Following the Panama Papers leak of files from last year, earlier this month, the Paradise Papers leak once again threw light on the world elite’s hidden wealth. 3.4 million confidential documents relating to offshore investments were leaked to Suddeutsche Zeitung, the same German newspaper that took hold of the Panama Papers in April, 2016, which then shared them with the International Consortium of Investigative Journalists (ICIJ) and a network of more than 380 journalists. The files reveal that large corporations, heads of state, politicians, celebrities and High-Net-Worth individuals are investing huge amounts of money in offshore tax havens. Surprise, surprise. And whilst about 100 media outlets worldwide are pouring over the findings, that include the Queen’s private estate allegedly being invested in a Cayman Islands fund, as well as offshore dealings by Donald Trump’s cabinet members, advisers and donors, a lot of people have asked the question: “What exactly is the problem considering that tax avoidance is legal?”

Panama Papers vs. Paradise Papers

Of course, as with everything, opinions are divided with many ordinary people finding tax avoidance to be offensive and unfair, while others feel that it is a perfectly fine way to save some of their hard-earned money. However, does the muted response to the Paradise Papers scandal show that we don’t care as much anymore?

Following the leak’s predecessor, the Panama Papers, thousands of people gathered to protest, which immediately resulted in politicians stepping aside and losing their jobs. Iceland’s ex-Prime Minister, Sigmundur Davíð Gunnlaugsson, resigned amid widespread protests and outrage over allegations that his family had sheltered money offshore. In contrast, it seems like this time around, the public anger has been on a much smaller scale. Last year, US President Barack Obama called for international tax reform in the wake of the Panama Papers, whilst admitting that “The problem is that a lot of this stuff is legal, not illegal.” However, whilst some wealthy public figures suffered personally and governments and organizations have put out a handful of fixes in recent years, the system remains perfectly intact.

So, are we all silently waiting for that potential reform, or have we simply come to terms with the fact that tax avoidance is fine and the rich and powerful will continue dodging tax?

The morality of offshore tax havens

It is a fundamental principle of democracy that everyone obeys the law. The law applies to everyone. The law states that we have to pay taxes. Whilst in most cases, putting your money outside of your financial regulations is legal, many argue that dodging taxes is morally wrong. In addition, according to a  letter to world leaders from May 2016, more than 300 economists argue that: “The existence of tax havens does not add to overall global wealth or wellbeing; they serve no useful economic purpose.”

By sheltering trillions of dollars offshore ($10 trillion according to Boston Consulting Group), the world’s top end make their money untaxable, depriving governments of hundreds of billions of dollars of tax revenues each year. Niels Johannesen, an Economics professor at the University of Copenhagen discusses the consequences of this behaviour: “Either a lot of people pay more taxes [to compensate], or there’ll be less public goods - schools, hospitals, and so on.” He also adds: “Given that this offshore wealth is to a large extent owned by the very wealthiest… it is people who should be paying the highest taxes who are evading the most.”

Thus, not only do offshore tax havens not serve any economic purpose, but they’re also immoral and deprive economies of funds that could be used on improving public services. Some politicians are recognising the issue, such as the Leader of UK’s Labour Party Jeremy Corbyn, who promised that if his party wins the next General election, it would clamp down on tax havens and end loopholes. The Paradise Papers have once again highlighted the need for this to happen. Yet, the notion that the majority of those involved are ‘getting away’ with tax avoidance, paired with the seeming apathetic response from the public appear to be rather worrying.

Following the shock Genereal election result from this morning, Finance Monthly reached out to Mark Dampier, Head of Investment Research at Hargreaves Lansdown, who discusses the impact that the election result will have on the UK investment market.

The current siuation is very different to the Brexit vote of last year. While the result is a surprise and may lead to another election later this year – market reaction has generally been subdued so far because the Tory government will remain in power, but a hard Brexit now looks less likely.

There will be no dramatic changes in domestic policy immediately, as there would have been under Labour, had they got in. Therefore, I see no need to make any rash investment decisions, given the range of possible outcomes over the next few weeks. Investors should sit tight or even buy, if the opportunity arises.

Overseas investment is unaltered by the election apart from changes to sterling, which should act positively as we have seen over the last 12 months. That said - remember a softer Brexit could see sterling recover.

We have always advocated a level-headed, long-term approach to investing, and I would urge investors to resist the temptation to make short-term, knee-jerk reactions. We could see some volatility over the coming days as more details emerge about the new government.

Once a government is in place, I expect the dust to settle fairly quickly. There will be a dawning realisation that everything has changed and nothing has changed. For the vast majority of UK companies, it will be a case of “business as usual” on Monday. Many companies have been around for decades and seen governments of both colours come and go.

In our view, investors should continue to pursue their long-term strategy. The international nature of the UK market means that in reality, the election result matters little for many UK-listed companies.

Chris Saint, Currency Analyst added: “Uncertainty over the formation of the next government means sterling exchange rates will inevitably remain volatile in the days ahead, as markets try to fathom how this could impact upcoming Brexit negotiations. However, the pound’s initial declines may have been tempered by hopes that any eventual deal which requires cross-party support might actually imply a ‘softer Brexit’ approach which could see the UK keep trade access to the EU single market for trade.”