyrenees between France and Spain, thrives on skiers in the winter and on shoppers in the summer who cross the borders from the north and south to buy tobacco, liquor, perfume, and electronics that are free from the costly value-added taxes in France (VAT rate: 20%) and Spain (VAT rate: 21%). The Mediterranean getaway of Monaco funds its (small) government through tourism and a fee imposed on every bet placed in its famous Monte Carlo casinos. Macau, a quasi-independent Chinese enclave that bills itself as “the Asian Vegas,” also uses casino fees to take the place of most taxes. Many of these postage-stamp-sized jurisdictions also ta
ke in a fair share of government revenues by printing and selling stamps that are prized by collectors around the world.
So why don’t rich people just flock to these tax-free venues and hoard their wealth? It turns out that this is not simply a matter of packing a bag and renting a house on the beach in Bermuda. Any American citizen owes income tax to the Internal Revenue Service regardless of address. Some foreign earnings are excludable, and there is a credit for foreign taxes paid. But an American citizen who is willing to pick up stakes and move to Abu Dhabi is still legally required to file Form 1040 and pay up each year. You can avoid this requirement only by renouncing your U.S. citizenship. A few people actually do that; in fact, the number of Americans renouncing their native land just to dodge the tax man has grown somewhat in the past decade. To deal with this phenomenon, Congress in 2013 imposed a tax on renunciation. Yes, that’s right: you get taxed for avoiding taxes. The expatriation tax—set forth in Section 877 and Section 877A of the Internal Revenue Code—is due from any U.S. citizen with assets greater than $2 million who turns in his passport and becomes a citizen of a foreign country. Naturally, the IRS has issued a complicated form (Form 8854) and instruction booklet (Publication 519) to collect the U.S. expatriation tax.
Beyond that, the no-tax countries do not always welcome tax-fleeing immigrants with open arms. To get a residence permit in Monaco, you have to put half a million dollars in a bank there, and the money can’t be withdrawn for years. Macau requires a down payment of roughly $375,000. The Cayman Islands ask for an investment of at least $500,000 in real estate or stock in a Caymans corporation. Andorra requires ten years’ full-time residence before it will grant citizenship. And the Middle East sheikhdoms are not particularly welcoming to newcomers, except those who are male Muslims.
What many wealthy people would like to find, of course, is a way to duck taxes without the need to give up their passports and move to the parched deserts of Oman, where summer temperatures at midday run about 117 degrees. And we know that many of them manage to do so, hiding hundreds of billions of dollars, euros, pounds, and yen from the taxing authorities while living comfortably in their home countries. We know a great deal about how this is done and where the money is hidden. We know all this thanks to a huge journalistic scoop that hit the world’s newspapers in the spring of 2016. It was a story that came to be called “the Panama Papers.”
10.
THE PANAMA PAPERS: SUNNY PLACES FOR SHADY MONEY
In the spring of 2015, a newspaper reporter named Bastian Obermayer received an e-mail message. The sender was listed as “John Doe.” The subject line contained one word: “Data.” The message itself was cryptic: “Interested in data?”
For the recipient of that e-mail, this was all a little less obscure than it might seem. Bastian Obermayer is a financial correspondent for the great Munich newspaper Süddeutsche Zeitung (the name means “South German Newspaper”). He had been working for a few years on big stories exposing complex tax-avoidance schemes employed by European multimillionaires. Accordingly, Obermayer suspected from the start that the “data” from this “John Doe” might involve a few more cases of rich people hiding their money from the tax authorities. So the reporter e-mailed back, “How much data?” The answer, from the same John Doe, came back instantly: “More than anything you have ever seen.”
This proved to be true. The data that John Doe was offering involved more than eleven million discrete documents from the confidential files of Mossack Fonseca, a flourishing law firm based in Panama City. The Mossack firm was virtually unknown in general legal circles, but it was nearly a household name among millionaires and billionaires, and their bankers, in much of the world. This obscure Panama City law firm had developed a lucrative specialty: helping the 1% hide their money. Sometimes it was a rich man trying to keep his holdings away from his ex, or his new spouse. Sometimes it was a surgeon who wanted to make her assets invisible because of a pending malpractice suit. It might be drug dealers, arms dealers, gambling professionals, or corrupt government officials who didn’t want the police to track their illicit gains. But most often, it was a wealthy individual in a high-tax country who wanted to conceal money from the tax authorities. Mossack Fonseca had branch offices all over the world—including nine cities in China, which was its largest source of business by the second decade of the twenty-first century.
