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Wealth inequality and tax justice

By Ezra Ho

Wealth inequality is a scourge of many countries. Last year, Credit Suisse reported that the richest 0.7% of adults in the world owned 44% of global wealth. Closer to home, earlier this year, the Lien Centre for Social Innovation's 'A Handbook on Inequality, Poverty and Unmet Social Needs in Singapore' highlighted the persistence of income inequality and relative poverty in Singapore.

By now, the research is pretty clear: more unequal societies suffer from a host of problems, from poorer health, weaker social cohesion, to higher rates of crime and violence.

In most cases, recommendations center on fiscal redistributive policies. While helpful, such an approach is ultimately reactionary and overlooks how such structural inequality is generated in the first place - how the wealthy accumulates vast amounts of wealth at the expense of the rest of us.

A complementary and more proactive strategy must consider the role of tax injustices in perpetuating global wealth inequalities. After all, wealth inequality does not naturally occur, but is a state of affairs sustained and reproduced by particular groups of people, for particular groups of people.

Offshore tax havens are states that offer a combination of low or no taxes, lax regulations and considerable financial secrecy to corporations and wealthy individuals seeking to evade tax obligations at home. Prominent tax havens include certain US states, British territories such as the Cayman Islands and Jersey, Switzerland, Hong Kong and even our very own Singapore – notoriously lauded as the 'Switzerland of Southeast Asia'.

According to the Tax Justice Network, these offshore tax havens conceal a conservative estimate of $21-32 trillion. When tax havens compete to attract highly mobile financial capital, they deprive other governments of tax revenue to develop state capacities, undermining the rule of law and good governance. Such capital flight and tax evasion benefit a whole range of actors, from organised crime laundering the proceeds of criminal activity, to corporations and 'high net-worth' individuals seeking to evade tax obligations.

For example, in a 2015 Bloomberg report, 299 US companies were found to have concealed US$2.1 trillion in untaxed profits overseas.

Among many ways, one approach for multinational companies seeking to evade tax obligations would be to establish shell companies – non-existant companies with legal status – in low tax countries. Profits are then transferred from one entity to another through transfer mispricing – where a company sells something to a related shell company or subsidary at a manipulated price to shift profits offshore, thereby evading tax obligations.

To be fair, governments have responded to this challenge after years of public pressure and campaigning from civil society. Last month, the OECD released plans to introduce new guidelines for tax reporting and financial transparency, potentially helping governments recover lost tax revenue.

While these new regulations are encouraging, like downstream fiscal policies, they remain reactive attempts to grapple with the consequences of a problem, without addressing core dynamics.

Instead, a more productive approach would be to address the role of wealth management professionals who develop, promote and facilitate tax avoidance strategies. Such professionals include the tax accountants, lawyers, financial advisors and brokers who enable the design and implementation of tax shelters. Because of the complexity of tax laws across multiple countries, the line between what is legal and illegal is often a blurry, and difficult to enforce one.

Thus, having the expertise to understand and manipulate complex tax laws, tax professionals have much incentives to discover and exploit tax loopholes – as was the case with aggressive tax products marketed by the Big Four accounting firms during the late 1990s and early 2000s. Moreover, the playing field is an uneven one, where wealthy individuals and corporations possess the financial resources to marshall legal experts to fight prolonged legal battle.

In short, tax professionals are directly implicated in the offshore phenomena. At the same time, while they have a causal role in and benefit enormously from aiding abusive tax practices, they also have significant capacities to address tax injustices. The knowledge and expertise of private-sector tax professionals, if directed towards public goals, could go a long way in alleviating uneven and unjust tax relations. Tax professionals can provide assistance in ensuring robust tax laws, they can also strengthen the lax internal policies of accounting firms that enable widespread tax avoidance by wealthy individuals and corporations.

Notwithstanding, without a recognition and assertion of their unique responsibilities, tax professionals will remain complicit in exacerbating global wealth inequalities. After all, money itself does not make the rich powerful, but it is in combination with financial-legal expertise that allows the rich to truly exist above the law.