The Hidden Wealth of Nations

by Gabriel Zucman

  17. Adam, “Impact de l’échange automatique d’informations.”

  18. See, for instance, Credit Suisse, Global Wealth Report 2013, https://publications.credit-suisse.com/tasks/render/file/?fileID=BCDB1364-A105-0560-1332EC9100FF5C83.

  19. Adam, “Impact de l’échange automatique d’informations,” p. 8.

  20. Thomas Piketty and Gabriel Zucman, “Capital Is Back: Wealth-Income Ratios in Rich Countries, 1700–2010,” Quarterly Journal of Economics 129, no. 3 (2014).

  21. Bulletin de statistique et de législation comparée, vol. 1, 1908, p. 280. See also the budget plan for 1910, Bulletin de statistique et de législation comparée, vol. 1, 1909, p. 627.

  22. Niels Johannesen and Gabriel Zucman, “The End of Bank Secrecy?: An Evaluation of the G20 Tax Haven Crackdown,” American Economic Journal: Economic Policy 2014 6, no. 1 (2014): 65–91, http://gabriel-zucman.eu/files/JohannesenZucman2014.

  23. See US Senate, Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts. Staff Report of the Permanent Subcommittee on Investigations (Washington, DC: February 2014). See also Gabriel Zucman, “Taxing Across Borders: Tracking Personal Wealth and Corporate Profits,” Journal of Economic Perspectives 28, no. 4 (2014): 121–48.

  24. Federal administration of contributions, Directives relatives à la fiscalité de l’épargne de l’UE (retenue d’impôt et déclaration volontaire), July 1, 2013, http://www.estv.admin.ch/.

  25. Jean-Claude Juncker, quoted in “Le Luxembourg sera prêt à assouplir le secret bancaire en 2015,” Le Monde, April 10, 2014, http://www.lemonde.fr/economie/article/2013/04/10/le-luxembourg-sera-pret-a-lever-le-secret-bancaire-en-2015_3157200_3234.html.

  26. For a formal demonstration of these results, see Constantinos Syropoulos, “Optimum Tariffs and Retaliation Revisited: How Country Size Matters,” Review of Economic Studies 69, no. 3 (2001).

  27. On the commercialization of sovereignty, see Ronen Palan, “Tax Havens and the Commercialization of State Sovereignty,” International Organization 56, no. (2002).

  28. For some details, see the website of the Regulatory Oversight Committee (ROC) of the Global Legal Entity Identifier System at http://www.leiroc.org.

  29. Part of the material in this chapter was originally published in Gabriel Zucman, “Taxing Across Borders: Tracking Personal Wealth and Corporate Profits,” Journal of Economic Perspectives 28, no. 4 (2014): 121–48.

  30. Kimberly A. Clausing, “Tax-Motivated Transfer Pricing and US Intrafirm Trade Prices,” Journal of Public Economics 87 (2003): 2207–23.

  31. Jesse Drucker, “Google 2.4% Rate Shows How $60 Billion Is Lost to Tax Loopholes,” Bloomberg, October 21, 2010, http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-tax-loopholes.html.

  32. See Gabriel Zucman, “Taxing Across Borders: Tracking Personal Wealth and Corporate Profits,” Journal of Economic Perspectives 28, no. 4 (2014): 121–48.

  33. Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes, “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” Journal of Finance 66, no. 3 (2011): 753–87.

  34. OECD, Action Plan on Base Erosion and Profit Shifting, July 2013, http://www.oecd.org/ctp/BEPSActionPlan.pdf.

  Index

  Africa, 31, 32–33, 53

  Amazon, 104

  Apple, 1, 104

  arm’s-length pricing, 103

  Austria, 69, 70

  automatic exchange of data: EU savings tax directive and, 68, 69; FATCA and, 64–65, 66, 73–74; first international treaty for, 59; on inheritances in France, 57–59; progress toward a global system, 64–65; to end tax fraud, 5

  Bahamas, 23, 35, 71, 85

  Bank for International Settlements (BIS), 39

  bank note wealth, 43

  Bergier, Jean-François, 13

  Bergier commission, 13, 15, 16, 20

  Bermuda, 4, 103, 104, 105, 107, 109, 111

  Birkenfeld, Bradley, 68

  Bretton Woods, 23

  British Virgin Islands, 1, 26, 28, 31, 33, 43, 45, 73, 77

  BSI, 67

  Cahuzac, Jérôme, 62

  Caillaux, Joseph, 57, 58

  Canada, 21, 53, 85

  Capital in the Twenty-First Century (Piketty), 98

  Cayman Islands: dominance in hedge funds, 27; financial wealth held in tax havens, 35; role in routine tax fraud, 10–11; role in world’s asset/liability imbalance, 38; trust registration in, 28

