US$7.6tn hidden in tax havens - almost half annual US GDP
Gabriel Zucman, one of 3 French economists who in recent times have published extensive research on wealth and equality, in a book, 'The Hidden Wealth of Nations: The Scourge of Tax Havens,' published this month, estimates that 8% of the world's financial wealth — some US$7.6tn — is hidden in tax havens such as Switzerland, Bermuda, the Cayman Islands, Singapore, Luxembourg and Ireland. Oxfam in a report published last January said that in 2013 the number of billionaires holding the same amount of wealth as the bottom 50% of the global population of 7bn was at 92.
The US Bureau of Economic Analysis has estimated US GDP (gross domestic product) at $17.3tn in current dollars in 2014 and in chained 2009 dollars (real) at $16.0tn. On tax havens, there is no agreed definition of a tax haven and the Organisation for Economic Cooperation and Development, excludes its member countries from its list of tax havens including the biggest, Switzerland. In May 2013, United States senators Carl Levin and John McCain in response to a letter from the Irish ambassador to the US who had objected to Ireland being called a tax haven, referred to "a common-sense definition of a tax haven" — similar to Potter Stewart, US Supreme Court justice, who in a 1964 judgment famously characterised pornography: “I know it when I see it.”
On 5 Oct the final proposals of the Base Erosion and Profit Shifting (BEPS) project will be presented by the OECD in Paris. This week we will preview the work of this key corporate tax reform project that was commissioned by the G-20 group of leading advanced and emerging economies in 2012. There have also been dramatic advances against international personal tax evasion in recent years with Switzerland prepared to dismantle key parts of its once cherished banking secrecy laws.
Zucman, who will be 29 next month, is an assistant professor of economics at the University of California Berkeley and is on leave from the London School of Economics. He has collaborated with compatriots Emmanuel Saez, who also is based at Berkeley, and Thomas Piketty, author of the best-selling 'Capital in the Twenty-First Century,' who has written the foreword of Zucman's book.
Zucman tracked financial liabilities and assets in the world from central bank data and they should balance but reported liabilities were about $6tn higher than the reported assets — an amount that’s been growing. That led to the assumption that about $6tn assets are hidden.
The research reveals that tax havens are a quickly growing danger to the world economy.
"In the past five years, the amount of wealth in tax havens has increased over 25% — there has never been as much money held offshore as there is today."
Zucman estimates that three-quarters of the hidden wealth in tax havens goes unrecorded. "About 40% of the world’s foreign direct investments are routed through tax havens such as the British Virgin Islands. Many investment funds and financial vehicles are incorporated offshore. Luxembourg is the second largest mutual fund center in the world after the United States; a great deal of the world’s money market funds are incorporated in Ireland; and most hedge funds are in the Cayman Islands. Multinational corporations routinely use tax havens for treasury operations and group insurance. Some of these activities have legitimate roles and are satisfactorily covered in the statistics."
This month the Swiss Bankers Association reported that the value of assets held by Swiss banks rose nearly 8% last year to CHF6.66tn ($6.9tn) — more than half of which came from foreign sources.
Zucman says the Swiss National Bank (SNB: the central bank) does not provide statistics on the type of mutual funds that foreigners own (do they invest in bond funds? equity funds?). "But we do know that out of the 8,000 funds registered for distribution in Switzerland, about 4,600 are incorporated in Luxembourg and 1,200 in Ireland...On their Swiss accounts, foreigners do own some US equities, but they mostly own Luxembourg and Irish fund shares (the funds, in turn, invest all around the world)."
Switzerland in effect allows foreign tax evaders to invest in funds domiciled in countries such as Luxembourg and Ireland.
Zucman says Switzerland holds about one-third of hidden wealth and 30% of the wealth of the richest Latin Americans and Africans is held offshore while the estimate for Russians is 50%.
Tax evasion by individuals costs governments $200bn a year, and havens used by US multinational companies save them about $130bn annually — these estimates do not include items like property and art.
Last August French customs seized a Picasso painting from a yacht owned by a member of the Spanish Botín banking dynasty as it had been taken out of Spain in contravention on a ban.
Gabriel Zucman is not impressed by the lack of interest of most economists in tax evasion:
"Economists share some of the responsibility for the sense of mystery that still surrounds tax havens. Academics have for too long shown little interest in the subject, with some notable exceptions. But progress has been made within the past ten years, and we may rightfully hope for important advances in the near future. Te fact remains that most of the progress in understanding tax havens achieved up to now — remarkable progress in many respects — can be credited not to economists, but to a certain number of pioneering nongovernmental organizations, journalists, political scientists, historians, jurists, and sociologists."
He advocates 1) a worldwide register of financial wealth, recording who owns which stocks and bonds. "Financial registries already exist, but they are fragmentary and maintained by private companies such as the Depository Trust Company in the United States and the Luxembourg bank Clearstream. Te goal would be simply to combine them, to enlarge the field of data, and to transfer ownership of the data to the public. Combined with an automatic exchange of information between the banks of all tax havens and foreign tax authorities, a financial register would deal a fatal blow to financial secrecy";
"The second dimension of the plan of action I propose is to levy sanctions proportional to the costs that tax havens impose on other countries. Calls for transparency, new laws, or more bureaucrats are insufficient. Only combined international pressure can truly have an effect, by shifting the incentives of tax havens. One type of possible sanction is trade tariffs. The calculations presented in this book show that France, Germany, and Italy would be able to force Switzerland to disclose all the assets held there by their residents by jointly imposing customs duties of 30% on the goods that they import from Switzerland, because the costs for Switzerland would then be more than the income derived from its banks involved in tax evasion."
On companies, Zucman says:
"we need to rethink the taxation of companies. The fixes recently proposed by the Organisation for Economic Cooperation and Development (OECD) are unlikely to enable much progress. Looking forward, the taxation of multinational firms should derive from their worldwide consolidated profits, and not, as is true today, from their country-by-country profits, because those are routinely manipulated by armies of accountants. A tax on consolidated profits would increase corporate tax revenue by about 20%; this would essentially benefit the large countries of Europe as well as the United States, where the kings of tax dodging — the Googles, Apples, and Amazons — produce and sell the most but often pay little in taxes."
Switzerland has agreed to an information sharing system proposed by the OECD. It will take effect in coming years and currently the Swiss only share information about foreigners holding offshore accounts in Switzerland if it receives a valid request for information from a foreign tax authority.
Switzerland said it will “spontaneously” inform foreign tax authorities if it comes across information that could be of interest to them — such as property ownership.
In addition, it will also automatically exchange some information — including an account holder’s name and bank balance, and data about interest and dividend income — with some foreign tax authorities. However, Switzerland has yet to decide with which countries such information sharing will occur.
The proposals will not affect Swiss residents with accounts in Switzerland.
Last Thursday a verdict published by the Federal Administrative Court showed that the tax authorities violated Swiss law by offering France legal assistance in tracking down tax evaders using stolen UBS bank data. The court ruled in favour of a complainant whose name was among a number revealed to the French authorities in 2010 by a UBS employee who illegally dished out the data contrary to Swiss banking secrecy laws. The request for administrative assistance was sent by France in 2013 and was complied with in October 2014.
Because the data leak was punishable under Swiss law, the Federal Tax Administration (FTA) “was not permitted to grant administrative assistance,”the court ruled on 15 September — miracles are not expected!