Globalization and Tax Justice Gabriel Zucman (UC Berkeley) October - - PowerPoint PPT Presentation

Globalization and Tax Justice

Gabriel Zucman (UC Berkeley)

October 2017

How can we make globalization and tax justice compatible?

One of the most pressing policy questions of our time Clear by now that globalization is making redistribution harder Policy response so far: protectionism and/or let’s all become tax havens (Brexit, Trump, race to bottom) Another route is possible, but it requires: (i) a good understanding of the issues, (ii) creative policies

Why globalization and tax justice are conflicting

Tax havens severely affect national tax policies: Multinationals’ artificial profit-shifting Rising personal tax avoidance and evasion Internalizing this, gov’t cut capital taxes & top rates Cuts need to be offset by ↑ taxes elsewhere / less spending → Does globalization have a future if it means ever lower taxes for the rich, and higher for the rest of us?

Multinationals’ Profit-Shifting to Tax Havens

A growing fraction of global profits are made abroad

0% 5% 10% 15% 20% 25% 30% 35% 1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-16

% of U.S. corporate profits

The share of profits made abroad in U.S. corporate profits

Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). Foreign profits include dividends on foreign portfolio equities and income on US direct investment abroad (distributed and retained). Profits are net of interest payments, gross of US but net of foreign corporate income taxes. Source: author's computations using NIPA data, see Online Appendix.

63% of the foreign profits of US multinationals are now made in havens

0% 10% 20% 30% 40% 50% 60% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

% of U.S. corporate profits made abroad

The share of tax havens in U.S. corporate profits made abroad

Singapore Ireland Netherlands Luxembourg Switzerland Bermuda (and Caribbean)

Notes: This figure charts the share of income on U.S. direct investment abroad made in the main tax havens. In 2016, total income on U.S. DI abroad was about $450bn. 16% came from the Netherlands, 8% from Luxembourg, etc. Source: author's computations using balance of payments data, see Online Appendix.

The effective rate paid by US corporations has been reduced by 1/3 since late 1990s

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-16

% of US corporate profits

Nominal and effective corporate tax rates on US corporate profits

Nominal U.S. federal rate Effective rate paid to US government Effective rate paid to US and foreign gov.

Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). In 2010-2016, over $100 of corporate profits earned by US residents, on average $16 is paid in corporate taxes to the U.S. government (federal and States) and $4 to foreign governments. Source: author's computations using NIPA data, see Online Appendix.

Globally, 40% of multinationals’ profits are artificially shifted to tax havens

100 200 300 400 500 600 700 Profits shifted to tax havens Non-EU tax havens EU tax havens € Bn.

Global amount of profits artificially shifted to tax havens

Rest of OECD Developing countries US EU

Note: This figure illustrates the amount of tax base wrongfully allocated to tax havens in 2015, as well as the regions from which it originates. The total profits shifted to tax havens is estimated at 627 billion Euros. The size of mis-allocated tax base is equal to the estimated "Excess Profits" of the havens. The profts are allocated to the countries of origin, proportionally to the sum of high-risk service imports and FDI interest payments by partner countries. Foreign income is defined as income made by non-tax havens on investments abroad. The foreign income in 2015 was 1.4 trillion Euros.

The EU loses 20% of its corporate tax revenue due to tax havens

0% 5% 10% 15% 20% 25% 30% 35% G e r m a n y F r a n c e H u n g a r y I t a l y E U 2 2 U n i t e d K i n g d

• m

S p a i n S w e d e n A u s t r i a F i n l a n d E s t

• n

i a D e n m a r k P

• r

t u g a l P

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a n d L a t v i a C r

• a

t i a G r e e c e S l

• v

e n i a L i t h u a n i a C z e c h R e p u b l i c R

• m

a n i a S l

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a k i a B u l g a r i a

Lost corporate tax revenue as a share of current corporate tax revenue

Shifted to non-EU tax havens Shifted to high risk EU countries Corporate tax rate (avg. 2010-2015)

Note: This figure illustrates the amount of tax revenue lost per country as share of current total corporate tax revenue in 2015. The bars are split into the share lost to EU-havens and non-EU havens. The green line shows the top statutory tax rates of the countries. The tax losses are allocated using the share of high risk imports and interest paid to tax havens (Our benchmark scenario).

The winners: tax havens

0% 1% 2% 3% 4% 5% 6% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Corporate Income Tax Revenue (% Gross National Income)

Note: EU is the average of France, Germany, U.K., and Italy.

Ireland U.S. E.U.

