The ultra-rich are hiding way more money overseas than anyone realized
The ultra-rich are hiding way more money overseas than
anyone realized
By Ana Swanson June 1, 2017
It was the most consequential leak in the history of the
offshore world, providing journalists and the public an unparalleled view into
a notoriously shadowy industry that shuttles secret wealth around the globe.
In 2007, an engineer extracted detailed records on the
hidden wealth of more than 30,000 clients of HSBC Private Bank, the Swiss
subsidiary of the British multinational banking giant, and secreted them to the
French government. The data, which eventually became known as the “Swiss
leaks,” ended up in the hands of other authorities and of journalists.
Now, that data, along with the Panama Papers — the
records of a Panamanian law firm dealing heavily in offshore finance that were
leaked to journalists last year — is providing academic researchers with a
valuable look inside the opaque world of tax evasion and offshore holdings.
In a newly released paper, researchers in Scandinavia and
the United States use the Swiss and Panamanian leaks to show that global tax
evasion is likely much more prevalent than previously thought. Their estimates
indicate that the top 0.01 percent of the wealth distribution own about half of
all offshore assets and may be hiding roughly a quarter of their wealth
offshore.
“Most of the tax evasion happens at the very, very top of
the wealth distribution,” said Gabriel Zucman, one of the researchers.
Zucman has previously estimated that the equivalent of
about 10 percent of global gross domestic product is hidden in tax havens.
These countries, which often have laws that ensure the secrecy of offshore
accounts, include Singapore, Hong Kong, Luxembourg, the Cayman Islands, the
Bahamas, and, of course, Switzerland — which alone manages an
estimated 40 percent of the world’s offshore wealth.
The researchers matched up individuals present in the
leaks and in random tax audits with wealth records from Scandinavia. Those
countries offer particularly detailed records on the wealth of their
populations, allowing the researchers to figure out what the distribution of
offshore accounts might look like among different economic classes.
Their estimates show that the wealthiest people are
getting away with paying far less than their fair share. While about 3 percent
of personal taxes are evaded in Scandinavia overall, households with more than
$40 million in net wealth — or the top 0.01 percent of the wealth
distribution — evade about 30 percent of their personal tax burden, they
found. They caution that this figure might be much higher in other countries
where the rule of law is weaker.
The chart below, from the paper, shows that, compared
with all recorded wealth, the wealth hidden in HSBC's Swiss accounts — or
revealed by the kind of amnesty programs that allow people to declare earnings
they have previously hidden offshore — tends to belong to those at the upper
end of the wealth distribution.
Tax evasion has been difficult for researchers to study
because, as with all criminal behavior, people go to great lengths to keep
their actions secret. The most common method for studying tax evasion is to
look at random audits, but the researchers say these do not do adequately
capture the extent of tax evasion at the top.
For one thing, the sample size of the ultrawealthy that
are affected by random audits is quite small, making it hard to gather accurate
data. For another, the superwealthy may have ways of evading taxes that
are difficult for regulators to catch, like forming strings of shell companies
around the world to disguise the real owner of valuable assets, like a
property or a painting.
Previous researchers had theorized that tax evasion was
likely much more common at the top of the wealth spectrum. Not only can the superwealthy
afford expensive offshore services that help them hide their earnings, they are
also less likely to have to disclose to the government in the first place.
Top earners are more likely to be self-employed, and thus
have the burden of reporting their own income. In contrast, lower-income people
typically earn wages, which in the United States are reported directly to the
government by an employer in the form of W-2s. Among wage earners, rates of tax
evasion are almost zero, Zucman says.
The United States is now becoming one of the world’s
largest tax and secrecy havens. Here's why. (Daron Taylor/The Washington Post)
In addition to providing new insight into the nature of
tax evasion, the researchers say their findings probably mean that economists
have significantly underestimated inequality. If the top 0.01 percent have 30
percent more wealth than their tax returns indicate, that puts far more
distance in the yawning wealth gap between the haves and have-nots.
“It increases measured inequality quite
substantially,” said Zucman.
For Zucman, the findings imply that governments are
missing out on a lot of revenue that is being hidden by the super wealthy. He
says governments could recover more of these funds by cracking down on the kind
of tax evasion services provided by the companies at the center of the Swiss
and Panamanian leaks. To do so, countries would need to increase the penalties
for facilitating tax evasion until what is now a very lucrative industry
becomes too risky.
Despite the high profile leaks of the past few years,
there hasn't been much progress on this front, Zucman says. “If it remains
profitable for the providers of offshore services to facilitate tax evasion,
tax evasion will continue.”
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