Taxing Hidden Wealth: The Consequences of U.S. Enforcement - - PowerPoint PPT Presentation

Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initiatives on Evasive Foreign Accounts

Taxing Hidden Wealth

Niels Johannesen 1 Patrick Langetieg 2 Daniel Reck 3 Max Risch 4 Joel Slemrod 5

1University of Copenhagen 2Internal Revenue Service 3London School of Economics 4University of Michigan 5University of Michigan

Disclaimer: The views and opinions presented in this paper reflect those of the authors. They do not necessarily reflect the views or the official position of the Internal Revenue Service.

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Introduction

Taxing Hidden Wealth

• Use of offshore accounts to evade taxes is a serious problem:
• Households hold an estimated $6,000 billion of financial

assets in tax havens (Zucman, 2013)

• Offshore assets are largely untaxed and concentrated

among the very wealthiest (Alstadsæter, Johannesen and Zucman, 2017)

• Recent years: prolific policy activity, but little evidence on the

compliance effects of these policies

• Are we winning the battle against offshore tax evasion?

2

U.S. enforcement initiatives 2008-2009

Taxing Hidden Wealth

The U.S. has been a global leader in the battle against offshore tax evasion in the past decade:

• Ad hoc legal action against foreign banks, starting in Switzerland.

(often preceded by whistleblowers; first case against UBS starts July 2008 )

• Information exchange treaties with tax havens

(new wave of treaties starts 2008 )

• Offshore Voluntary Disclosure Program (OVDP)

(first program starts March 2009)

• Foreign Accounts Tax Compliance Act (FATCA)

(first draft bill in October 2009 ) Many other governments have taken similar policy measures.

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Timeline of 2008-2009 Enforcement Initiatives

• Information exchange treaties with Malta, Liechtenstein,

Luxembourg, Monaco also signed in late 2008 - 2009.

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This Project

Taxing Hidden Wealth

• We use U.S. administrative data to examine the impact of the

enforcement initiatives on tax compliance

• Steps of the main empirical analysis:
• What was the effect of U.S. enforcement initiatives on

disclosures of evasive foreign accounts?

• Did taxpayers who disclosed new foreign accounts report

more capital income?

• Main finding: significant compliance responses, especially outside
• f the official Offshore Voluntary Disclosure Program.

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Background: Related literature

• Compliance effects:

Recent enforcement efforts caused a decline in incorporations

• f Panama shell corporations (Omartian, 2016)

First customer leak from tax haven bank caused a drop in the value of offshore banks and a drop in their deposits (Johannesen and Stolper, 2017) Amnesties may increase offshore tax evasion (Langenmayr, 2015)

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Background: Related literature

• Unintended consequences of enforcement efforts

Information exchange treaties with tax havens caused relocation of deposits across havens (Johannesen and Zucman, 2014) EU Savings Directive caused relocation of deposits (Johannesen, 2014) and increase in incorporations in Panama (Omartian, 2014)

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Data

Taxing Hidden Wealth

We use 3 primary sources of administrative data:

• 1. Report of Foreign Bank and Financial Accounts (FBAR)

Information on: location of account and account holder, value of account, timing of filing.

• 2. Offshore Voluntary Disclosure Program (OVD)

Observe whether someone participated in an amnesty and in which year.

• 3. Income information from tax return (1040)

Linked with above data: various sources of income, date and liability implications of amended filings.

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Treatment

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP Treatment

Taxing Hidden Wealth

• Amended return
• No OVDP
• No amended return
• No OVDP

“Quiet disclosures”:

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP Treatment

• Are new FBARs

disproportionately filed by people less likely to have a legitimate reason to hold the account?

Taxing Hidden Wealth

• Amend returns
• No OVDP
• No amended returns
• No OVDP

“Quiet disclosures”:

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP Treatment

• How do people decide to

disclose quietly vs OVDP? Would OVDP disclosures have especially high risk of detection?

Taxing Hidden Wealth

• Amend returns
• No OVDP
• No amended returns
• No OVDP

“Quiet disclosures”:

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP Treatment

• Are new FBARs associated

with increased capital income reporting?

Taxing Hidden Wealth

• Amend returns
• No OVDP
• No amended returns
• No OVDP

“Quiet disclosures”:

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP Treatment

• Are new FBARs associated

with increased capital income reporting?

• …even for non-OVDP

participants?

Taxing Hidden Wealth

• Amend returns
• No OVDP
• No amended returns
• No OVDP

“Quiet disclosures”:

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Conceptual Framework

Full compliance

• Pays taxes
• Files FBAR

Tax compliance

• Pays taxes
• No FBAR

Non-compliance

• Pays no taxes
• No FBAR

No change No change File FBAR File FBAR Pay taxes No FBAR Pay taxes No change (relocate wealth?) Enter OVDP

• Amend returns
• No OVDP
• No amended returns
• No OVDP

Treatment

• Are new FBARs associated

with filing amended tax returns?

