Leak-Driven Law

Abstract

Over the past decade, a number of well-publicized data leaks have revealed the secret offshore holdings of high-net-worth individuals and multinational taxpayers, leading to a sea change in cross-border tax enforcement. Spurred by leaked data, tax authorities have prosecuted offshore tax cheats, attempted to recoup lost revenues, enacted new laws, and signed international agreements that promote “sunshine” and exchange of financial information between countries.

The conventional wisdom is that data leaks enable tax authorities to detect and punish offshore tax evasion more effectively, and that leaks are therefore socially and economically beneficial. This Article argues, however, that the conventional wisdom is too simplistic. In addition to its clear benefits, leak-driven lawmaking carries distinctive risks, including the risk of agenda setting by third parties with specific interests and the risk associated with leaks’ capacity to trigger non-rational responses. Even where leak-driven lawmaking is beneficial overall, it is important to appreciate its distinctive downside risks, in order to best design policy responses.

This Article is the first to thoroughly examine both the important beneficial effects of tax leaks, and their risks. It provides suggestions and cautions for making and enforcing tax law, after a leak, in order to best tap into the benefits of leaks while managing their pitfalls.

Keywords: transparency, banks, secrecy, whistleblowers, Panama Papers, FATCA, ICIJ, journalists, intelligence, WikiLeaks, cyber, tax compliance, international tax, OECD, European Union, exchange of information, common reporting standard, social welfare, tax administration, offshore tax enforcement

JEL Classification: H20, H21, H22, H23, H24, H25, H26, H27, H29, K34