On 19 February Ecuador is set to become the first country in the world to hold a national referendum about tax havens.
Despite the Panama Papers, and other scandals repeatedly making international headlines, and despite noisy assurances about action from political leaders, the offshore system is as strong as ever. Perhaps this innovative referendum can offer a new way forward.
Ecuador is right to be concerned about this issue because an estimated $30 billion dollars, a sum equivalent to one third of Ecuador’s GDP, is hidden away in tax havens abroad. That is equivalent to $2,000 for every Ecuadorian citizen, which has been lost to their country’s economy.
These super-rich individuals and multinational corporations in Ecuador are no different to those in Britain. They are both quite happy to use the fruits of public investment in modern roads, airports, universities, wider internet access and other infrastructure projects. Yet, with no sense of irony, they happily secrete their vast sums offshore to avoid contributing to the taxes that pay for the public realm they enjoy and which enables them to maximise profits from their business activities.
This corporate scrounging phenomenon has reached gargantuan proportions. According to Oxfam, a conservative calculation of the sum hidden by wealthy individuals in tax havens across the world is 7.6 trillion US dollars. That figure does not include the amount stolen away by multinational corporations.
But why haven’t we seen more serious progress on this issue around the world? One reason seems to be the scale of involvement by politicians and civil servants in the abuse. The Panama Papers alone revealed that 12 world leaders, past and present, and 140 public officials were using tax havens. This places a huge question mark over the rigorousness of systems set up to catch the tax cheats and their armies of creative accountants and lawyers.
For that reason, I think the referendum question in Ecuador is really interesting. Alongside the Presidential and National Assembly elections, the people of Ecuador will be asked: Do you agree that, for those holding a popularly elected office or for public servants, there should be a prohibition on holding assets or capital, of any nature, in tax havens? Politicians and public servants will have a year from the referendum date to repatriate their money or face the sack.
The plebiscite is the initiative of the outgoing progressive President Rafael Correa, who calls it an “ethical pact”. It is an attempt to renew the social contract between the population, their elected representatives and public servants in a common effort to stop wealthy elites routinely abusing the system.
The referendum is just the latest in a series of bold reforms by the Correa government over the last decade designed to bring fairness to an economy in the world’s most unequal region.
In spite of these wealthy tax cheats, Ecuador has achieved unparalleled growth rates and economic redistribution. This has been achieved by reining in the banks, renegotiating unfair international debts and oil contracts with giant multinationals, to tripling tax revenues by increasing tax collection levels not by hiking tax rates. This has enabled Ecuador to slash poverty by 30%, cut inequality and introduce free health care for all, in addition to a free national education service including free higher education.
In short, Ecuador has shown what can be achieved with the political will to put people first by pursuing an agenda that prioritises investment over cuts.
Even with extraordinarily low oil prices, the strong dollar and the devastation of a huge earthquake in April 2016, which pushed the country into recession, the government maintained funding for public services. Correa chose to protect those most in need and to continue investing in the economy which is now growing again.
How much more would be possible if that $30 billion dollars hidden in tax havens were available in the economy, stimulating growth, funding jobs and contributing towards tax revenues?
But Ecuador is well aware that this battle will not be won at a national level alone, which is why it has brought its battle to the United Nations in New York. It has taken on the presidency of the influential G77 group of 134 developing countries, which is the biggest grouping in the UN, representing over half the world’s countries. President Correa has pledged that Ecuador will put tackling tax havens right at the centre of the presidency.
Disgracefully, the UK and France blocked the proposal at the 2015 Addis Ababa UN Finance for Development conference, despite overwhelming support from the developing world and civil society groups.
But that was before the revelations contained in the Panama Papers along with other exposés and the mood is now changing. There has never been more public outrage on this issue. There has never been so much concern by Western governments about the role of secretive tax havens in facilitating organised crime and terrorism. This means there has never been a better time to construct a global consensus powerful enough to overcome the huge vested interests at play.
Ecuador’s leadership on this issue, in terms of their innovative referendum at home and by raising it on the world stage, could prove to be pivotal in galvanising other governments to tackle this scourge.
Ecuador has already done a great service for the world, and their innovative action could prove to be the catalyst to deliver a fundamental shift in that facilitates worldwide tax justice. We owe them a huge debt of gratitude.
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