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 NationsThe Scourge of Tax Havens

Gabriel Zucman(UC Berkeley)

How big are offshore tax avoidance andevasion & 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 recentresearch papers

1. “The Missing Wealth of Nations: Are Europe and the US netDebtors or net Creditors?”, QJE 2013

2. “The End of Bank Secrecy?” (with Niels Johannesen), AEJ2014

3. “Taxing Across Borders: Tracking Personal Wealth andCorporate Profits”, JEP 2014

...But much more research needed to offer definitive answers

All figures and data available online athttp://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 beingmanaged by offshore financial institutions

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2%

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1940 1950 1960 1970 1980 1990 2000 2010

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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 facilitatetax 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 magnitudeof offshore tax evasion?

Monthly statistics by the Swiss National Bank

Systematic anomalies in the international investment positions ofcountries 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 heldoffshore, costing at least $200bn

Offshore wealth ($ bn)

Share of financial

wealth held offshore

Tax revenue loss ($ bn)

Europe 2,600 10% 75USA 1,200 4% 36Asia 1,300 4% 35

Latin America 700 22% 21Africa 500 30% 15

Canada 300 9% 6Russia 200 50% 1

Gulf countries 800 57% 0

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: auditsdo not capture offshore evasion

New micro data from amnesties, crackdowns, and leaks shed newlight on evasion behavior of the wealthy

With Johannesen and Alstadsæter we use such data inScandinavia to study how tax evasion varies with wealth

In Norway, the proba to disclose hiddenassets rises sharply with wealth

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Position in the wealth distribution

Percent of households who disclosed hiding wealth, by wealth group

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

0%

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6%

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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

%ofh

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ldsw

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enwealth

Wealth group (million of US$)

Percent of households who disclosed hiding wealth, by wealth group

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

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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 verysharply at the top

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%ofh

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Position in the wealth distribution

Percent of households with revealed hidden wealth, by wealth group

Norway

Sweden

At the top-end, the use of offshoreaccounts is widespread

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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 seculardecline in wealth concentration

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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, muchremains to be done

Automatic exchange of bank information will become global standardby 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 previousattempts at curbing tax evasion

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1982 1986 1990 1994 1998 2002 2006 2010

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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 multinationalcorporations

The taxation of multinationals is basedon 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 ifunrelated

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 arecoming back to haunt the tax authorities

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35%

1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13

% o

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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 forinternational 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 multinationalcorporate tax avoidance?

Hard to quantify: double-counting issues, tax laws vary acrosscountries, etc.

My approach: use national accounts & balance of payments data

Focus on the United States: what is happening to the profits ofUS-owned companies?

⇓Latest data show offshore tax avoidance is sizable and

growing fast

A growing fraction of US corporateprofits are made abroad

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35%

1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13

% o

f U.S

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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 ofUS firms are booked in tax havens

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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 arebooked in tax havens

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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 corporationshas been reduced by 1/3 since late 1990s

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1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-13

% o

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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 jointmove to formula apportionment as part of free-trade talks