  Clearstream, 4, 94–95

  Common Consolidated Corporate Tax Base (CCCTB), 112

  Congress of Vienna (1815), 9

  Convention IV, 21

  cost of offshore tax evasion. See global cost of offshore tax evasion

  Credit Suisse, 13, 16, 67, 68

  Cyprus, 1, 90

  Depository Trust Company (DTC), 4, 93–94

  derivatives, 97–98

  Economist, 15

  Euroclear, 94, 95

  Euroclear France, 95

  European Union: anti-tax-haven coalitions and, 84; attempt at an automatic exchange (see EU savings tax directive); means of achieving a tax on global profits, 112–13; ownership of wealth managed by Swiss banks, 16; question of Luxembourg’s membership in, 89–92

  EU savings tax directive: ease of avoiding the withholding tax, 70–71; effect of, 72–73; exemptions granted to some countries, 69–70; ignoring of dividends by, 71; premise of, 69; revenues lost due to evasion, 73

  financial register, global. See global financial register

  Foreign Account Tax Compliance Act, US (FATCA): criticisms of, 63, 65–66; penalty for noncompliance, 63–64, 65; prediction for future of automatic exchange of data, 73–74; problem of compliance verification, 67–68; problem of dissimulation, 66–67; progress toward global automatic exchange of data, 64–65; protections afforded to large banks, 68; provisions of, 62–63; qualified intermediary program failure, 66–67; scope of, 71–72

  France: bank holdings in Switzerland, 16, 31, 32; blockade imposed on Monaco, 76; history of tax evasion and, 9, 15, 18, 57–58; income tax on noncooperative territories, 77; inheritance tax and, 50, 57–59; leverage over Switzerland, 5, 80, 81, 82–83, 84, 85; pitfalls of on-demand information exchange, 62; post–WWII pressure to end Swiss banking secrecy, 18–19; public debt benefit of ending hidden wealth, 54–55; role in a world financial register, 95; US stock holdings held in, 21; withholding-tax agreements, 70

  G20 countries: current approach to reform, 110; interest in ending secrecy, 4, 29, 46; lack of systemic penalties, 77; on-demand exchange of information enacted by, 59–62

  Germany: bank holdings in Switzerland, 31, 32; investments in, 17; leverage over Switzerland, 5, 81, 83, 84, 85; US stock holdings held in, 21

  global cost of offshore tax evasion: amount in bank deposits, 39; annual revenue cost of unreported foreign accounts, 47–48, 50; average return on private capital, 49–50; average wealth per client, 46–47; balance-sheet imbalance due to hidden assets, 37; bank note wealth not accounted for, 43; calculation basis, 36–37, 116n12; declared vs. undeclared offshore wealth, 48–49; estimates using the asset/liability imbalance, 38–39; estimation method used by Henry, 40–42; financial wealth in tax havens, by country, 35–36; growth of offshore wealth since 2009, 46; life insurance wealth not accounted for, 44; losses not included in the calculations, 50–51; nonfinancial wealth not accounted for, 44–45; percent of households’ financial wealth held in tax havens, 35, 39, 45, 52–53; public debt benefit of ending hidden wealth, 54–55; shell companies and, 47; social benefits of unreported income, 51–52; source of new inflows, 46; tax revenue losses globally, 52–53; total amount of tax evasion on investment income in 2014, 50; total global household financial wealth, 35; uncertainties inherent in the estimates, 39–40, 45

  global financial register, 92; challenge of identifying owners, 95–96; change from a paper-based securities exchange system, 93–94; choice of a public body to manage it, 95; Clea
rstream’s clearinghouse role, 94–95; defect in the current central depository system, 94; derivative products inclusion, 97–98; global wealth tax proposal, 98–101; need for, 92–93; plan of action for creating, 95; public benefit of, 93; purpose of, 4–5; question of a threat to individual privacy, 96–97

  Google US, 103–4

  Grand Duchy. See Luxembourg

  Greece, 35, 54

  Henry, James, 40–42

  Hong Kong: EU savings tax directive and, 61, 70; exports as a total of GDP, 78; financial wealth held in tax havens, 35; growth of offshore wealth since 2009, 46; history of tax evasion and, 23; potential impact of sanctions on, 80

  HSBC, 67, 68

  inheritances, 50, 51, 57–59, 82

  International Monetary Fund (IMF), 95

  intragroup loans, 103

  Ireland: advantages of country-specific profit attribution system, 111; cost of tax avoidance, 109–10; dominance in monetary funds, 27; responsibility for crises, 1, 90; role in world’s asset/liability imbalance, 38, 105

  Italy: bank holdings in Switzerland, 31, 32; leverage over Switzerland, 5, 81, 83, 84, 85

