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illicit financial flows

Panama Papers underscore need for fair tax systems

Sri Mulyani Indrawati's picture

High-rises and hotel buildings in Panama City, Panama. © Gerardo Pesantez/World Bank

The so-called “Panama Papers” scandal reminds us that concealing wealth and avoiding tax payments is neither uncommon nor — in many cases — illegal. But the embarrassing leak exposes something else: The public trust is breached when companies, the rich and the powerful can hide their money without breaking the law. If this breach is left unaddressed, those who aren’t rich enough to hide money will be less willing to pay and contribute to the social contract in which taxes are exchanged for quality services.

As finance minister in my home country of Indonesia, I saw firsthand how a weak tax system eroded public trust and enabled crony capitalism. Shadow markets arose for highly subsidized fuel, family connections secured jobs, and bribes helped public servants beef up their salaries. Tax avoidance among the elites was common and the country couldn’t mobilize the resources we needed to build infrastructure, create jobs, and fight poverty.