The so-called ‘Paradise Papers’

We should be careful not to join cohorts of accusers who themselves act illegally to bring ourselves at the receiving end of all sorts of unfair accusations — By Anil Gujadhur

Things that Matter

 The International Consortium of Investigative Journalists (ICIJ) released on 5th November last details of electronic documents hacked from the files of international law firm Appleby, which also has a small branch in Mauritius. From the 13.4 million documents illegally hacked from the law firm’s database, the so-called ‘Paradise Papers’ disclosed that several well-known personalities and big companies had funds belonging to them placed in what are called “tax havens”, notably places in different countries of the world which have low taxes.

The aim of the account holders is to minimize the amount of tax they pay on such amounts, under advice from experts in the field. They don’t do it directly: skilled managers like Appleby with in-depth knowledge of financial markets do so.

One may recall that a similar disclosure called ‘Panama Papers’ from Panamanian law firm Mossack Fonseca taken in a similarly stealthy manner was publicly released in 2016. Last year, the disclosures led to widespread outrage that so many political and other personalities were hiding away their money abroad whereas sharp income and wealth inequalities were rife in the home countries. This time, public reaction was more muted but the sense of outrage was no less, given the personalities and big companies concerned.

No one should condone tax evasion, which is a deliberate action taken by people with income and property to illegally not pay the fair amount of tax due by them. Unlawful action of this sort shifts the burden of public expenditure on those who comply with law and are less able to evade the tax. And this is unfair.

On the other hand, once certain people have paid the due amount of tax on monies belonging to them, they take action by lawful means to avoid having to pay taxes again on such amounts. This lawful action is called tax avoidance, not evasion. In such cases, the after-tax amount is lawfully placed by specialist managers into places which have advantageous, typically low tax rates, which the French pejoratively call “paradis fiscal”, hence the expression ‘Paradise Papers’ for the papers hacked from law firm Appleby during last November’s haul by hackers.

The false impression is created in the public mind in rich countries that tax avoidance and tax evasion are one and the same thing and that this is facilitated by the smaller developing economies like Mauritius, Seychelles, the Caribbean islands, Panama, Bahamas, etc. It is difficult to even contemplate that pension funds or their basic contributors, for example, which use offshore jurisdictions like these to invest into higher yielding securities globally would not be paying their tax dues in the countries of origin beforehand.

Nothing could be further from the truth: the global centres from which the funds actually go out in the first place into the other low tax jurisdictions are much bigger places like Delaware and New York in the US, London, Luxembourg and Switzerland in Europe. Shifting the blame helps rich country governments explain numerous failings and disparities of public policy to their own populations: why we can’t increase welfare spending, why we’ve got to tax you more, why we can’t deal with the problem of economic inequality, etc. The buck is passed on to the low-tax jurisdictions, the havens so-called, according to the explanation they and their media give from time to time.

Mauritius created an international financial centre in the late 1980s in response to the need to diversify the economy and to employ trained persons in callings offering reasonable pay to many who would have otherwise remained unemployed. We should be careful not to join cohorts of accusers who themselves act illegally (stealing data) to bring ourselves at the receiving end of all sorts of unfair accusations. That said, we should also not deliberately do the same thing as do the hackers of Appleby – criminally obtain undue advantages by loosely vetting those who do business with us in defiance of strict international norms of conformity with the law and regulations we’ve endorsed as our norm.

 * * *

 The US Fed

 Janet Yellen is on her first term as Chair of the US Federal Reserve Bank (the Fed).This term ends in February next year. Usually, the Fed Chair’s tenure of office is extended for a second 4-year term. Not in the case of Janet Yellen, because, despite her brilliant qualifications and experience and skilful management of post-financial crisis America (the US economy is doing well; unemployment is low at around 4% and inflation steady at below 2%), she is perceived by the White House as an Obama nominee and, therefore, needing to be replaced.

Jerome Powell, a non-economist but a Republican, who had previously been appointed to the Fed by Obama himself, has been nominated by President Trump to succeed her at the Fed’s head. Ms Yellen will therefore not get a second term like her predecessors.

Be that as it may, Fed watchers have breathed a sigh of relief at this new appointment, given that Mr Powell has not voted against a single interest rate decision of the Fed under Ms Yellen’s cautious stewardship of the Fed. The choice could have been worse. Mr Powell is seen as less likely to disrupt matters than other appointees President Trump had contemplated in replacement of Ms Yellen.

 Why does it matter?

One may well ask the question as to why a remote decision such as this should be a concern for us. The answer is that, with Jerome Powell at the head of the world’s most powerful economic institution – the Fed – the world will not have to deal with a bull-in-a-china-shop situation. He will not be the iconoclast who might have made the situation chaotic and landed America – and the rest of the world – into a perilous situation.

It matters who heads the Fed because the US dollar is still the world’s reserve currency, America is still the world’s number one economy and the majority of global trade is carried on in US dollars. The situation globally has been kept stable by the Fed’s (and other Western central banks’) pursuit of a low-interest rate policy since the financial crisis of 2007, along with over the last 10 years of huge amounts of liquidity injections into the financial system (called Quantitative Easing, QE) in several trillions of dollars by the US Fed and other key central banks.

Injecting this serum has helped stave off a mighty global downturn as from 2007 but the objective now is to enable central banks to once again function normally as lenders of the last resort to the market after removing the huge liquidity crutches afforded by QE.

Any inept unwinding of this mass of central bank liquidity has the potential to send markets in diverse parts of the world into an unmanageable tailspin. So, you need responsible hands – like those of Ms Yellen – to carefully time the removing of all that liquidity from the markets without causing a global panic or sending economies across-the-board into recession. One just has to recall the East Asia crisis of 1997 when huge amounts of US dollars were suddenly withdrawn from certain heavily indebted East Asian economies at a time inflows of US dollars dried up completely. A persistent wave of panic and economic disruption visited upon these globally open countries for some years.

No one wants such a traumatic experience to come back. A sober management of policy actions will give global markets the right signal. Financial markets, propped up by cheap and easy availability of liquidity, have been bullish since the past ten years and not necessarily because economic fundamentals of listed companies or bond issuers are at their brightest.

Speculation has been rife in pushing up stock and bond prices to ever higher peaks. Stock market indices have kept soaring to unprecedented highs. Any untoward signal may cause this bubble to burst inordinately, as it happened in 2007, ushering in global instability and an even more persistent quest for protectionism and nationalism as what led to Brexit and the election of Mr Trump.

An open economy such as that of Mauritius will stand exposed to grave dangers in such a case. It is the reason why we should pray that the voice of reason guides the world’s key economic institutions like the US Fed. The cautious Ms Yellen, the first female Chair of this institution in its history, will not be here but Mr Powell, in her stead, may well avert any catastrophic mishandling of the situation.


*  Published in print edition on 17 November 2017

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