Paul L. Caron

Tuesday, January 19, 2016

Hemel Reviews The Hidden Wealth Of Nations

WealthDaniel Hemel (Chicago), What’s the Matter with Luxembourg? (reviewing Gabriel Zucman (UC-Berkeley), Hidden Wealth of Nations: The Scourge of Tax Havens (University of Chicago Press, 2015)):

The Grand Duchy of Luxembourg is rarely the subject of international attention, much less the target of international opprobrium. With fewer than 600,000 inhabitants, it is less populous than the City of Milwaukee. With an area of under 1,000 square miles, it is smaller than the State of Rhode Island. Conquered twice by Germany and thrice by France, it is much more accustomed to the role of victim than villain. In the words of one New York Times writer, “Luxembourg is about as cuddly as countries come.”

But in the view of economist Gabriel Zucman, Luxembourg is the enfant terrible of the European Union. “If we wish to prevent the Irish and Cypriot catastrophes from happening again,” Zucman writes near the end of his new book, “it is essential that Luxembourg go backward” (p. 91). Back to where is not clear, but what is clear is that Zucman wants Luxembourg to change its ways. And if the tiny state refuses to cooperate, Zucman says, Luxembourg should be excluded from the EU and blockaded by its neighbors.

Why does Zucman place so much blame on little Luxembourg? The answer has to do with a statistical quirk—an inconsistency in international economic data. As Zucman notes, Luxembourg’s official statistics show that shares of mutual funds domiciled in the Grand Duchy are worth $3.5 trillion. But when Zucman looks at official data from other countries on their international investment positions, he can account for only $2 trillion of Luxembourgish mutual fund shares recorded as assets. To whom does the remaining $1.5 trillion belong? We don’t know. “This,” says Zucman, “is a big problem” (p. 38).

The big problem has a name: tax evasion. And thanks to Zucman, we can now have a better sense of just how big a problem it is. In 2014, according to Zucman, liabilities on national balance sheets exceeded assets by $6.1 trillion. In other words, $6.1 trillion of the world’s wealth has gone missing. Zucman hypothesizes that this missing $6.1 trillion has been stashed in offshore bank accounts, hiding out of tax authorities’ sight. And while we can’t be sure that’s the case, Zucman persuasively argues that the $6.1 trillion figure is “a reasonable estimate of the amount of offshore portfolios owned by households all over the world” (p. 39). ...

Ostracizing Luxembourg and other tax havens is only one piece of Zucman’s anti-evasion strategy; a second element is the creation of a global financial register. Zucman’s idea is to establish a central database recording the beneficial owners of all stocks, bonds, and shares of mutual funds in circulation. ... [A] more serious defect with the proposal is its futility: a comprehensive securities register probably would not accomplish very much. That is because savvy investors still could use derivatives to circumvent the register’s requirements. ...

Zucman’s final proposal is his most ambitious: a global wealth tax of 0.1% a year levied at the source....

Zucman powerfully argues that offshore tax evasion is an outrage. It is unfair that some households can escape their obligation to pay for public services. But it is also unfair to place the blame entirely on offshore tax havens; onshore financial centers—including the United States and United Kingdom—are at the heart of the problem and are an essential part of any solution. To his credit, Zucman has done more than anyone else in recent years to draw attention to the scourge of household tax evasion. In his zeal to shine a light on the misdeeds of offshore havens, though, he lets the real culprits off the hook.

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