The Hidden Wealth of Nations Dr Gabriel Zucman Assistant Professor - - PowerPoint PPT Presentation

The Hidden Wealth of Nations

Hashtag for Twitter users: #LSEwealth Department of Economics and Centre for Macroeconomics public lecture

Dr Gabriel Zucman

Assistant Professor of Economics, UC Berkeley Author, The Hidden Wealth of Nations: The Scourge of Tax Havens

Dr Camille Landais

Associate Professor in Economics, LSE Chair

The Hidden Wealth of Nations

The Scourge of Tax Havens

Gabriel Zucman (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 be used to shed light on these issues

The book is based on a number of recent research papers

• 1. “The Missing Wealth of Nations: Are Europe and the US net

Debtors or net Creditors?”, QJE 2013

• 2. “The End of Bank Secrecy?” (with Niels Johannesen), AEJ

2014

• 3. “Taxing Across Borders: Tracking Personal Wealth and

Corporate Profits”, JEP 2014 ...But much more research needed to offer definitive answers All figures and data available online at http://gabriel-zucman.eu/hidden-wealth

• 4. 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 being managed by offshore financial institutions

0% 2% 4% 6% 8% 10% 1940 1950 1960 1970 1980 1990 2000 2010

% of U.S. equity market capitalization

In 2012, 9% of the U.S. listed equity market capitalization was held by tax haven investors (hedge funds in the Cayman Islands, banks in Switzerland, mutual funds in Luxembourg, individuals in Monaco, etc.). Source: author's computations using US TIC data

U.S. equities held by tax haven firms and individuals

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 facilitate tax 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

• f offshore tax evasion?

Monthly statistics by the Swiss National Bank Systematic anomalies in the international investment positions of countries 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

• ffshore, costing at least $200bn

Offshore wealth ($ bn) Share of financial wealth held

• ffshore

Tax revenue loss ($ bn) Europe 2,600 10% 75 USA 1,200 4% 36 Asia 1,300 4% 35 Latin America 700 22% 21 Africa 500 30% 15 Canada 300 9% 6 Russia 200 50% 1 Gulf countries 800 57% Total 7,600 8.0% 190

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 new light 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

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

• 5

P 5

• P

9 P 9

• P

9 5 P 9 5

• P

9 9 P 9 9

• P

9 9 . 5 P 9 9 . 5

• P

9 9 . 9 P 9 9 . 9

• P

9 9 . 9 5 P 9 9 . 9 5

• P

9 9 . 9 9 P 9 9 . 9 9

• P

1 % of households who disclosed hidden wealth Position in the wealth distribution

Percent of households who disclosed hiding wealth, by wealth group

12% of households with wealth > $36m used the Norwegian amnesty

0% 2% 4% 6% 8% 10% 12% < 0.1 0.1 - 0.5 0.5 - 0.7 0.7 - 1.4 1.4 - 2.0 2.0 - 6.4 6.4 - 10.5 10.5 - 36 .3 > 36.3 % of households who disclosed hidden wealth Wealth group (million of US$)

Percent of households who disclosed hiding wealth, by wealth group

Similarly, the probability to appear in the Panama Papers rises sharply with wealth

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 0% 2% 4% 6% 8% 10% 12% 14% P

• 5

P 5

• P

9 P 9

• P

9 5 P 9 5

• P

9 9 P 9 9

• P

9 9 . 5 P 9 9 . 5

• P

9 9 . 9 P 9 9 . 9

• P

9 9 . 9 5 P 9 9 . 9 5

• P

9 9 . 9 9 P 9 9 . 9 9

• P

1 % of individuals who appear in Panama Papers % of households who disclosed hidden wealth Position in the wealth distribution

Percent of Norwegians who disclosed hiding wealth or whose name appears in Panama Papers, by wealth group

Disclosed hiding wealth in tax amnesty (left scale) Appear in Panama Papers (right scale)

In Sweden too, evasion rates rises very sharply at the top

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

• 5

P 5

• P

9 P 9

• P

9 5 P 9 5

• P

9 9 P 9 9

• P

9 9 . 5 P 9 9 . 5

• P

9 9 . 9 P 9 9 . 9

• P

9 9 . 9 5 P 9 9 . 9 5

• P

9 9 . 9 9 P 9 9 . 9 9

• P

1 % of households who disclosed or were caught hiding wealth Position in the wealth distribution

Percent of households with revealed hidden wealth, by wealth group

Norway Sweden

At the top-end, the use of offshore accounts is widespread

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% of total household wealth (excluding offshore)

Composition of the top 0.1% wealth share in Norway (including offshore wealth)

This figure depicts the share and composition of the wealth held by families in the top 0.1% of the wealth distribution, after taking into account unreported offshore wealth. Source: Appendix Table B5b.

Business assets Equities Offshore wealth

Tax evasion can erase half of the secular decline in wealth concentration

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Figure : Top 0.1% wealth share in Norway: including vs. excluding hidden wealth

Top 0.1% Norway (excl. offshore) Top 0.1% Norway (inc. offshore)

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 world financial registry

How Swiss bankers torpedoed previous attempts at curbing tax evasion

0% 10% 20% 30% 40% 50% 60% 70% 1982 1986 1990 1994 1998 2002 2006 2010 % of Swiss accounts amounts Accounts held through sham corporations Accounts directly held by Europeans EU Saving Tax Directive

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

Tax avoidance by multinational corporations

The taxation of multinationals is based

• n 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 are coming back to haunt the tax authorities

0% 5% 10% 15% 20% 25% 30% 35% 1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13

% 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.

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 and growing fast

A growing fraction of US corporate 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 2010-13

% 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.

More than half of the foreign profits of US firms are booked in tax havens

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

% 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 other Caribbean)

Notes: This figure charts the share of income on U.S. direct investment abroad made in the main tax havens. In 2013, total income on U.S.DI abroad was about $500bn. 17% came from the Netherlands, 8% from Luxembourg, etc. Source: author's computations using balance of payments data, see Online Appendix.

20% of all US corporate profits are booked in tax havens

0% 5% 10% 15% 20% 25% 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

% of US corporate profits

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

Notes: This figure charts the ratio of profits made in the main tax havens (Netherlands, Ireland, Switzerland, Singapore, Luxembourg, Bermuda and other Caribbean havens) to total US corporate profits (domestic plus foreign). Source: author's computations using NIPA and 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 2010-13

% 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 2013, 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.

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 international cooperation always better: ideal would be joint move to formula apportionment as part of free-trade talks