The Hidden Wealth of Nations

by Gabriel Zucman

  The Hidden Wealth of Nations

  The Hidden Wealth of Nations

  The Scourge of Tax Havens

  Gabriel Zucman

  Translated by Teresa Lavender Fagan

  With a Foreword by Thomas Piketty

  The University of Chicago Press

  Chicago and London

  GABRIEL ZUCMAN is assistant professor at the London school of economics.

  The University of Chicago Press, Chicago 60637

  The University of Chicago Press, Ltd., London

  © 2015 by The University of Chicago

  Foreword © 2015 by Thomas Piketty

  All rights reserved. Published 2015.

  Printed in the United States of America

  24 23 22 21 20 19 18 17 16 15 1 2 3 4 5

  ISBN-13: 978-0-226-24542-3 (cloth)

  ISBN-13: 978-0-226-24556-0 (e-book)

  DOI: 10.7208/chicago/9780226245560.001.0001

  Originally published as La richesse cachée des nations: Enquête sur les paradis fiscaux © Editions du Seuil et la République des Idées, 2013

  Library of Congress Cataloging-in-Publication Data

  Zucman, Gabriel, author.

  [Richesse cachée des nations. English]

  The hidden wealth of nations: the scourge of tax havens / Gabriel Zucman; translated by Teresa Lavender Fagan; with a foreword by Thomas Piketty.

  pages; cm

  Includes bibliographical references and index.

  ISBN 978-0-226-24542-3 (cloth: alk. paper) — ISBN 978-0-226-24556-0 (e-book) 1. Tax havens. 2. Tax evasion. I. Fagan, Teresa Lavender, translator. II. Piketty, Thomas, 1971–, writer of foreword. III. Title.

  HJ2336.Z8313 2015

  336.24'16—dc23

  2015019946

  ♾ This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence of Paper).

  Contents

  FOREWORD by Thomas Piketty

  INTRODUCTION Acting against Tax Havens

  ONE A Century of Offshore Finance

  TWO The Missing Wealth of Nations

  THREE Mistakes

  FOUR What to Do?: A New Approach

  FIVE The Tax Avoidance of Multinational Corporations

  CONCLUSION

  NOTES

  INDEX

  FOREWORD

  Thomas Piketty

  If you are interested in inequality, global justice, and the future of democracy, then you should definitely read this book. The Hidden Wealth of Nations by Gabriel Zucman is probably the best book that has ever been written on tax havens and what we can do about them. It is nontechnical and lively, and it achieves three different goals in a very concise and efficient manner.

  First, it provides a fascinating history of tax havens: how they came into existence in the interwar period, and how they gradually acquired the prominent role that they have today. Next, it offers the most extensive and rigorous quantitative evaluation ever proposed of the global financial significance of tax havens in today’s world economy. Finally, and most important, it sets a precise and realistic course of action for change, which has at its core the creation of a worldwide register of financial wealth recording who owns what in stocks and bonds.

  Tax havens with their financial opacity are one of the key driving forces behind rising wealth inequality, as well as a major threat to our democratic societies. Why is this so? Quite simply because modern democracies are based on a fundamental social contract: everybody has to pay taxes on a fair and transparent basis, so as to finance access to a number of public goods and services. Of course, there is ample room for disagreement about what “fair” and “transparent” taxation means. But if some of the wealthiest individuals and some of our largest corporations use tax havens and fiscal dissimulation in such a way that they avoid paying taxes almost entirely, then it is our basic social contract that is at stake. If middle-class taxpayers feel that they are paying higher effective tax rates than those at the top of the pyramid, if small and medium-size businesses feel that they are paying more than our largest companies, then there is a serious risk that the very notion of fiscal consent—which is at the core of modern democracies—will fall apart altogether. And if a rising fraction of the population, at the bottom and in the middle of the pyramid, feels that the system is not working for them, and that they are not being well treated by the global economy or by their government, then many might reject the very notion of interclass solidarity and of a fair fiscal and social state. Some might become tempted by nationalist solutions, ethnic divisions, and the politics of hatred.

  But what makes Zucman’s book so important is that it is not only about abstract principles and dangerous threats: it is about data and solutions. There are systematic inconsistencies in international financial statistics. In particular, there are always more liabilities than financial assets reported by the world’s financial centers. By analyzing these statistical anomalies in a systematic and innovative manner, Zucman offers one of the most credible evaluations to date of the global importance of tax havens. According to his benchmark estimate, which should be viewed as a lower bound, around 8% of the world’s financial wealth is held in tax havens. In developing and emerging countries, this percentage can be much higher, which makes it even more difficult to build fiscal consent and trust in government and to address situations of extreme inequality. In Africa the share of financial wealth that is held offshore is estimated by Zucman to be around 30%. In Russia and the oil-rich countries of the Middle East (probably the most unequal and explosive region of the entire world), the share of offshore financial wealth appears to be above 50%.

