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Monday, June 16, 2014

NY Times: Piketty Protégé: $7.6 Trillion of World's Wealth Is Stashed in Tax Havens, Evading $200 Billion Taxes/Year

New York Times op-ed:  The True Cost of Hidden Money: A Piketty Protégé’s Theory on Tax Havens, by Jacques Leslie:

Gabriel Zucman is a 27-year-old French economist who decided to solve a puzzle: Why do international balance sheets each year show more liabilities than assets, as if the world is in debt to itself?

Over the last couple of decades, the few international economists who have addressed this question have offered a simple explanation: tax evasion. Money that, say, leaves the United States for an offshore tax shelter is recorded as a liability here, but it is listed nowhere as an asset — its mission, after all, is disappearance. But until now the economists lacked hard numbers to confirm their suspicions. By analyzing data released in recent years by central banks in Switzerland and Luxembourg on foreigners’ bank holdings, then extrapolating to other tax havens, Mr. Zucman has put creditable numbers on tax evasion, showing that it’s rampant — and a major driver of wealth inequality.

Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. Corporate tax avoidance has become so widespread that from the late 1980s until now, the effective corporate tax rate in the United States has dropped from 30 percent to 15 percent, Mr. Zucman found, even though the tax rate hasn’t changed.

Mr. Zucman, an assistant economics professor at the London School of Economics, is part of a wave of data-focused economists led by his mentor, Thomas Piketty, of the Paris School of Economics. Mr. Zucman’s short book on tax evasion, The Missing Wealth of Nations, was a best seller in France last year.

Mr. Zucman’s tax evasion numbers are big enough to upend common assumptions, like the notion that China has become the world’s “owner” while Europe and America have become large debtors. The idea of the rich world’s indebtedness is “an illusion caused by tax havens,” Mr. Zucman wrote in a paper published last year [The Missing Wealth of Nations:  Are Europe and the U.S. Net Debtors or Net Creditors?]. In fact, if offshore assets were properly measured, Europe would be a net creditor, and American indebtedness would fall from 18 percent of gross domestic product to 9 percent.

[T]here is no economic, political or moral justification for tax evasion — it exists only because of the political influence that wealth buys. A society that fails to fight widespread tax evasion proclaims its own corruption.

Gabriel Zucman (London School of Economics), Tax Evasion on Offshore Profits and Wealth:

This article attempts to estimate the magnitude of corporate tax avoidance and personal tax evasion through offshore tax havens. In the United States, corporations book 20% of their profits in tax havens -- a tenfold increase since the 1980s -- and tax avoidance reduces corporate tax revenues by up to a third. Globally, 8% of the world’s personal financial wealth is held offshore, costing more than $200bn to governments annually. Despite ambitious policy initiatives, profit shifting to tax havens and offshore wealth are rising. I discuss the recent proposals made to address these issues, and I argue that the main objective should be to create a world financial registry.

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(Hat Tip: Francine Lipman, Mike Talbert.)

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I wish discussions didn't confuse money put in tax havens to illegally avoid taxes with corporate accounts openly put in tax havens to legally reduce taxes.

Posted by: Eric Rasmusen | Jun 17, 2014 6:14:08 PM