The media has breathlessly reported on the massive data breach of Panamanian law firm Mossack Fonseca. Much of that coverage has involved the politicians and other figures whose activities revealed corruption, ethical lapses, or dishonesty and wrongdoing. That includes Icelandic Prime Minister Sigmundur David Gunnlaugsson, who has “stepped aside” for an unspecified period of time after his ownership of a holding company established by Mossack in the British Virgin Islands was discovered. There’s been no indication so far that there was anything legally wrong with the company or its activities, or that he pursued favoritism on behalf of his financial interests while in office. However, he failed to disclose his assets in Iceland’s parliamentary register of MPs’ financial interests and was not forthcoming with his constituency.
In other words, like most of the stories from the Panama Papers that are dominating the news, Gunnlaugsson’s is one of only tangential relation to the actual business of Mossack Fonseca. Had he been a private citizen with the exact same legal and business arrangements, no one would care. Where he erred was on his responsibility to disclose his holdings and maintain the trust of his citizens.
Nevertheless, his and other similar stories have been framed as proof that something must be done about “shady” offshore dealings. In fact, the entire media coverage from start to finish has been littered, either directly or through implication, with myths.
Here are a few areas where the media, and the public discussion surrounding the Panama Papers, has more often than not gotten it wrong:
Myth 1: Tax Avoidance and Tax Evasion Are Both Wrong
On the tax front (the instances of corruption representing a different matter entirely), most all of the media and political hand-wringing surrounding the Panama Papers has been due to a willful blurring of the lines between tax evasion and avoidance. Yet in reality there are significant legal and ethical differences between the two.
Tax evasion is a crime, and involves the deliberate disregard of tax obligations. Evasion can be committed by lying about assets or engaging in fraud. Banking in jurisdictions that respect privacy rights can be used by unscrupulous individuals as part of a strategy to commit tax evasion. But so can using cash. Both also have legitimate functions, making it unfair to treat everyone who uses privacy respecting services (or cash) as suspect and unwise to create rules on that assumption.
Tax avoidance is not a crime. It is, in fact, simply obedience to the law as it is written. Lawmakers bemoan those who seek to minimize their tax burdens when doing so shines a negative light on the quality of the laws they have written. But in other instances they encourage it. When politicians provide tax credits, for instance, it is with the understanding that those who use them are doing so to avoid paying more tax than they have to. And when they seek to discourage other activities through excise taxes, they are counting on people changing their behavior to avoid the tax. Politicians understand and even expect tax avoidance when it suits them, and decry it when it does not.
Most of what the media directly claims or indirectly implies to be tax evasion is merely legal avoidance. It is individuals choosing to do business in jurisdictions with less onerous tax codes. Not only is this legal, but it has concomitant positive benefits. Tax competition between jurisdictions serves as a check on political greed, and pressures governments to adopt tax policies designed to grow economies instead of just treasuries.
Myth 2: Offshore Financial Services Are Only Used for Wrongdoing
Opportunists who have long despised the ability of individuals to legally flee from confiscatory tax rates want to make the Panama Papers story about financial privacy. It’s not. That makes no more sense than if the story of Congressman William Jefferson, found with a stash of ill-gotten money in his freezer, had been spun as one primarily about cash or kitchen appliances.
Yes, bad people also use legal and financial services. Sometimes they even do so to help them conduct their illicit activity. They also sometimes use airplanes to meet with co-conspirators, or cash to conduct black market sales. That’s not an argument for depriving law abiding citizens of then use of either of those. The fact that corrupt politicians made use of the legal services of Mossack Fonseca does not mean that something must be done about Mossack Fonseca and similar firms. It suggests, if anything, that something must be done about political corruption.
The idea that anyone benefiting from the legal services of Mossack Fonseca, and others who specialize in meeting the needs of international clientele in establishing new businesses and trusts, simply does not match reality. They file incorporation papers. What is then done with those companies is on the people who actually manage them.
Myth 3: Indiscriminate Leaking of Private Financial and Legal Information, Especially of the Rich, Serves a Public Good
While exposing potential corruption of politicians who might be looting their national treasuries or hiding potential conflicts of interest likely serves a public good, massive data leaks that include innocents are still a massive violation of privacy. The Panama Papers leak consists of confidential and legally protected communications, including those of the vast majority of innocent Mossack Fonseca clients caught up in the data for no other reason than that they used ordinary legal and tax planning services that a small number of elites may have been simultaneously misusing.
Whether or not the individuals who did nothing wrong but were exposed anyway are wealthy or not shouldn’t matter. They have the same expectation of privacy as the rest of us. Moreover, the implication that they are “hiding” their wealth even when all tax laws have been followed presumes a public right to individual financial information that does not exist. No one accuses an individual with an ordinary savings account who chooses not to broadcast their account balance as “hiding” their money. That information is simply their business and their business alone.