  In the United States, the share of offshore wealth certainly seems to be much less than in Africa or in Russia. Offshore personal wealth also appears to play a smaller role in the United States than in European countries, which have been particularly bad at coordinating their policies to fight tax havens. For instance, they had to wait for the US FATCA legislation and the US sanctions against Swiss banks in order to start moving in the direction of automatic information transmission.

  It would be a mistake, however, to underestimate the importance of tax havens for the US fiscal system. According to Zucman’s conservative estimates, eliminating the US tax revenue losses due to tax havens would be equivalent to an average tax increase of about 20% for all taxpayers within the top 0.1% income group. Also, while the United States may have less of an issue than Europe with offshore personal wealth, they have a bigger problem with corporate tax evasion by multinational companies. Finally, and most important, Zucman warns us that the FATCA legislation still has a lot of holes in it and that the overall importance of tax havens has continued to rise between 2008 and 2015. We might need much larger sanctions than those that have been implemented so far in order to make real progress. For instance, according to Zucman’s computations, the benefits that a country like Switzerland gains from financial opacity are equivalent to the losses that it would suffer from a 30% trade tariff imposed by its three biggest neighbors (Germany, France, and Italy). Of course, we might choose not to apply these sanctions—but then we should not complain when the problem gets bigger and bigger. Global financial opacity is a major challenge for all countries, and there is still a long way to go before we can curb these structural trends.

  According to Zucman, the key step should be the creation of a worldwide register of financial wealth, recording who owns what in stocks and bonds. This global financial register would act as a central depository: it would be coordinated by governments and international organizations, allowing national tax administrations to fight tax evasion and to levy taxes on capital-income flows and wealth stocks.

  Some might consider the very idea of a cen
tral depository as utopian. But it is not. In fact, central depositories for global securities already exist. The problem is that these central depositories are not truly global (they are national or sometimes regional), and most important they are private, not public. Starting in the 1950s and 1960s, securities were gradually dematerialized, and paper titles soon disappeared entirely. This is when modern central depositories were created, simply because there was a need to secure financial transactions and to keep track of who owns what in a computer database (it is difficult to do business if several financial institutions or economic agents in the world claim property rights over the same asset). A number of private financial institutions developed in order to provide this service. The most well-known central depositories are the Depository Trust Company (DTC) in the United States, and Euroclear and Clearstream in Europe. The problem is that these private institutions do not exchange information with governments and tax administrations on a systematic basis. Sometimes they even tend to exacerbate and to benefit from tax evasion and financial opacity (see, for example, the Clearstream scandal in France) rather than to promote transparency.

  Zucman’s proposal is clear and simple: governments should take control of these central depositories and gradually unify them into a global financial register. The United States, the European Union, Japan, and possibly the IMF should play a leading role in this process, together with the emerging countries in Asia, Latin America, and Africa that are currently losing a lot from tax evasion and capital flight and that are ready to join this cooperative effort. Participation in the global financial register would entail rights and duties, guaranteeing well-protected property rights and financial transactions, in exchange for a commitment to transmit all information that is necessary to identify the actual owners of all assets. This registration system, Zucman argues, should come together with a common minimal registration tax (say, 0.1% of individual net wealth), which could then be supplemented by higher progressive tax rates chosen by national governments (or regional coalitions of national governments).

  It is worth noting that the development of centralized registers for real estate and land property titles, together with the creation of inheritance taxes and annual property taxes, played a key role in the building of the modern state and legal systems during the eighteenth and nineteenth centuries. The problem is that these legal and fiscal systems of property registration and taxation were developed at a time when financial assets and liabilities did not play the major role that they do today, and that they were never fully updated for the modern world. In the early twentieth century, income tax systems were created in order to make new forms of wealth creation and income flow—in particular, corporate profits and dividends—contribute to the tax system. One problem that we see today is that it is difficult to properly tax and monitor the income flow generated by an asset if we do not at the same time have a proper registration and taxation system for the stock of assets. This is the problem for modern nations: they still live with a system to register property that was conceived more than two hundred years ago. The good news coming from The Hidden Wealth of Nations is that we now understand this problem more clearly, and we know that it can be solved.

  INTRODUCTION

  Acting against Tax Havens

  Tax havens are at the heart of financial, budgetary, and democratic crises. Let’s take a look: In the course of the last five years alone in Ireland and Cyprus—two offshore centers with hypertrophic financial systems—banks have gone almost bankrupt, plunging thousands of people into poverty. In the United States, Congress has revealed that one of the largest companies on the planet, Apple, avoided tens of billions in taxes by manipulating the location of its profits. In France, the budget minister had to resign because he had cheated on his taxes for twenty years through hidden accounts. In Spain, the former treasurer of the party in power went to jail after having revealed a hidden system of financing through accounts in Switzerland. Accepting the status quo seems irresponsible.

