The Hidden Wealth of Nations
The Scourge of Tax Havens
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.
- 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
- 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
- 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
- Treaty shopping to generate stateless income
- Example: Google
Arm’s length pricing
- Easy to manipulate transfer prices
- Reference prices often do not exist
- 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
- 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