The Panama Papers: What Should Be Done?

The Panama Papers are the latest major leak revealing the extent of tax avoidance among the world’s rich and famous. How big is the tax evasion problem? Since it involves illegal behavior, it is hard to know. A recent estimate of the annual global costs of illegal tax evasion by the economist Gabriel Zucman was $200 billion, but this is probably too low since estimates for the U.S. alone range from $20 billion to $70 billion.

What might be done to reform this massive loss of revenue? In the case of the US, Congress has acted decisively. In 2010, it enacted the Foreign Account Tax Compliance Act (FATCA). Under FATCA, any foreign bank or other financial institution has to report to the IRS accounts held by American citizens and residents. The penalty for failure to comply is a hefty 30 percent tax on the foreign bank’s U.S. income.

FATCA has real teeth, as the chorus of complaints by foreign banks and their governments shows. It also led to real developments. The IRS Offshore Voluntary Disclosure Program, which has netted more than $6 billion in taxes, is a child of FATCA. So are more than 100 “intergovernmental agreements” (IGAs) that the U.S. Treasury has negotiated with various countries. Under the IGAs, the foreign banks can disclose the information about U.S. account holders to their government, which can turn it over to the IRS. This avoids legal problems from the banks dealing directly with the IRS, which is illegal in most countries. Even Switzerland has signed an IGA.

In addition, more than 80 countries (including the U.S.) have signed a Multilateral Agreement on Administrative Assistance in Tax Matters (MAATM), which envisages automatic exchange of tax information among the signatories, using a common reporting standard developed under FATCA.

But problems remain. First, FATCA itself is vulnerable because it can be avoided by using a foreign bank with no U.S. exposure ...

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