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Panama Papers show need to crack down on tax cheats

A marquee on a building in Panama City,

A marquee on a building in Panama City, Panama, lists the Mossack Fonseca law firm, one of the leaders in setting up offshore bank accounts for the rich and powerful, April 4, 2016. Credit: AP

The stunning revelations that have emerged from the trove of documents known as the Panama Papers keep coming — and the explosive aftermath has rippled across the world.

Millions of pages of confidential material, which came from files of one Panama law firm, were leaked to a German newspaper and then reported on by the International Consortium of Investigative Journalists. The documents indicate that wealthy private individuals and public officials stowed their money in offshore shell companies to avoid taxes in their home countries. The scandal has resulted in the resignation of Iceland’s president, and it implicates individuals close to Russian President Vladimir Putin and relatives of China’s president, Xi Jinping. Even Britain’s prime minister, David Cameron, owned shares in an offshore trust set up by his late father. He sold them six years ago for a profit on which, according to some reports, he didn’t pay capital gains taxes.

More than 200 individuals with U.S. addresses appear in the files, though it’s unclear how many of them are Americans.

It’s a complicated web that may seem irrelevant to those of us filing our tax returns ahead of this year’s April 18 deadline or waiting for small refund checks. But it’s not, because it deprives our cash-strapped government of funds.

Much of the effort to evade taxes is legal. And that’s the problem. It’s a world where wealthy individuals and corporations do everything they can to avoid the taxes that should take a chunk of their wealth each year. They use “havens” and “shelters” — words associated with safety, warmth and comfort, but instead are protective devices for the rich and sometimes-famous to keep money hidden from view.

Even without major Panama Papers connections, don’t be fooled; there’s plenty of tax avoidance in the United States. Hundreds of thousands of firms incorporate in or establish shell companies in states like Delaware to avoid a big tax bill. They don’t need a Panama law firm or an offshore company.

Then there’s the legal practice of corporate inversions, when U.S. firms acquire smaller foreign-based ones and move their addresses on paper to avoid the tax impact here. Between 2015 and 2024, U.S. coffers could lose $19.5 billion just due to inversions, according to Rep. Steve Israel (D-Huntington), who has led on the issue. President Barack Obama may have lowered that number a bit by recently making inversions tougher to do through new Treasury Department rules. Those rules had an immediate impact, squashing Pfizer’s $160-billion plan to merge with Ireland-based Allergan. But they only limit parts of the activity.

Perhaps the Panama Papers will be the impetus to change one of the worst-kept secrets, abroad and closer to home. Real change requires congressional action. Israel takes it one step further in his bill, which would allow companies to bring back money based overseas at a special tax rate, and then use the funds gained for infrastructure improvements. Political candidates talk of closing loopholes. It must be more than an applause line. Laws and regulations must be tightened, and corporate inversion and other methods of evading taxes must end. Then, we hope, tax avoiders will have nowhere to hide. — The editorial board