The Cost of Tax Havens - An Analysis of Empirical Data (6/16/14)

Jacques Leslie, The True Cost of Hidden Money: A Piketty Protégé’s Theory on Tax Havens (NYT 6/15/14), here.

GABRIEL ZUCMAN is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself? 

Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality. 

Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed. 

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Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent. 

Only multinational corporations and people with at least $50 million in financial assets usually have the resources to engage in offshore tax evasion. Since the less wealthy continue paying taxes, the practice deepens wealth inequality. Indeed, newly invigorated efforts in the United States to curb personal tax evasion, codified in the 2010 Foreign Account Tax Compliance Act, have armed the Internal Revenue Service with strong sanctions to levy on foreign banks that fail to disclose accounts held by American residents. This has made it “more difficult for moderately wealthy individuals to dodge taxes,” Mr. Zucman says, while the richest account holders still have more elaborate evasive techniques at their disposal. 

“There’s a profound shift in attitudes that happened in the 1980s,” Mr. Zucman says. “In the ’50s, ’60s and ’70s, taxes were much higher, yet it was not considered normal to try to aggressively minimize your tax bill and even to evade taxes.” He finds it “no coincidence” that the era of widespread tax evasion began in the Reagan era, with the rise of the idea that government is a beast that must be starved. 

Because large-scale tax evasion skews key economics statistics, it hampers officials’ ability to manage the economy or make policy, Mr. Zucman says. It erodes respect for the law, preventing the government from carrying out one of its essential tasks. And it discourages job creation, since it rewards people and corporations for keeping money overseas, instead of investing it domestically.

Despite the obstacles that the tax compliance act faces, Mr. Zucman believes its passage marked a global turning point, starting an era of “remarkable progress” in reducing bank secrecy. Even so, only an international approach has a chance of stopping tax evasion, he says. Its most important feature would be a global financial registry, which would track wealth ownership in the same way that Americans routinely record real estate holdings now. “If you can’t measure wealth,” Mr. Zucman says, “it’s almost impossible to tax it.

Of course, what we who practice in this are find is that the offshore game can be played by people with a lot less than $50 million in financial assets.  The Swiss and other tax haven banks hustled and certainly preferred the very affluent, but dipped down to accept accounts in some cases with even less than $100,000.  I don't have enough data to know what that might mean to Mr. Zucman's conclusions (it seems like, if the data I have are representative, it would accentuate the issue of hidden national wealth).  Of course, that side steps the issue of whether wealth and resulting income is even a proper basis of measuring ability to pay tax.

As the title article notes, the genre of analysis is in the style of the controversial research and book by Thomas Piketty, Capital in the Twenty-First Century (2014), here.

Professor Zucman's web page is here.  A prior paper:  Gabriel Zucman, The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors (2/25/13), here.

See also, Paul Krugman, Offshore and Underground (NYT 4/11/14), here.

And, while on an NYT roll, see

Lynn Vavreck, Definition of ‘Rich’ Changes With Income (NYT TheUpShot 6/16/14), here.