Stupid Is As Stupid Votes: Mossack Fonseca and the Tax Inversion Perversion

Co-authored by Cyrus Jabbari, USC student and researcher

When 11.5 million files from the database of Mossack Fonseca were revealed to the public, it sparked an international revelation of how much tax evasion persists around the globe. Wealthy individuals laundering money and dodging taxes is about as novel of a release as the latest Lil' Wayne single - but this is still a remarkable exposé.

Gabriel Zucman, author of The Hidden Wealth of Nations estimates offshore tax havens hold $7.6 trillion - 8 percent of global financial wealth. There could be up to $21 trillion worth of wealth offshore.

This case doesn't involve the typical miser trying to save a buck or two - this is Ebenezer Scrooge on steroids.

The 2.6 terabyte leak shows the Panamanian law firm has helped drug lords, sports stars, Ponzi schemers, kings, presidents, prime ministers, FIFA officials, Mafia members, high-profile thieves, high-ranking politicians, and at least one convicted sex offender launder money, dodge taxes, and escape prosecution over the past 40 years through offshore shell corporations.

The following are some high-profile officials linked to Mossack Fonseca:

"They also include at least 33 people and companies blacklisted by the U.S. government because of evidence that they'd been involved in wrongdoing, such as doing business with Mexican drug lords, terrorist organizations like Hezbollah or rogue nations like North Korea and Iran."

Repatriating Corporate Patriotism

The Panama Papers have prompted President Obama to rail against tax inversions, lambasting corporations for exploiting "insidious" existing loopholes to dodge taxes at the "expense of the middle class, because that lost revenue has to come from somewhere." He also called on Congress to overhaul the corporate tax system.

Meanwhile, the Treasury Department announced the latest in a series of new regulations designed to restrict the inversions.

This has had a positive effect so far. The proposed Pfizer-Allergen $160 billion merger, that would've involved the New York-based pharmaceutical giant jettisoning overseas to domicile in Ireland, is now scrapped, due to the newly announced Treasury regulations.

Cracking down on these shell companies can be tricky, however. Although this corporate secrecy is utilized in shady, illegitimate ways - specifically to launder money by feigning business transactions and obscuring the identity of the owner for tax dodging purposes - they're also used for valid strategic business purposes. This includes raising capital, mergers and acquisitions, real estate transactions, product development, or expanding operations overseas.

Apple, for example, appears to have created SixtyEight Research, which journalists believe to be a front for its interest in developing a car. Walt Disney used a plurality of shell companies to buy land in order to build Disneyworld. If it had bid as Disney, prices could have skyrocketed. Generally, companies don't want to tip their hand to what they're doing, so they establish shell companies to partake in not-ready-for-public-announcement projects.

The problem is, regulating these shell companies will be difficult, since the free flow of capital is a key part of globalization and international relations. This calls into question whether the current system of national boarders and nation states is economically functional in a globalized world.

It's also difficult to differentiate corrupt shell companies from legitimate ones without the proper identities of the owners.

There's a major difference between tax evasion - illegally refusing to pay owed taxes, and then taking advantage of secret accounts to try to hide the money - and tax avoidance, which involves hiring scheming lawyers to find and exploit legal loopholes to minimize taxes.

Therefore, incorporating a business in a country with no corporate income tax, even though all its employees and investors reside in the U.S., and the majority of its operations and sales occur within America, is perfectly legal.

As sleazy as it is, the Panama Leaks have revealed no criminal wrongdoing in terms of tax avoidance, since it's a feature of many tax systems.

Although America has the highest tax rate in the world at 35 percent, the Economist points out two fatal flaws that make it grossly ineffective at raising revenue.

The first is the myriad loopholes and tax breaks that allow corporations to dodge taxes, foregoing hundreds of billions of dollars without that money being reinvested into the economy. The second pitfall is America levies tax on a company's income no matter where in the world it's earned. Contrastingly, every other major developed nation only taxes income earned within their boarders. In America, firms don't have to pay tax on foreign profits unless they bring them home. Unsurprisingly, many don't.

Since all this mischief is technically legal, tax reform that reduces the incentive of tax inversion is needed.