Taxing Hidden Wealth

“Quiet disclosures”:

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Results Part 1: Aggregate FBAR Analysis

• Analyze the increase in the number of FBARs filed and number of
• ffshore accounts disclosed occurring in 2009.
• Use decompositions of this increase to argue that a large part of this

effect likely derives from quiet disclosures of evasive accounts.

• Not 100%: anecdotal evidence and data suggests some

“FBAR-only” compliance responses.

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Number of Account Disclosures by Year

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Characteristics of FBAR filers and accounts in 2008, 2009

Taxing Hidden Wealth 18 2008 2009 Total number of FBAR filers 236,331 100% 326,312 100% U.S. address 161,214 68% 233213 71% non-U.S. address 75,117 32% 93099 29% haven account 39,784 17% 63052 19% no haven account 196,547 83% 263260 81% amended return 7,022 3% 18081 6% no amended return 229,309 97% 308231 94% multiple accounts 157,786 67% 213815 66% single account 78,545 33% 112497 34% Total number of FBAR accounts 859,700 100% 988,020 100% Europe 406,723 47% 433,142 44% Asia 185,018 22% 258,503 26% North America 246,272 29% 272,485 28% Other 21,687 3% 23,890 2% <$10,000 279,548 33% 274,174 28% $10,000 - $100,000 391,612 46% 480,881 49% $100,000 - $1 million 150,407 17% 200,078 20% >$1 million 39,941 5% 41,033 4%

New Disclosers of Foreign Accounts

Note: First-time FBAR filers with a foreign address are excluded.

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Taxing Hidden Wealth 20

Total Value of Accounts Disclosed

First-time FBAR filers, U.S. vs non-U.S. addresses

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First-time FBAR filers, U.S. vs non-U.S. addresses, normalized

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New U.S., non-OVDP, FBAR Filers: Havens vs Non-Havens

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Note: Havens includes OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg

New U.S., non-OVDP, FBAR Filers: Havens vs Non-Havens, Normalized

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Note: Havens includes OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg

New U.S. FBAR Filers: Change from 2008-2009 by Country Level Difference

Note: Includes OVDP and non-OVDP disclosers. OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg in red, all

• thers in blue.

Taxing Hidden Wealth 25

New U.S. FBAR Filers: Change from 2008-2009 by Country Percent Difference from 2008 baseline

Note: Includes OVDP and non-OVDP disclosers. OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg in red, all

• thers in blue.

Taxing Hidden Wealth 26

New Same-Country Address FBAR Filers: Change from 2008-2009 by Country Level Difference

Note: OECD (2000) uncooperative tax havens plus Switzerland, Singapore, Hong Kong and Luxembourg in red, all others in blue.

Cayman Islands Luxembourg Mauritius Bermuda Lebanon Russia Korea, Republic of (South) UAE Poland Portugal Venezuela Chile Indonesia Finland Colombia Argentina Costa Rica Hungary Bahamas Norway Malaysia Mexico Turkey Belgium Austria Czech Republic Japan Greece South Africa Philippines Ireland Denmark Spain Saudi Arabia Netherlands Sweden New Zealand Thailand Brazil Italy United Arab Emirates Singapore Taiwan France China India Hong Kong Australia Germany Switzerland United Kingdom Canada Israel

• 500

500 1,000 1,500 2,000 2,500 Change in filers

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New U.S., non-OVDP, FBAR Filers: by Account Value

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New U.S., non-OVDP, FBAR Filers: by Account Value, Normalized

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Intensive Margin Responses: Multiple Accounts for Existing FBAR filers

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Intensive Margin Responses: Multiple Accounts for Existing FBAR filers

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Results Part 2: Quiet Disclosures versus OVDP

• Question: Why would one disclose quietly instead of using OVDP?
• Theory: trade off risk of criminal enforcement, harsh penalties when

disclosing quietly with OVDP penalties

• esp the offshore penalty = 20% of the balance in 2009 OVDP.
• risk of criminal enforcement is plausibly largest for very large

accounts, accounts in havens, esp. Switzerland.

• Problem: distribution of account/taxpayer characteristics for quiet

disclosures

• Solution: Assume the distribution of characteristics in the 2009 new filer

cohort would be similar to that in the 2008 cohort in absence of quiet disclosures.

• distribution of characteristics and overall number of new accounts is

similar for 2006-2008 cohorts.