  Japan, 78, 103

  Jersey, 23, 35, 61

  Juncker, Jean-Claude, 74

  Lebanon, 64

  Leroy-Beaulieu, Paul, 57

  Liechtenstein, 28, 71, 73

  life insurance wealth, 44

  Lombard credit, 11

  Luxembourg: amount held in mutual funds, 33; contribution to fraud, 1; dominance in incorporation of mutual funds, 26, 27, 29; dominance in the finance industry, 85–87; economic health of, 87, 90–91; exemption from the EU savings tax directive, 69; exports as a total of GDP, 78; financial impact of its trade in sovereignty, 87–89; financial wealth held in tax havens, 35; growth of offshore wealth since 2009, 46; history of tax evasion and, 23; potential impact of financial transparency on, 91–92; questioning of validity of its membership in the EU, 89–90; role in world’s asset/liability imbalance, 38, 105; sharing of information, 40

  Mediapart, 62

  Monaco, 76

  multinational corporations: advantages of country-specific profit attribution system, 111; cost of tax avoidance by US firms, 1, 105, 109; effective tax rate paid by US firms, 107–8; fundamental multinational corporations problem with the corporate tax, 102; illustration of how a firm avoids taxes, 10–11; intragroup loans and, 103; means of achieving a tax on global profits, 111–13; means of attributing intra-country profits to each country, 110–11; problem with trying to strengthen transfer-pricing regulations, 110; tax benefits of shifting profits to low-tax locales, 105–8; tax inversion by US firms, 107; transfer prices manipulation and, 103–4

  negative externality, 79

  Netherlands, 105, 106

  nonfinancial wealth, 44–45

  off-balance-sheet activities, 12–13

  offshore tax evasion costs. See global cost of offshore tax evasion

  offshore wealth management: beginning of the service, 11–12; change from land-ownership wealth to financial wealth, 9, 11; country most dominant in (see Switzerland); electronic transfers use, 10; historical impetus of tax evasion, 8–9; steps in sheltering money profitably, 10–11

  on-demand exchange of information, 59–62

  Organisation for Economic Co-operation and Development (OECD): automatic exchange of data and, 64, 65, 77; current approach to reform, 110; enactment of on-demand exchange of information, 59–62

  Panama, 19, 26, 71

  pay to bearer securities, 10–11

  Pigou, Arthur, 79

  Piketty, Thomas, 98

  policies to fight against tax havens: absence of a strategy to end banking secrecy, 65–66; automatic exchange of information in France, 57–59; beginnings of, 56–57; failure of the EU savings tax directive (see EU savings tax directive); FATCA and (see Foreign Account Tax Compliance Act); first international treaty for automatic exchange, 59; global register and (see global financial register); number of information-sharing treaties signed, 61; on-demand exchange of information by G20 countries, 59–62; pitfalls of on-demand information exchange, 62; problem of compliance verification, 67–68; problem of dissimulation, 66–67; progress toward global automatic exchange of data, 64–65; sanctions and (see sanctions)

  Programme for International Student Assessment (PISA), 91

  Puerto Rico, 89

  Rubik agreement, 20

  sanctions: country benefits from harboring tax havens, 75–76; creating a coalition of countries to impose, 81, 84–85; economic justification for, 78–79; effectiveness of systematic penalties for noncompliance, 77; example of the potential impact of a trade tariff, 81–84; goal of, 84; importance of measuring the hidden wealth first, 79; international trade focus approach, 77–78; Luxembourg’s protection from, 85–91; margin of error when calculating optimal customs duties, 82–83; optimal coalition size, 81; potential to force transparency compliance, 5, 76; risks in imposing trade tariffs, 79–80

  savings tax directive, EU: ease of avoiding the withholding tax, 70–71; effect of, 72–73; exemptions granted to some countries, 69–70; ignoring of dividends by, 71; premise of, 69; revenues lost due to evasion, 73

  Schaufelbuehl, Janick Marina, 19

  S-corporations, 108

  shell corporations: avoidance of the EU withholding tax, 71; benefits to tax-haven countries, 75, 88; citizenship of people hiding their money in, 31–32; for hidden asset ownership, 45, 47, 72; increase in use since 2009, 47; Panama and, 19; Switzerland and, 28

  Singapore: advantages of country-specific profit attribution system, 111; automatic exchange of data and, 64; exemption from the EU savings tax directive, 70; exports as a total of GDP, 78; financial wealth held in tax havens, 35; growth of offshore wealth, 46, 61; history of tax evasion and, 23, 25; nonfinancial wealth held in, 45; role in world’s asset/liability imbalance, 105

