Financial privacy has come under fire in recent years. Although it is obvious that privacy cannot be a smokescreen for criminal behaviour, there is no reason why governments should know every financial detail of individuals and corporations under their jurisdiction without reasonable suspicion of such behaviour.
The current trend to “transparency” in financial affairs, by way of information exchange in tax matters, is not warranted by any notion of justice and should ideally be reversed in the future. Governments are expected to enforce their tax laws, but this needs to take place within clearly defined constitutional and territorial boundaries if individual rights are to be preserved against all sorts of oppression.
First, higher levels of confidentiality allow for better protection of individuals living in deficient jurisdictions where fundamental rights self-evident in a civilized society cannot be enforced. In fact, corruption, expropriation, crime and the persecution of various minorities remain endemic risks in most of the world. The annual Freedom in the World report published by Freedom House estimates that only 45 per cent of the world’s population live in countries that can be considered free. In such cases, enhanced protection of financial privacy in a jurisdiction with better financial privacy rules can prevent the unwarranted loss of legitimate property and even save lives. Financial privacy can be an essential safeguard for fundamental freedoms and for a right as essential as the right to live.
Reconciling the private and public spheres
In essence, privacy cannot be separated from a person’s individuality. Individuals choose what they reveal in the public sphere, and what they keep private. Privacy allows an individual to delimitate his or her private and public spheres, an idea that is grounded in the human condition as a balance between individuality and social interaction. The distinction between the private and public spheres and its respect are traditional features of civilisation. For the same reason people put curtains on their windows or wear clothes in the streets: Whether someone has something to hide or not is not the issue. Such practices are necessary lines of demarcation between one’s individuality and participation in society. In practical terms, the confidentiality due in financial affairs is akin to the professional secrecy of medical doctors or lawyers. It is intended to protect the individual against third parties, including government.
Government intervention into a citizen’s private sphere is in fact more problematic than any other instance, since as a monopoly of coercion government acts without the voluntary or explicit consent of the individuals on whom it applies its regulations. The use of data may be beyond a person’s control and there is often no effective right of recourse or withdrawal: Governments themselves define what they deem as “data protection”.
Yet it is one of the great merits of the Enlightenment, and before that of the old Jewish and ancient Greek wisdom to have recognised that political leaders and government agents must submit themselves to the rule of law like any other person and that the citizen must be protected against their arbitrariness. A government that transforms every taxpayer into a potential tax “evader” distances itself from the rule of law. It places its own prerogatives before the rights of the citizen, thereby giving in to authoritarian or even totalitarian leanings in cases where total transparency is demanded.
Excessive taxation also violates indirectly an individual’s private sphere in that his or her disposable income and freedom of choice are diminished. Standardised government services, such as schools and healthcare, may be also imposed in complete disregard of personal needs and preferences. Therefore financial privacy goes hand in hand with a smaller scope of government and a lower tax burden in preserving an individual’s private sphere.
The primacy of individual property rights
On the specific issue of “tax evasion” or tax avoidance, the refusal to subject oneself unconditionally to excessive taxation may be perfectly reasonable in states deemed “free” or “democratic”. This is especially true in a context in which welfare states generate unlimited public debts and unfinanced promises of future benefits, and cause growing parallel or underground economies.
The attempt to avoid confiscatory marginal tax rates or taxes that are discriminatory and infringe on basic property rights may be lawful in any true sense of the word. Legitimate (honestly acquired) individual property rights always precede a government’s right to tax. As the German philosopher and economic moralist Peter Koslowski has argued, there is no “natural” right to excessive taxation or to progressive taxation on the part of governments, but there is a right to one’s legitimate property arising from productive activity or exchange (such as one’s own labour). It is not government that yields the right to privacy to citizens, but citizens who yield (to some extent) the right to tax to government.
As the 19th-century French economist Frederic Bastiat put it, “Life, faculties, production – in other words, individuality, liberty, property – this is man. And in spite of the cunning of artful political leaders, these three gifts precede all human legislation, and are superior to it. Life, liberty and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.” The right to financial privacy must be protected against government intervention. Only in the case of serious suspicion of crime can bank secrecy be lifted. Otherwise the government would violate the necessary balance between the public and the private spheres; it would no longer act as a subsidiary instrument to keep the peace in a civilised society, but increasingly become a threat to it.
The balance between the private and public spheres enabled by strong financial privacy rules is also justified by the necessary prevention of envy and resentment, which motivates to a large extent the structure of tax systems (such as progressive taxation) and other public policies of income redistribution. In international relations, it follows that the avoidance of excessive progressive tax rates does not violate international private law; this implies that not all governments should prosecute it, let alone assist others in prosecuting it: There is no ethical obligation for a jurisdiction applying more stringent financial privacy rules to assist another jurisdiction in the fight against “tax evasion”, especially if the other jurisdiction violates individual property rights by means of excessive or discriminatory taxation.
The often-heard argument that citizens must comply with the tax laws, voice their dissent by participating in the political process or move out to another country is in fact the true offensive proposition: Governments do not own “their” citizens or the territory of their country. Political participation is costly and usually not an option, not least because the governance structure of large centralised states often resembles an oligarchy: The policy differences between the largest political parties tend to be negligible and an individual’s actual choice is insignificant.
The idea that representative mass democracy ensures a sufficient guarantee of legitimacy for any kind of tax system is a naïve point of view that overlooks the intrinsically coercive nature of government action as well as the personal motives of its agents. Government is a utilitarian organisation, and it is made up of human beings prone to pursuing their own electoral, financial or other interests. One of the great lessons of history is that governments as monopolies of force should not be idealised or romanticised into infallible incarnations of the “common good”: In the 20th century, the worst abuses of individual rights were committed in the name of the state, and repressive political regimes remain the main cause of human oppression around the world today.
In democracies, governments may be viewed as generally benevolent, but this does not prevent them from usually supporting policies likely to keep them in power, even if those policies are known to be at the expense of freedom and prosperity. Unlimited unfunded welfare states are a typical case in point; costs are difficult to identify immediately and the burden can be shifted in part to future generations of taxpayers through unsustainable levels of public debt. Both theory and practice suggest that the only consequence to be expected from an overall weakening of financial privacy is a rise in taxes and a loss of freedom for everyone.
Total transparency toward the state, by the logic of the fight against “tax evasion”, degrades citizens by analogy to the rank of “tax prisoners” that should be prevented from evading their “tax prison”. This is far off from any humane vision of a just society that recognises that individuals are at the origin of all wealth creation and that there can be no primary moral claim on the part of government on wealth that would not exist if it had not been for the decision and effort of those who engaged in productive activity to create it. This does not question the fact that tax laws should be respected, but tax laws cannot justify lifting the fundamental human right of financial privacy as a constitutional safeguard against abuses, including government abuses.