Four years after the outbreak of the economic crisis in the euro-zone, we finally see some real evaluation of the European economic system and reality by our leaders. We have some strong voices stating that the EU needs a closer political integration, if it wants to keep the euro.We see the first attempts of a banking union and deeper financial coordination. But also our leaders are realizing that one of the problems of the European economy was the very system that it was based on until now.
A system that it allowed, if not encouraged rich individuals or companies to retain their wealth by tax evading and transferring their wealth in off-shore shadow companies. It also allowed banking secrecy in some countries, better known as tax havens. Tackling tax evasion seems to be high on the political agenda at the moment, and it was even one of the main themes of the recent G8 summit in Lough Erne.
The European tax evasion problem is very high. Just look at the number of tax haven states in Europe, plus how rich they are and then you will understand how big the problem is. And no, tax evasion is not something that exists in the poor "corrupt" countries of the South or Eastern Europe. The biggest problem in fact exists in the richer nations.
Just notice where the majority of the tax haven states lie and under which nation's administration they fall. From Gibraltar, Monaco, San Marino, Liechtenstein, Ireland, Andorra, the City of London, Malta, Luxembourg, Austria, Switzerland, Channel Islands, Isle of Man and Cyprus. Most of them are in Western Europe and are attached to a rich Western European country.
But it does not stop only here. Off shore European territories and dependencies are also in the tax evading list. States like Bermuda, the British Virgin Islands, the Cayman Islands, Anguilla, Montserrat, Turks and Caicos Islands, Jersey, Guernsey are operating as tax havens and these are only the British territories.
If you look at the world map of tax haven nations, half of them are located in Europe or are under a European country's administration. Never mind those who have close links with a European country due to their colonial links. Despite Europe being the second smallest continent in the world, it is to be blamed for more than half of the tax havens on it!
So personally I find it a bit rich and daft, when our European partners pointed the finger at the Greeks for being tax evaders. Tax evasion is a European disease and the worse offenders are the citizens of the richer nations, not those of the poorer. So as tax evasion is a European problem it should be dealt, like every other problem in our continent on a European level and with a single coordinated response.
Until now our leaders had the terrible habit of going after the working class to collect taxes from, instead of going after the rich. This was part of the economic model and system that Europe and America were following, a liberal agenda that was encouraging rich people to tax evade.
According to them, if you place high taxes on the rich, they are going to leave the country and move somewhere else. Or as they claim, taxing the rich would hinder any investment in the country, as it would put off rich multinational companies and investors.
In result the working class and the small local companies had to carry most of the burden of taxation and that made it difficult for any small/medium company to flourish. And so any of us the "average Joes" can not enjoy a more comfortable life or start our own business, unless we tax evade too.
It seems that the very purpose of existence of the tax haven states is to function as such. Small states that have limited natural resources and are dependent to their former colonies or larger neighboring countries, do not have much of a choice if they want to thrive on their own. They can either be tax havens or be absorbed into a larger neighboring state. Also the economic system of the Western countries needs and feeds such havens, in order to have a place to stash their money when in times of crisis.
But that results in a huge loss in tax revenue across Europe. An estimated 1 € trillion is the potential tax revenue lost annually to tax evasion or avoidance in the EU only. Of that, 514 € billion was the EU's total budget deficit in 2012 alone. It is clear that in times of crisis, that is a lot of money. And that the average tax payer will somehow be forced to cover this huge deficit, in order to put his country's and Europe's finances back in order.
Arguably that is not at all fair. We need to find solutions to this problem and either make tax evasion to off shore companies less attractive, or we need to clamp down on the practice altogether drastically. One solution would be to put pressure or even eventually place sanctions on states that are not willing to cooperate with us and encourage this practice. We place sanctions in every other state that disagrees with us for political reasons, so why can't we proceed with something like that?
Well the main problem is that many EU states are themselves tax havens, so we need to first start working from the inside before we tell others how to sort their own finances. And that can be very difficult while some very rich and powerful countries like Britain are tax havens, or some others like Ireland are totally dependent on foreign investment in order to keep their economy going.
If they agree to give up their tax haven status, then the rest of Europe must agree to somehow compensate them for their loss of revenue. In Ireland's case, that it really needs the investments coming from American multinationals, any change on their taxation system will be disastrous. When the American multinationals leave Ireland if any Irish government agrees to harmonize their taxation system with the rest of Europe, then European multinationals must fill the gap and establish branches in the country to keep their economy going.
Otherwise the Irish economy will collapse and will be in need of constant financial support from its partners, but that will leave it totally dependent on them. If there will ever be a decisive solution to the tax evasion issue, it must be collective and with the absolute cooperation of all EU states. When we sort our own finances, then we can ask other states to follow our lead or abide with our rules if they want to do business with us.
Another solution would be to make the whole of EU a tax haven and allow big multinationals to be established across Europe. Lower the tax rate in all EU states and allow companies to flourish. But if such thing ever happens it must also apply to SMEs and every single citizen, not just the large multinationals or big companies. It must be fair to all and not create an unfair environment that will favor the rich again.
We could all pay less taxes and rely on private companies, not the state to provide us with services, social protection and security. That will lead to massive privatizations and I am not sure that countries like Sweden, that has formed a very successful model based on high taxes but very effective public services, will be willing to redesign its model from scraps.
Also what will happen if all do what Switzerland does, can we all allow bank secrecy across the EU? Perhaps nobody should pay any taxes to the state and so it won't be needed anymore. We should let the corporate companies to provide us with health and social security, roads, water, schools and education, public services.
I do not think that any of us is ready to go through with this plan and I do not believe that our leaders are willing to stop receiving any taxes from their citizens. Besides banking secrecy and corporate malpractice have led us to this crisis, so giving more power to the banks and allowing them to be dominant in our continent should not be part of the solution. If anything else, we need to create regulations that will keep the banking sector and the multinationals answerable to some state authority, to avoid another future mess.
Once we sort our own economy we could put pressure on others to follow suit. Since we are the largest market on the planet, multinationals can not afford to avoid us forever. And if we really put our effort in becoming one of the world's main economic powerhouses, then with a united voice we could influence other countries to join us in our battle in limiting tax revenue loss.
We should also crack down on tax evasion of any kind in our countries, upgrading our taxation system by reducing the red-tape and bureaucracy and of course eliminating the black market. The black market is widespread in countries like Greece and Italy, with cheap goods or copies arriving mainly from China , finding their way into our markets.
Tax, salary and retail prices harmonization across the EU will end the practice of importing cheaper goods from poorer member states, into the markets of the rich ones. But that will take even longer to achieve and will need a lot of compromises, mainly from the richer nations. They will have to allow the poorer nations to catch up with them in economic and social terms.
I am curious to see how our leaders plan to limit tax evasion, but I am glad to see that they recognize that this practice is a part of the problem. Will they decide to radically reform our economic system and make it fairer?
Well the European Commission and EU leaders have promised to create one of the toughest tax transparency regimes in the world by passing a new Savings Tax Law by the end of the year.You may read more about their plans here. So things are eventually moving towards a right direction and that is good news for all of us.
