According to an Organization for Economic Cooperation an d Development (OECD) study of 20 countries, government pursuit of tax havens resulted in 100,000 tax evaders having to pay close to $20 billion in taxes. However, OECD estimates that the wealthy are hiding from tax authorities $1.4 trillion in assets, not to mention the $1 to $2 trillion that US corporations have sitting in foreign banks and refuse to bring back so they will not be taxed. Similar problems exist around the world, according to the OECD.
One reason for the public debt problems in Greece and to a lesser extent in Italy, Spain, Portugal and Ireland is tax evasion/loopholes on a massive scale combined with large-scale capital transfers out of the country of origin. For example, the Greek finance ministry has repeatedly announced the existence of a few thousand individual who owe the government approximately 37 billion euros, and accounts of at least $140 billion in Swiss banks alone. Greek banks had been reluctant to cooperate with the government, almost as much as foreign banks, until the IMF and EU put pressure on them. Once the money was tracked domestically and abroad, and once the government called for tax compliance, the wealthy and corporations tried to undermine the government, according to the ruling Socialist party PASOK and its leader George Papandreou.
The situation is much better in the US than it is in Greece or Southern Europe, but tax evasion does place on a massive scale by corporations and wealthy individuals. Although the US has a corporate income tax rate of 35%, the average effective tax rate is 18.5%, among the lowest in the world. Thirty large and profitable U.S. corporations (General Electric, Procter and Gamble, and other fortune 500 companies) paid no income taxes between 2008 and 2010, a time that government suffered massive public debt problems owing to the recession, a period when the American middle class was shrinking in real numbers and in terms of its income.
The reason for corporate tax evasion is that congress yielded to corporate lobbying and carrot/stick approach of campaign contributions, thus there is a 50% gap between the official corporate tax rate and the real one. Oddly enough, corporations are pressing for more tax breaks, including profits repatriated from overseas at a reduced tax rate. Republicans want to tax hikes and agree with the corporations, while Democrats are trying to defend what is left of the social programs, a facade of the dying welfare state now replaced by corporate welfare capitalism.
The European Union is dealing with similar issues, but like the US there are politicians who are guardians of capital and yield to its pressures. While the 'informal economy' that escapes taxes is around 7% in the US, in Europe it is double that number, and across southern Europe it is around 20 percent, with Greece leading the pack at 26%, officially and perhaps as high as 50% unofficially. Southern Europe suffering massive public debt problems, is in such a precarious position largely because it has lost control of the 'informal economy', and it has permitted the wealthy and corporations to engage in tax evasion.
This is not to say that public wasteful and parasitic spending must not be trimmed, this is not to say that someone in Italy or Greece who worked 25 years ought to be receiving social security benefits, this is not to say that defense spending should not come down by at least half of current levels, but tax evasion and tax loopholes are at the core of the public debt problem. The question is who subsidizes corporate and wealthy tax evaders and what is government doing about it?
The solution is not IMF-style austerity that undercuts economic growth, reduces revenue, and causes sociopolitical instability. Nor is the solution blind dogmatic pursuit of neo-liberal policies that permit the markets to dictate policy affecting the entire society. In fact, the contradiction with the G-20 this week at Cannes was the agreement on cracking down on tax evaders, on the hand, but not daring to take on systemic problems of finance capitalism that is responsible for the growing socioeconomic gap throughout much of the world, and the root cause of social instability.
Unless and until governments address systemic causes of the crisis of capitalism, there will be no sociopolitical harmony in society, not for Italy, not for the US, not for any country. Unless there is an end to corporate welfare capitalism and a return to social democracy policies that allow for the middle class and workers that produce wealth to enjoy the fruits of their labor, democracy is on its last legs.