How Global Inequality Undermines Global Democracy

Yet another massive leak of offshore banking documents has revealed the remarkable extent of the world’s “parallel economy”, in which a large and growing proportion of global wealth is secretly stashed away in a complex and opaque network of tax havens.

In addition to the obvious diversion of literally trillions of dollars of capital that could be better spent alleviating the needless suffering of billions (with plenty left over to spare), this development is arguably a threat to democratic governance the world over, as Matt Phillips at Vice argues.

First, it is worth noting the sheer scale of this shadowy, yet largely legal, economy:

Roughly $7.6 trillion in financial assets, 8 percent of the world’s total, is secreted away in tax havens such as Switzerland, Luxembourg, the Cayman Islands, Singapore, and Bermuda, according to University of California, Berkeley economist Gabriel Zucman’s 2015 book “The Hidden Wealth of Nations.”

There’s considerable variation in exactly how much wealth is hidden by residents of different countries. The rich in the Gulf States and Russia are the worst offenders, with roughly 57 percent and 52 percent of financial wealth, respectively, kept in tax havens. Zucman’s estimate for the U.S. is roughly 4 percent.

And the very existence of such wealth has far-reaching implications. For one thing, it means that the wealth inequality that has grown in recent decades is likely much worse than it currently appears on paper, as significant amounts of wealth are not included in calculations of wealth inequality, which are based on reported taxes.

It also means the U.S. Treasury is missing out on roughly $35 billion in revenue annually, Zucman estimates in his book. (In fairness, for the U.S. that’s not as large a problem as corporate tax avoidance, which cuts U.S. tax collections by roughly $130 billion a year.)

Again, it is unconscionable that so much raw capital is hoarded while much of the world remains mired in illiteracy, disease, poverty, and hunger. Why doesn’t the free market, or the conscience of the individual, lead the world’s rich to spare at least a fraction of all this wealth towards proven causes? To what end is this much money — in sums well beyond what any single person could possibly know what to do with — stashed away?

But beyond concentrating wealth away from worthier causes and investments, this shadowy financial system is entrenching a small but ever-powerful global elite that is coalescing on the basis of class interests at the expense of their fellow citizens:

But in a world where the wealthy are increasingly central to the political system, there are also corrosive political implications to personal tax avoidance, as details of the Paradise Papers make plain. At best, those undisclosed business alliances present serious conflicts of interest as politics around the world is increasingly dominated by the richest members of society. At worst, they create the infrastructure for outright corruption, especially for a Trump administration replete with billionaires and multi-millionaires.

In part, this reflects the changing nature of world inequality. According to Branko Milanovic, an economist who studies inequality around the world at the Graduate Center of the City University of New York, in the past the world’s rich and poor were largely determined by which countries they lived in. Compared to the world at large, Americans were by and large rich. Chinese were, by and large, very poor.

But today, inequality is driven by the differences within countries. In other worlds, the richest in China, Russia, and the Gulf States have far more in common with one another than they do with the average worker in their own country.

By hiding their wealth, America’s richest are effectively entering into a quasi-legal underworld — an exceptionally polite and well-dressed underworld that relies on well-compensated attorneys and tax consultants. That puts them in close contact — given the small numerical size of the global 1 percent — with the dictators, political cronies, quasi-criminal organizations, and outright gangsters who also avail themselves of tax evasion services.

It goes to show how globalization is a double-edged sword, connecting us in a lot of great ways — economically, culturally, morally — but also giving criminals, corrupt politicians, rapacious corporations, and unscrupulous business people the ability to raid the resources of entire societies and stash it beyond the reach of national authorities. Insofar as their interests and activities align — often without even the pretense of national loyalty or social responsibility — we may be seeing the creation of an unprecedentedly powerful transnational class of individuals and organizations that are undermining governments (and the social fabric) across the world.  The disproportionate political influence that has always been exerted by the wealthiest members of society is more amplified than ever.

Bear in mind, there was nothing illicit about any of the business dealings and financial transfers outlined in the Paradise Papers and various other leaks; there is a distinction between tax evasion and tax avoidance, even if the result and motive are the same. And there is certainly nothing new or unusual about the rich and powerful doing everything they can to advance their interests in both the public and private sector. Economic and financial globalization has only broadened the scope and intensity of a familiar issue.

How we go about resolving this will likely require developing a commensurate transnational network of financial watchdogs, or maybe even an international taxing authority (something that is still a ways off given the weakness of global institutions and the lingering, if not strengthening, nationalist sentiment across the world). It is unlikely that any one country could reign in on this practice on its own — after all, tax havens exist because individuals can now easily move their assets (and themselves) to any number of places whenever an unfavorable government policy gets enacted. Barring a coordinated international effort — or some sort of science fiction-style global federation — I am not quite sure how something on this scale could be resolved.

What are your thoughts?

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