Offshore Wealth

A high and growing amount of personal wealth is held in tax havens

0% 2% 4% 6% 8% 10% 12% 14% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

% of world GDP

Global offshore wealth (Our estimate) Global offshore wealth (BCG) Offshore wealth in Switzerland (Swiss National Bank)

From some countries, offshore wealth is as high as 50% of GDP

0% 10% 20% 30% 40% 50% 60% 70% Korea Poland China Denmark Finland Japan India Norway Indonesia Canada Iran Sweden Netherlands Brazil Australia Mexico USA Austria Thailand Colombia Ireland Spain South Africa Italy Russia France Germany UK Belgium Turkey Portugal Taiwan Greece Argentina Russia (NEO) Saudi Arabia Venezuela UAE

Offshore wealth / GDP

(All countries with GDP > $200 billion in 2007)

World average: 9.8%

Hidden wealth is extremely concentrated

0% 10% 20% 30% 40% 50% 60% P0-50 P50-P90 P90-P99 P99-P99.9 P99.9-99.99 P.99.99-P100 % of total recorded or hidden wealth Position in the wealth distribution

Distribution of wealth: recorded vs. hidden

Hidden wealth disclosed in amnesty Hidden wealth held at HSBC All recorded wealth

Combining offshore tax evasion with

• ther forms of tax evasion

0% 5% 10% 15% 20% 25% 30% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-P99.95 P99.95-P99.99 P99.99-P100

% of taxes owed that are not paid Position in the wealth distribution

Taxes evaded, % of taxes owed

Offshore evasion (leaks) Tax evasion other than offshore (random audits)

Tax evasion is widespread among the very wealthy

0% 10% 20% 30% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-P99.95 P99.95-P99.99 P99.99-P100

% of taxes owed Position in the wealth distribution

Taxes evaded, % of taxes owed (stratified random audits + leaks)

Average: 2.8%

Tax evasion makes the tax system regressive at the top

25% 30% 35% 40% 45% 50% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-P99.95 P99.95-P99.99 P99.99-P100

% of taxable income Position in the wealth distribution

Taxes paid vs. taxes owed

Taxes paid Taxes owed

Because of offshore wealth, we significantly under-estimate inequality

0% 2% 4% 6% 8% 10% 12% Spain UK Scandinavia France USA Russia % of total household wealth

The top 0.01% wealth share and its composition

Offshore wealth All wealth excluding offshore

The Solutions

Despite recent policy initiatives, much remains to be done to fight tax evasion

Automatic exchange of bank info is becoming global standard: big progress. Three obstacles: Incentives of offshore bankers Financial opacity Incentives of tax havens ⇓ What is missing: well defined sanctions and a world financial registry

We need a world financial register to fight financial opacity

The case for a world financial register

The companies Clearstream, Euroclear, etc. feed the world financial register. Tax authorities can verify that tax-payers indeed declare all the financial securities included in the register

Despository Trust Corporation (USA) Clearstream (Luxembourg) Euroclear France (France) Other central securities depositories & other sources World financial register U.S. tax authority U.K. tax authority French tax authority Other tax administrations

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 fairly Can be done unilaterally But best done multilaterally as part of free trade agreements

Supplementary Slides

The proba to have an unreported HSBC account rises sharply within the top 1%

0.0% 0.2% 0.4% 0.6% 0.8% 1.0%

P90-P95 [0.6 – 0.9] P95-P99 [0.9 – 2.0] P99-P99.5 [2.0 – 3.0] P99.5-P99.9 [3.0 – 9.1] P99.9-P99.95 [9.1 – 14.6] P99.95-P99.99 [14.6 – 44.5] Top 0.01% [> 44.5]

Net wealth group [millions of US$] Probability to own an unreported HSBC account, by wealth group (HSBC leak)

HSBC evaders hide close to half of their wealth at HSBC

0% 10% 20% 30% 40% 50% P90-P95 [0.6 – 0.9] P95-P99 [0.9 – 2.0] P99-P99.5 [2.0 – 3.0] P99.5-P99.9 [3.0 – 9.1] P99.9-P99.95 [9.1 – 14.6] P99.95-P99.99 [14.6 – 44.5] Top 0.01% [> 44.5]

Net wealth group [millions of US$]

Average wealth hidden at HSBC, by wealth group (% of total wealth (including held at HSBC))

The Panama Papers confirm the sharp gradient in use of tax havens by wealth

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2%

P90-P95 [0.6 – 0.8] P95-P99 [0.8 – 1.8] P99-P99.5 [1.8 – 2.7] P99.5-P99.9 [2.7 – 8.1] P99.9-P99.95 [8.1 – 13.3] P99.95-P99.99 [13.3 – 41.4] Top 0.01% [> 41.4]

