On Sunday, a massive data leak popularly called the Panama Papers revealed who among the world’s wealthy are hiding their millions from taxation — and people all over the globe have been quick to criticize international tax havens like Panama for laws which they believe effectively encourage such evasion.
U.S. political leaders have been quick to add their voice to the outrage.
“There is no doubt that the problem of global tax avoidance generally is a huge problem,” Obama told reporters at the White House on Tuesday. “The problem is that a lot of this stuff is legal, not illegal.”
However, some critics have suggested that global tax havens exist right within American borders, and that individual states’ legal systems encourage it.
“There’s a big neon sign saying the U.S. is open to tax cheats,” John Christensen, executive director of the Tax Justice Network, told the Associated Press.
According to Christensen, the U.S. ranks third in the world in financial secrecy — behind Switzerland and Hong Kong — with states like Delaware, Nevada, South Dakota, and Wyoming having tax systems that are particularly friendly to individuals hoping to stow their wealth in secret.
To those calling for global tax reform, it’s also problematic that the United States will not share financial information about foreign clients such that other countries can better identify their own tax dodgers — even though the U.S. demands that other countries do so — the AP reported.
Since 2014, “more than 90 countries have signed on to an information-sharing agreement set up by the Organization for Economic Cooperation and Development,” wrote the AP. “The U.S. is among the few that haven’t joined. American banks don’t even collect the kind of information foreign countries would need to identify tax dodgers.”
In short, critics say that the United States is both a site of tax evasion and a source of the problems in cracking down on it. “Washington’s independent-minded approach risks tearing a giant hole in international efforts to crack down on tax evasion, money laundering and financial crime,” the Tax Justice Network wrote in a report last year. It also added that foreign elites have “used the United States as a bolt-hole for looted wealth.”
According to financial crime experts, individual U.S. states compete with one another to make it easier to set up corporations, so much so that it’s occasionally the case that nothing is known about who even owns the corporations — which makes it that much harder for them to be taxed properly, if at all.
“We have states that set up corporations where there’s no information about ownership,” Jack Blum, a Washington lawyer who specializes in financial crime, told the AP. “The states make a lot of money doing that.”
By lowering business and incorporation licensing fees and demanding little information on ownership, these states attract a lot of business, which to critics means that there is little to no incentive for these states to change their laws. Likewise, these consistently lax laws provide even more of a reason for shell corporations to continue popping up in the United States.
“Nevadans will continue to see nefarious business practices like those reported in the Panama Papers if state officials don’t change the laws of incorporation,” Rep. Dina Titus, D-Nevada, told the AP.
“It is time for the state to tighten its disclosure and liability laws and remove the sign from our front yard that says: ‘Sleazeballs and rip-off artists welcome.’”