International Tax Review suggests legislation that stipulates if a U.S. company completes an inversion and 80 percent or more of the shares in the foreign holding company are held by former shareholders of the American company, the foreign holding company will be subject to U.S. tax as if it was still incorporated within Uncle Sam's jurisdiction, despite its foreign residency. Ideally, this would make inversions not worth undertaking.

The Economist recommends lowering the corporate rate, eliminating tax breaks, broadening the tax base, and moving America from a worldwide system to a territorial one.

In a New York Times op-ed, economist Laurence J. Kotlikoff stated:

"Eliminating the corporate tax and raising income tax rates or lowering the corporate tax rate and eliminating its loopholes are not the only options. Eliminating the corporate income tax, but making shareholders pay income taxes on their companies' profits as they accrue. This leaves companies with no tax reason to avoid operating in the United States but ensures that shareholders, not wage earners, make up for any revenue losses through higher personal tax payments."

A report from Citizens for Tax Justice advocates for international tax reform:

"If Congress wants to increase revenues and encourage domestic investment, it needs to minimize the incentive for U.S. multinationals to shift profits to tax havens in the first place. It could accomplish this by ending the policy of deferring taxes on foreign income. This would mean that corporations would pay the same rate on all income, whether it is earned at home or abroad (or earned in the U.S., but disguised as foreign earnings). Plus, the tax would be due as the income is earned, eliminating the potential for perpetual deferral."

The Big Picture

This isn't the first situation involving corporate America sodomizing the average taxpayer. President Obama had similar tough talk when it came to reforming Wall Street after the "too big to fail" banks crashed the global economy and plundered the taxpayers to bail themselves out.

"Given the importance of the financial sector, Wall Street reform is absolutely essential... Without it, our house will continue to sit on shifting sands, leaving our families, businesses and the global economy vulnerable to future crises. That is why I feel so strongly that we need to enact a set of updated, common-sense rules to ensure accountability on Wall Street and to protect consumers in our financial system."

And what did we get out of this? Dodd-Frank, which sort of regulates Wall Street - but commercial and investment banking remain intertwined; big banks are even bigger than they were before the Recession; and there are numerous attempts to gut derivative-swap regulation within proposed budgets. Essentially, this bill is the Swiss cheese of regulatory legislation.

What was even more disappointing was none of the major banking executives responsible for the fraudulent behavior were even criminally prosecuted.

While the Mossack Fonseca leaks reveal the largest and most grotesque form of tax dodging and political corruption in recent memory, just remember this type of behavior is legal because establishment politicians have allowed it to be. Nothing has been done about it, because it simply isn't a political priority.

Particularly, the Republican Party believes that high levels of taxation on rich people and capital gains are economically ruinous. If the federal government reinvests that revenue into infrastructure, education, Social Security, welfare, and health care, it will result in the reemergence of the Soviet Union and a hostile Bolshevik takeover of America. Meanwhile, corporate Democrats promise marginal, "pragmatic" change that still heavily promotes big-business interests.

Therefore, there's a dearth of institutional mobilization to tackle this problem.

There's a bevy of interchangeable, null in consequence, Wall Street or corporate-bought politicians like Hillary Clinton, Marco Rubio, Debbie Wasserman-Schultz, Paul Ryan, Barney Frank, Mitch McConnell, or Harry Reid, who deliver stage-focused, poll-driven, saccharine talking points about helping the middle-class and holding corporate America accountable.

Just remember that oodles of big-business campaign donations fund their empty platitudes.

There's a reason why major corporations bankroll these politicians.

In essence, we may get some incremental change, but we shouldn't expect a fundamental shift in this system without a grassroots movement that will demand action. This is a case of global inequality, as billions of people around the world lack access to basic health care, clean water, a quality education, and modern infrastructure while some wealthy individuals and companies hoard capital like a chronic binge shopper stockpiles discount TVs on Black Friday. They're not going to surrender their amassed capital for peanuts.

What's necessary is a collaborative effort amongst developed nations to ensure that the wealth of its richest individuals and companies are not being stashed for private gain, but to help global and domestic communities in poverty. We should at least strive for this effort if we can't efficiently address the corruption of authoritarian regimes, black markets, and networks that propagate such systemic global destitution.

But unless this leak spurs populations in various countries to pressure their respective governments to enact significant tax reforms, this will simply be another wasted revelation instead of a meaningful revolution.