Over a period of weeks, John Doe funneled batch after batch of the firm’s confidential documents—contracts, letters, e-mails, and tens of thousands of incorporation papers—to the German newspaper. Quickly, it became clear to Obermayer and his team that this trove of data was too big for any one newspaper to handle. By sheer number of pages, it was the biggest leak in history—the papers constituted about ten times as many documents as the notorious WikiLeaks revelations. There were so many clients and so many clandestine deals, and there was so much money secreted in anonymous bank accounts in so many countries, that the investigative reporters in Munich were quickly overwhelmed. Finally, they took a step that would be difficult for any scoop-hungry journalist: they decided to share the Panama Papers with other reporters around the world (they did not, of course, show the documents to any of their German competitors).
A Washington, D.C., organization called the International Consortium of Investigative Journalists put together an ad hoc team of some four hundred reporters and editors from a hundred media outlets in eighty countries; the group included the BBC and the Guardian newspaper in Britain, the French daily Le Monde, and the McClatchy chain in the United States, the owner of newspapers like the Charlotte Observer, the Kansas City Star, and the Miami Herald. The reporters held meetings in Munich, London, and Washington, D.C., and agreed that it would take months to track down all the information in the law firm’s records. Accordingly, they made a pact that nobody would publish the story until all members of the team had finished reporting on Mossack Fonseca clients in their countries. Indeed, one of the most surprising things about this whole saga is that none of these reporters broke the self-imposed embargo.
Consequently, when the Panama Papers were finally made public, in the first week of April 2016, the story was a bombshell around the world. “The revelation of vast wealth hidden by politicians and powerful figures across the globe,” the New York Times reported on its front page, “set off criminal investigations on at least two continents . . . as harsh new light was shed on the elaborate ways wealthy people hide money in secretive shell companies and offshore tax shelters.”1 For several days, the hashtag #PanamaPapers was the number one topic on Twitter. Columnists and editorial pages everywhere condemned the tax dodgers and the lawyers who helped them conceal their wealth. A few editorial pages took a different stance; the newspapers owned by the billionaire press magnate Rupert Murdoch generally said that tax avoidance was not such a big deal. “The mistake now,” read the editorial in Murdoch’s American flagship, the Wall Street Journal, “would be to narrow the focus prematurely, zeroing in on tax avoidance that is a hobbyhorse of the political class but in this case is a distraction.”
The law firms’ records provided strong confirmation of the widespread feeling, in the wake of the global recession of 2008–9, that the financial system was rigged in favor of the elites—that the very rich in almost every country could find ways to avoid the legal obligations (like paying taxes) that applied to ordinary citizens. The firm’s clients included members of wealthy families as well as famous actors and athletes, marquee names like Jackie Chan and Lionel Messi. But the elite tax dodgers who made use of Mossack Fonseca’s legal maneuvers also included dozens of public officials who had somehow become extremely rich while serving in government jobs. Family members or close friends of the former Egyptian president Hosni Mubarak, the Syrian president Bashar al-Assad, and China’s president Xi Jinping were revealed to have hired the Panamanian firm to hide large sums of money. Several close associates of the Russian strongman Vladimir Putin showed up in the Panama Pap
ers, including one Sergei Roldugin, a well-known friend of Putin’s who listed his occupation as “cellist” but reportedly placed some $2 billion in offshore tax havens through the good offices of Mossack Fonseca. The prime minister of Pakistan and the son of the prime minister of Malaysia both had multimillion-dollar secret accounts arranged by the Panama law firm. Two days after the first news stories based on the leak, the prime minister of Iceland was forced from office after it was revealed that he and his wife had employed Mossack Fonseca to secrete millions of dollars in a shell corporation in the British Virgin Islands.
The British prime minister, David Cameron—a leader who had launched a high-profile campaign against tax avoidance in the U.K.—was embarrassed to see that his own wealthy father had hired the Panama City lawyers to create a secret offshore entity to hold his money. When reporters demanded to know whether the prime minister himself had any money stashed overseas, the PM’s press secretary foolishly responded that this was a “private matter.” This non-denial led to such widespread speculation in the ferocious British newspapers that Cameron felt the need to deal with the matter himself, making a personal declaration in Parliament that he had no overseas accounts. In Moscow, Putin’s office declared that the whole Panama Papers story was simply an American plot. Russia’s government-run TV news programs said that the “information war” against Putin was “the curatorial work of the U.S. State Department,” a manifestation of continuing “Putinphobia” in the West. In China, President Xi’s government reiterated its commitment to fight corruption but also banned any mention of the scandal in the news media and blocked all Internet searches that mentioned “Panama,” “Papers,” or the law firm. Back in Panama City, Ramón Fonseca, one of two name partners of the firm, said the law firm itself was the real victim. Because privacy had been the firm’s most important product, it faced an angry backlash from clients whose secret fiscal maneuvers were suddenly bannered atop the front page.