• use this to recover the distribution of characteristics among 2009

”FBAR compliers”

Taxing Hidden Wealth 32

Distribution of Account Value: OVD vs 2009 New Filers

Taxing Hidden Wealth 33

.2 .4 .6 .8 A B C D New Filers (all) New filers (compliers) OVD participants

>$1M

All 2009 filers

$100k-$999k $10k-$99k <$10k

FBAR compliers All 2009 New Filers OVD Participants

.1 .2 .3 .4 .5 Liechtenstein Austria Netherlands Luxembourg Isle of Man Mexico Spain Singapore Taiwan Ireland Bermuda Italy Australia Hong Kong Korea, Republic of (South) China Germany Israel Japan France India Cayman Islands Canada United Kingdom Switzerland

Distribution of Account Country: OVD vs 2009 New Filer Compliers

OVD participants FBAR compliers

Taxing Hidden Wealth 34

Results Part 3: Did Reported Income Increase

• Event-study design:
• Event: first-time filing of FBAR in 2009
• Outcome: reported capital income
• Control group: filed FBAR continuously from 2006-2009
• Intuition:
• Compare growth in capital income at first-time FBAR filing to

growth in capital income of control group in the same year (DD estimator)

• Two applications
• Compliance effect within OVDP for participants in OVDP
• Compliance effect outside OVDP for non-participants

Taxing Hidden Wealth 35

Income Statistics: 2009 New Filers and OVDP Participants Reported Income in 2010

Income Statistics - 2009 New Filers and OVD Participant reported Income in 2010

OVD Participants mean median p25 p75 p90 p95 p99 Interest 49,454 4,716 720 21,790 78,393 156,485 699,903 Dividends 75,858 4,200 95 23,439 83,493 184,587 870,225 Capital Gains 56,827 1,667 12,164 49,652 112,428 567,980 Wages 192,257 38,250 157,849 376,664 659,528 2,724,648 AGI 593,118 148,438 61,621 367,925 994,841 2,068,570 8,196,693 Total Tax 128,425 17,861 2,225 73,874 216,023 451,853 1,866,814 New Filers mean median p25 p75 p90 p95 p99 Interest 61,750 1,243 112 8,010 44,630 131,638 959,204 Dividends 58,458 369 6,466 49,986 143,907 846,979 Capital Gains 42,860 118 3,483 29,465 87,962 545,556 Wages 280,338 114,163 19,333 238,332 481,841 808,713 3,073,700 AGI 653,566 159,220 72,442 335,558 885,694 1,930,176 10,092,259 Total Tax 157,119 21,629 4,581 65,170 203,976 459,459 2,360,167

Taxing Hidden Wealth 36

Event Study Specification

Taxing Hidden Wealth

Variables: 𝑧"# - reported income of various types 𝑔 - inverse hyberbolic sine transformation, ln 𝑧 + 1 + 𝑧*

• ,

(similar results with log for non-negative values)

𝜀# ∗ 𝑏𝑕𝑓𝑕𝑠𝑞" - controls for life-cycle wealth accumulation 𝐸"#

4 - event-time dummies

(relative to first-time FBAR filing or OVDP participation)

𝛾4 - coefficients of interest Standard errors: clustered at individual level

𝑔 𝑧"# = 𝛽" + 𝜀# ∗ 𝑏𝑕𝑓𝑕𝑠𝑞" + 8 𝛾4𝐸"#

4 9 4:;<

+ 𝜁"# ,

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Event Studies: OVDP Participants, Financial Capital Income

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Event Studies: OVDP Participants, Total Financial Capital Income

Taxing Hidden Wealth 39

Event Studies: OVDP Participants, Other Income

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Event Studies: First-time FBAR Filers Outside OVDP, Financial Capital Income

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Event Studies: First-time FBAR Filers Outside OVDP, Total Financial Capital Income

Taxing Hidden Wealth 42

Event Studies: First-time FBAR Filers Outside OVDP, Other Income

Taxing Hidden Wealth 43

Event Study: Filing Amended Returns With First-time FBAR Filing

Taxing Hidden Wealth

• amend"# - indicator for filing an amended return in year t for

any of the last 4 years.

• Any increase in the probability of amending returns after

first-time FBAR filing is a strong indication of a quiet disclosure amend"# = 𝛽 + 𝜕" + 𝜀# ∗ 𝑏𝑕𝑓𝑕𝑠𝑞" + 𝑌"# + 8 𝛾4𝐸"#

4 9 4:;<

+ 𝜁"# Similar spec. to before, but LPM:

44

Event Studies: First-time FBAR Filers Outside OVDP, Amended Returns

Taxing Hidden Wealth

Note: baseline 1% rate of filing amended returns in the pre- period.

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Ongoing Work

Taxing Hidden Wealth 46

• Back out rates of return from event study estimates
• Preliminary results are quite sensible
• Calculate total aggregate effect

Conclusion

• Our results suggest at least 40,000 individuals started disclosing accounts

to the IRS in 2009 outside OVDP

• + over 10,000 existing FBAR filers disclosing additional accounts
• Compare to 15,000 participants in 2009 OVDP
• Almost $100B in total disclosed wealth
• Many of these accounts were previously non-compliant:
• Concentrated in tax havens
• Disclosures associated with increased capital income reporting
• …and frequent amending of income tax returns
• Significant compliance response to enforcement outside of the OVDP.
• Risk of detection of a quiet disclosure was a major factor in the

decision to disclose quietly versus through OVDP

• Important lessons for the design of offshore enforcement policies
• This type of enforcement can improve compliance
• Penalty structure in “amnesty” programs
• Importance of information-sharing

Taxing Hidden Wealth 47