  Each country has the right to choose its forms of taxation. But when Luxembourg offers tailored tax deals to multinational companies, when the British Virgin Islands enables money launderers to create anonymous companies for a penny, when Switzerland keeps the wealth of corrupt elites out of sight in its coffers, they all steal the revenue of foreign nations. And they all win—fees, domestic activity, sometimes great influence on the international stage—while the rest of us lose. In the end, the taxes that are evaded have to be compensated for by higher taxes on the law-abiding, often middle-class households in the United States, Europe, and developing countries. Nothing in the logic of free exchange justifies this theft.

  What Is to Be Done?

  For some, the battle against tax havens has been viewed as lost from the start. From London to Delaware, from Hong Kong to Zurich, offshore banking centers are essential cogs in the financial machine of capitalism, used by the rich and powerful throughout the world. We can’t do anything about them, we’re told: some countries will always impose less tax and fewer rules than their neighbors. Money will always find a safe haven: strike here, it will go over there. Capitalism without tax havens is a utopia, and a progressive taxation of income and fortunes is destined to fail, unless we choose the path of protectionism.

  For others, the battle has almost been won. Thanks to the determination of governments and to multiple scandals and revelations, tax havens will soon die out. From the harsh words of large countries seeking new solutions ever since the financial crisis, they have all promised to abandon banking secrecy, and multinationals will finally be forced to open their books and pay what they owe. This is the triumph of virtue.

  What is missing in this debate is data. Tax evasion by the wealthiest individuals and large corporations can be stopped, but only if we have statistics to measure it, to implement proportional penalties against the countries that facilitate it, and to monitor progress.

  It is with this goal in mind that I wrote this book, an economic study of tax havens. I gathered the available sources on the international investments of countries, the balances of payments, the on- and off-balance sheet positions of banks, the wealth and income of nations, the accounts of multinational companies, and the archives of Swiss banks. Some of these statistics had never been used before, and this is the first time that all this information has been collected, confronted, and analyzed with a single objective: to expose the true activities of tax havens and their costs to foreign nations.

  Let’s say it from the outset: These statistics have many imperfections, and the results of my study are thus in no way definitive. Our system for measuring world financial activity has many weaknesses. But this is no reason not to use it. In spite of any limitations, the available data shed an irrefutable light on the activity of tax havens; and there is no foreseeable progress in ending tax evasion without a quantitative picture of the extent of this fraud. Only on the basis of such an evaluation, however imperfect, will it be possible to impose sanctions and follow any progress in the fight against the scourge of tax havens.

  The main conclusion of my investigation is that, despite some progress in curtailing it in recent years, tax evasion is doing just fine. There has, in fact, never been as much wealth in tax havens as today. On a global scale, 8% of the financial wealth of households is held in tax havens. According to the latest available information, in the spring of 2015 foreign wealth held in Switzerland reached $2.3 trillion. Since April 2009, when countries of the G20 held a summit in London and decreed the “end of banking secrecy,” the amount of money in Switzerland has increased by 18%. For all the world’s tax havens combined, the increase is even higher, close to 25%. And we are only talking about individuals here.

  Corporations also use tax havens. Corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a massive and growing scale. Fifty-five percent of all the foreign profits of US firms are now kept in such havens. Since multinationals usually try to o
perate within the letter—if not the spirit—of the law, this profit shifting is better described as “tax avoidance” rather than outright fraud. But its cost is enormous—$130 billion a year for US firms alone—and since equity ownership is very concentrated, it essentially benefits only the wealthiest among us.

  An Action Plan

  To effectively fight offshore tax avoidance and evasion, this book outlines a set of coherent and focused measures.

  The first is to create a worldwide register of financial wealth, recording who owns which stocks and bonds. Financial registries already exist, but they are fragmentary and maintained by private companies such as the Depository Trust Company in the United States and the Luxembourg bank Clearstream. The goal would be simply to combine them, to enlarge the field of data, and to transfer ownership of the data to the public. Combined with an automatic exchange of information between the banks of all tax havens and foreign tax authorities, a financial register would deal a fatal blow to financial secrecy.

  But how can all tax havens be compelled to cooperate? It is not enough to politely ask them to abandon the financial opacity that allows them to prosper. The second dimension of the plan of action I propose is to levy sanctions proportional to the costs that tax havens impose on other countries. Calls for transparency, new laws, or more bureaucrats are insufficient. Only combined international pressure can truly have an effect, by shifting the incentives of tax havens. One type of possible sanction is trade tariffs. The calculations presented in this book show that France, Germany, and Italy would be able to force Switzerland to disclose all the assets held there by their residents by jointly imposing customs duties of 30% on the goods that they import from Switzerland, because the costs for Switzerland would then be more than the income derived from its banks involved in tax evasion.