The Hidden Wealth of Nations
The Scourge of Tax Havens
UC Berkeley
How big are offshore tax avoidance and evasion & what can be done about them?
A growing policy concern, yet hard to quantify:
- For some observers, considerable tax revenue losses
- For others, most of the activities in tax havens are legitimate
- On both sides, generally limited empirical evidence
A number of recent initiatives:
- FATCA, automatic exchange of bank information, BEPS
- What can we expect from these policies?
In the book I try to explain how published macro statistics can beused to shed light on these issues
The book is based on a number of recent research papers
- “The Missing Wealth of Nations: Are Europe and the US netDebtors or net Creditors?”, QJE 2013
- “The End of Bank Secrecy?” (with Niels Johannesen), AEJ20143.
- “Taxing Across Borders: Tracking Personal Wealth andCorporate Profits”, JEP 2014
...But much more research needed to offer definitive answers
All figures and data available online at http://gabriel-zucman.eu/hidden-wealth4.
Will also talk about ongoing work “Tax Evasion & Inequality”(with Niels Johannesen and Annette Alstadsæter), 2016
Tax evasion by wealthy individuals
A growing fraction of wealth is beingmanaged by offshore financial institutions
What do offshore centers do?
A great deal of activities, many of which legal and legitimate:
- Investment funds (Luxembourg, Ireland...)
- Shadow banking (Caymans...)
- Treasury management (U.S.-Cayman...)
- Personal wealth management (Switzerland, Singapore...)
But some offshore centers, institutions and instruments also facilitatetax evasion by wealthy individuals
How offshore tax evasion works
- Shell companies
- Fake invoices
- Offshore accounts
- Disconnecting legal and beneficial ownership
What do we know about the magnitude of offshore tax evasion?
- Monthly statistics by the Swiss National Bank
- Systematic anomalies in the international investment positions ofcountries caused by offshore portfolio wealth
- Central bank data on foreign-owned bank deposits
- HSBC leaks and Panama Papers on who owns shell companies
- Swiss data on what fraction of offshore wealth is undeclared(≈ 90-95% prior to 2008, down to ≈ 80% today)
8% of the world’s financial wealth is held offshore, costing at least $200bn
Who conducts tax evasion?
Widespread view that tax evasion has become more “democratic”,and that the super-rich do not evade as they can easily avoid
- View largely based on randomized audit data. Problem: audits do not capture offshore evasion.
- New micro data from amnesties, crackdowns, and leaks shed newlight on evasion behavior of the wealthy.
- With Johannesen and Alstadsæter we use such data in Scandinavia to study how tax evasion varies with wealth.
In Norway, the proba to disclose hidden assets rises sharply with wealth
12% of households with wealth > $36m used the Norwegian amnesty
Similarly, the probability to appear in the Panama Papers rises sharply with wealth
In Sweden too, evasion rates rises very sharply at the top
At the top-end, the use of offshore accounts is widespread
Tax evasion can erase half of the secular decline in wealth concentration
Despite recent policy initiatives, much remains to be done
Automatic exchange of bank information will become global standard by end of 2010s: big progress.
Three obstacles:
- Incentives of offshore bankers
- Financial opacity
- Incentives of tax havens
What is missing: well defined sanctions (FATCA) and a worldfinancial registry
How Swiss bankers torpedoed previous attempts at curbing tax evasion
The Case for a World Financial Register
Tax avoidance by multinational corporations
The taxation of multinationals is basedon 3 principles adopted in the 1920s
Source-based taxation
- Taxes are to be paid to countries where profits have been made
- Not to countries where shareholders live (= residence taxation)
- But how to determine where the profits have been made?
Arm’s length pricing
- Subsidiaries of a same group must compute their profits as if unrelated
- I.e., trade goods and services internally at market prices
Bilateral agreements
- No multilateral agreement like GATT
- Instead, thousands of bilateral tax treaties
The choices made in the 1920s arecoming back to haunt the tax authorities
Each of the 3 core principles for international taxation raises its own issues
Bilateral agreements
- Treaty shopping to generate stateless income
- Example: Google
Arm’s length pricing
- Easy to manipulate transfer prices
- Reference prices often do not exist
Source-based taxation
- Artificial profit shifting
- Tax competition for real investments
What is the cost of multinational corporate tax avoidance?
Hard to quantify: double-counting issues, tax laws vary across countries, etc.
My approach: use national accounts & balance of payments data
Focus on the United States: what is happening to the profits of US-owned companies?
Latest data show offshore tax avoidance is sizable andgrowing fast
A growing fraction of US corporate profits are made abroad
More than half of the foreign profits of US firms are booked in tax havens
20% of all US corporate profits are booked in tax havens
The effective rate paid by US corporations has been reduced by 1/3 since late 1990s
Reforming the corporate tax
Formula apportionment
- Works reasonably well for US States
- Based on final sales to remove incentives to move real activity
- It’s the best way to levy taxes efficiently and fairlyCan be done unilaterally
- But international cooperation always better: ideal would be joint move to formula apportionment as part of free-trade talks
The Hidden Wealth of Nations
Date: Thursday 30 June 2016 | Time: 6.30-8pm | The Hidden Wealth of Nations
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