The Panama Papers join the bookshelf of exposes like the Pentagon Papers. If you haven’t already heard about it, you will. (Here’s a synopsis from my other blog, PretendingNotToPanic.com) This is big, and yet, this financial news may not effect most people’s personal finances. And yet, the Pentagon Papers changed American government. So did the Watergate reporting. Abu Ghraib and Edward Snowden continue to create repercussions. In the short term, the revelations about tax havens is a news story but not a change in lifestyle for most. In the long term, the specifics of the process of hiding wealth may begin a fundamental change in our economic system. I think long term and am fascinated by the implications of technology, so I admit to being interested in the impacts that are only now hitting the news.
The Panama Papers revealed nothing new, but revealed specifics only imagined, previously. There’s no surprise that tax havens have allowed the wealthy to accumulate wealth in ways only available to them. Whether it is just or not, the wealthy paying for expensive ways to hide wealth is simply assumed by most. The eleven million documents released to journalists take that assumption and change it from an abstraction to reality. Specific people are identified, and their actions can be questioned. Tax havens are legal, but the way they are used can cross the line – and it looks like that line has been crossed several times. About a dozen heads of nations have already been identified. Conflicts of interest are apparent. Scandals can affect the careers of people whose reputations are based on the opposite of their actions. In some cases, those conflicts of interest may do more than ruin careers; they may put people in jail. As the news hit, I’m sure there was a dramatic increase in messages and calls between the tax haven wealthy and their advisors.
Tax havens hide wealth and accumulated income legally, at least from the tax havens’ perspective. The people using them may be under restrictions placed on them by their positions, which means they may have broken the law. While legal from one perspective, and illegal from another, the greater impact may be the loss of tax revenue to the wealthy person’s country. A billion dollars protected from home nation taxation means a billion dollars not available for basic services. At some point, the abstraction of lower tax revenues means less money available for health care which means people have died. Grim, but true. And also why the impact of the news may be more than just a story for people to complain about.
Hidden wealth is nothing new. Waiters can hide tips. Consultants can decide to not disclose gifts. Royalty can move gold to other countries in case they are deposed. Until recently, those actions were physical. Now, especially as transactions have become electronic, those actions are traceable (though they may be encrypted.) Encryption creates the illusion of security the way a locked door protects the contents of a car; but as the recent iPhone incident proved, there’s always a way to get past the protection. Sometimes that is sophisticated. Sometimes it is the equivalent of a rock smashing a window. In the case of almost all of the recent exposes, security was defeated by someone on the inside deciding that some secrets shouldn’t be secret.
This period of tax havens may have been a temporary aberration. Prior to technology, the logistics were difficult. Within a few years, computers may be able to crack any code. The Panama Papers proved that any system is vulnerable to one person who thinks a change must be made.
The Panama Papers are the biggest leak. At roughly 2.6TB, they are more than ten times are voluminous as the previous record holder, which was more than ten times the previous record. As large as that is, it also can fit on a device smaller than a phone. This probably won’t be the last leak.
The data came from one company. There are many more. The news from one company has already implicated a dozen world leaders. The other tax haven files undoubtedly include more. I’d be surprised if each firm isn’t reviewing their security measures, each questionable client isn’t reviewing their exposure and options, and in each firm and within the staff of each person someone isn’t considering whether this is the time to leak their information.
The rest of us, however, watch the news, possibly cheer the scandal, and continue with our daily routine of trying to make enough money to support our lifestyles. Our tax havens may be Mason jars buried out back.
I suspect the impact won’t be that abstract. When the elephants (the 1% of the 1%) dance, the mice (the 99.99%) must scurry; but some of the elephants are discovering that the ground contains pits and traps that they may not escape. The mice may get a chance to relax while some of the elephants decide to gingerly exit the dance floor.
With the security being compromised by one individual, the entire process of wealth accumulation and tax avoidance has been revealed. The risk to reward ratio has shifted with one news story. Some will entrench in denial. Some will shift to alternative strategies. Some will see the risk as too great and will live according to the rules as they were supposed to. Most haven’t broken any laws and will continue the practices because they’ve done nothing illegal. But, if there are any doubts, there will naturally be some who start paying higher taxes.
One of the safer alternatives will be to invest within their countries, in their public financial markets, and abandon practices that encouraged corruption. The Panama Papers may have, with one press release, done more to encourage local investing and fight corruption than any governmental initiative.
This first release of data was mostly about people outside the US. That’s a comfort for Americans. It wouldn’t be a surprise that another leak could be the opposite, something that involved more Americans. That could be an interesting revelation, especially in an election year. That would have a dramatic impact.
(Thanks to a free press and The International Consortium of Investigative Journalists for their work uncovering, verifying, and analyzing the information. Their main page for the Panama Papers.)