Net wealth group [millions of US$] Probability to appear in the "Panama Papers", by wealth group (Shareholders of shell companies created by Mossack Fonseca)

Amnesty data show widespread evasion at the top

0% 2% 4% 6% 8% 10% 12% 14%

P90-P95 [0.6 – 0.8] P95-P99 [0.8 – 1.8] P99-P99.5 [1.8 – 2.7] P99.5-P99.9 [2.7 – 8.1] P99.9-P99.95 [8.1 – 13.3] P99.95-P99.99 [13.3 – 41.4] Top 0.01% [> 41.4]

Net wealth group [millions of US$] Probability to voluntarily disclose hidden wealth, by wealth group (Swedish and Norwegian tax amnesties)

Even in countries with low total evasion, including hidden wealth ↑ inequality a lot

0% 1% 2% 3% 4% 5% 1930 1940 1950 1960 1970 1980 1990 2000 2010

Top 0.01% wealth share in Norway

Excluding hidden wealth Including hidden wealth

Tax evasion on hidden wealth

0% 10% 20% 30% 40% 50% P90-95 P95-99 P99-99.5 P99.5-99.9 P99.9-P99.95 P99.95-P99.99 P99.99-P100

% of total taxes owed that are not paid Position in the wealth distribution

Offshore tax evasion, by wealth group

Lower-bound scenario High scenario

Tax evasion detected in random audits

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-100

% of taxes owed that are not paid Position in the wealth distribution Macro average: 2.3%

Random audits detect a lot of errors on tax returns

0% 10% 20% 30% 40% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-100

Position in the wealth distribution

Fraction of households evading taxes, by wealth group (stratified random audits)

But random audits fail to capture sophisticated evasion at the top

0% 5% 10% 15% 20% 25% 30% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-100

% of total income (reported + evaded) Position in the wealth distribution

Fraction of income undeclared, conditional on evading (stratified random audits)

Tax evasion in random audits:

• US. vs. Denmark

0% 5% 10% 15% 20% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% P0-10 P10-20 P20-30 P30-40 P40-50 P50-60 P60-70 P70-80 P80-90 P90-95 P95-99 P99-99.5 P99.5-100

Position in the income (US) or wealth (Denmark) distribution

Figure S.23: Fraction of income undeclared (stratified random audits)

Denmark (left) average: 1.8% US (right) average: 11%

Why is detected evasion higher in US? DCE multiplier + self-employment

0% 5% 10% 15% 20% 25% 30% Norway Iceland Sweden Japan Luxembourg Denmark Finland France Ireland Lithuania Belgium Estonia United Kingdom Austria Netherlands Germany Spain Hungary United States Slovenia Czech Republic Switzerland Latvia Portugal Italy Slovak Republic Turkey Poland Greece

The share of self-employment income in GDP in OECD countries (Gross mixed income as a % of factor-cost GDP)

Stronger enforcement → fewer, wealthier clients

5,000 10,000 15,000 20,000 25,000 30,000 35,000 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 Number of clients Average account value (million US$)

Number of clients and average account value at HSBC Private Bank Switzerland

Number of clients (right scale) Average account value (left scale)

Income inequality in the United States

10% 12% 14% 16% 18% 20% 22% 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

% of national income Pre-tax national income share: top 1% vs. bottom 50% Bottom 50% Top 1%

Source: Appendix Table II-B1

Changes in Tax Progressivity

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Top marginal tax rate applying to highest iincomes

Top income tax rates in rich countries, 1900-2017

U.S. U.K. Germany France Japan

Tax progressivity in the United States

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1913 1918 1923 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

% of pre-tax income Average tax rates by pre-tax income group

Source: Appendix Table II-G1.

All Bottom 50% Top 1%

Inequality rose more where top marginal tax rates were cut more

Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Denmark Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland Finland France France France France France France France France France France France France France France France France France France France France France France France France France France France France France France France France Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Germany Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Italy Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ NZ Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Norway Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Portugal Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Spain Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Sweden Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland Switzerland UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK UK US US US US US US US US US US US US US US US US US US US US US US US US US US US US US US US US US US

2 4 6 8 10 Change in Top 1% Income Share (points)

• 40
• 30
• 20
• 10

10 Change in Top Marginal Tax Rate (points)

Changes Top 1% Share and Top Marginal Tax Rate since the 1970s in Rich countries

No growth for the U.S. bottom 50% since 1980

• 1%

0% 1% 2% 3% 4% 5% 6% 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

Real average annual growth, 1980-2014 Income percentile

Average annual growth by percentile, 1980-2014

Top 0.001% Average adult Pre-tax Post-tax P99 P99.9 P99.99