London's iconic Trafalgar Square was transformed into an interactive, tropical tax haven by Oxfam, Action Aid and Christian Aid to clamp down on tax dodging in 2016. Photo: Andy Hall/Oxfam

Tax avoidance and evasion will only grow if Europe doesn’t have the guts to confront the world’s second largest offender.

The European Union released today its updated blacklist of tax havens. The welcome initiative attempts to crack down on actions that rob countries of critical public resources to improve the lives of their people.

But it’s a half-hearted one, due to one glaring omission: the US.

The US ranks second after Switzerland on the Tax Justice Network’s Financial Secrecy Index. And a new Oxfam report sheds light on why the EU has given the world’s most powerful country exactly what it wants.

A get-out-of-jail-free card.

Pushing more people into poverty

At the recent World Economic Forum, Dutch historian Rutger Bregman took the Davos elite to task for not paying its fair share of taxes. “I hear people talking the language of participation and justice and equality and transparency, but then almost no one raises the real issue of tax avoidance, right?”

Tax havens became a problem in the 1970s and ‘80s when global finance was liberalized. After the 2008 financial crisis, the issue took even greater prominence. Scandals like the Panama and Paradise papers fueled popular anger as well as international cooperation to tackle the financial malpractice.

Tax havens essentially facilitate tax evasion by wealthy individuals and tax avoidance by multinational corporations—deepening a global inequality crisis that now has 26 people owning the same wealth as the poorest half of the planet. Both respectively cost developing countries an estimated $70 billion and $100 billion a year (which is more than the foreign aid they receive).

That’s enough to provide an education for all of the 262 million children now out of school. In fact, tax dodging is a double whammy for poor people. Besides cutting essential services, governments compensate for it by increasing consumption taxes. That pushes even more people into poverty.

Ok, so why is the US a tax haven?

The US initially led the fight against tax havens. In 2007, the US dealt a blow to Swiss banking secrecy by fining Swiss banks billions of dollars for their complicity in tax evasion committed by US nationals.

Three years later, the US adopted a comprehensive tax evasion remedy: the Foreign Accounts Tax Compliance Act (FATCA). The law compels foreign banks to send information about their US customers to the IRS. Banks that don’t comply are charged a hefty tax on their transactions with the US—a death sentence given the dollar’s status as the global clearing currency.

FATCA may be a good deterrent against tax evasion by US nationals, but it is not fully reciprocal. Foreign tax authorities do not receive as much information as the IRS gets, so it is not a good solution for the rest of the world. Through a multilateral process, more than 150 countries have already or are committed to automatically exchanging banking information of non-residents through a separate framework called the Common Reporting Standard (CRS).

So why should the US be on the EU blacklist? Because refusal to join the CRS is one of the objective criteria to be on it.

The US is getting off the hook because the EU claims FATCA is equivalent to CRS. But that just isn’t true: European tax administrations receive less data from the US to fight tax evasion than what they receive from CRS partners. So it is easier for a French individual, for example, to evade French tax through an anonymous shell company incorporated in the US than in the Cayman Islands. (See table comparing CRS and FATCA.)

The EU must grow a spine

The fight against tax evasion is a compelling illustration of the food chain in today’s geopolitics. While the US does not hesitate to impose drastic extra-territorial sanctions to solve problems unilaterally, the Europeans could have demanded bilateral FATCA agreements to be fully reciprocal. But they withered in the face of US opposition—notably about ending anonymous shell companies.

Meanwhile, smaller tax havens like the Cayman Islands feel screwed because their dirty business migrates to the US. And developing countries are left out of CRS on the ground that they lack the administrative capacity to protect the confidentiality of taxpayers’ information.

The cards are in the EU’s hands. It must grow a spine and put the US on the blacklist. But blacklisting alone won’t work, as banks are not going to flee the US. The next logical step is sanctions against blacklisted jurisdictions and the adoption of a withholding tax similar to the one the US uses under FATCA.

Download Oxfam’s Off the Hook report to learn more about how the EU must go after the tax havens in its midst.