  Spain, 1, 43, 55, 84

  Starbucks, 110–11

  Swiss Bankers Association, 9, 21

  Swiss National Bank (SNB), 9, 29

  Switzerland: amount of foreign wealth held by, 4; avoidance of the EU withholding tax, 72–73; banking cartel formation, 9; banks’ asset growth, pre–WWII, 15; benefits from its financial system, 1; composition of the hidden wealth, 16–17; countries of origin of foreign-owned assets, 16; culpability in enabling tax fraud, 12, 28–29; current prosperity of wealth management system, 24–25; determination of the amount of wealth held in Swiss banks, 12–14; distribution of bank holdings by country, 31, 32–33; emergence of new centers of wealth management after 1980s, 23–24; estimate of current foreign wealth holdings, 29–31; falsity about why Swiss banking is successful, 17; financial benefit from oil crisis of 1973, 22; financial wealth held in tax havens, 35; fraud enacted to protect depositors, 19; growth in offshore wealth, pre–WWII, 14–15; growth of offshore wealth since 2009, 46; growth of wealth management up to the 1970s, 20, 21; increase in fees charged for Swiss assets, 21–22; measures taken by banks to protect against an inflow of capital, 22–23; myth about the origin of banking secrecy laws, 15–16; post–WWII decrease in value of hidden wealth, 18; post–WWII pressure to end secrecy, 18–19; potential for sanctions to force transparency compliance, 5; problem of not identifying the true beneficiaries of the wealth, 30–32, 116n10; problem with relying on voluntary reporting compliance, 19–20; reason to deposit securities in a Swiss bank, 17; results of US Treasury surveys of ownership of holdings, 20–21; role in world’s asset/liability imbalance, 105; statistics on wealth held in, 13, 25, 29, 72, 83; steps in sheltering money Switzerland profitably, 10–11; trade tariffs’ impact on, 81–84; types of investments made by foreigners, 33

  tax evasion: in Africa, 32–33; cost of in the United States, 53; dissuading with a global tax on wealth, 100–101; dominance of use of tax havens (see tax havens); global cost of (see global cost of offshore tax evasion); history of, 8–9, 15, 18–19, 22, 23, 25, 57–58; revenues lost due to, 73; tax avoidance by multinational corporations (see multinational corporations
)

  tax havens: amount of money held worldwide in, 3–4; asset/liability imbalance statistics and, 37; Cayman Islands’ dominance in hedge funds, 27; emergence of new centers of wealth management after 1980s, 23–24; ending using sanctions (see sanctions); ending using verification (see global financial register); facilitation of tax fraud by banks, 12; investment-fund managers’ role in, 26; Ireland’s dominance in monetary funds, 27; Luxembourg’s dominance in the finance industry, 26, 27, 29, 85–87; percent of households’ financial wealth held in, 35, 39, 45, 52–53; percent of US foreign profits held in, 4; problem with relying on voluntary reporting compliance, 19–20; proposal of a tax on consolidated profits, 5–6; responsibility for crises, 1; revenue stealing by, 1–2; specialization in stages of wealth management, 25–26; statistics’ importance in understanding, 3, 7, 20, 34, 35, 38, 39–40, 41, 79, 109; Swiss culpability in enabling tax fraud, 12, 28–29; symbolic power of finance and, 6–7; techniques used to hide beneficiaries, 27–28; wins and losses against, 2. See also tax evasion

  tax inversion, 107

  trade in sovereignty, 87–89

  transfer-prices manipulation: advantages of country-specific profit attribution system, 111; problem with trying to strengthen transfer-pricing regulations, 110; tax avoidance by multinational corporations and, 103–4

  UBS, 13, 67

  Undertakings for Collective Investment in Transferable Securities (UCITS), 26

  United Kingdom: anti-tax-haven coalitions and, 84, 85; asset/liability imbalance statistics and, 37; inadequacy of treaties and, 60, 69; inheritance taxes and, 59; leverage over Switzerland, 84, 85; US stock holdings held in, 21

  United States: asset/liability imbalance statistics and, 37; automatic exchange of data policy (see Foreign Account Tax Compliance Act); bank note wealth estimates, 43; cost of tax avoidance by US firms, 1, 105, 109; cost of tax evasion by the wealthy, 53; country origins of foreign profits, 105; effective tax rate paid by US firms, 107–8; exports as a total of GDP, 78; history of tax evasion and, 18–19, 22; illustration of how a firm avoids taxes, 10–11; means of achieving a tax on global profits, 111–13; need for a global register, 92–94; post–WWII pressure to end Swiss banking secrecy, 18–19; potential coalitions, 85; share of tax havens in total corporate profits, 105; stock holdings held in other countries, 21; Swiss culpability in enabling tax fraud, 17; Swiss transparency cooperation, 30; tax benefits of shifting profits to low-tax locales, 105–8; tax inversion by US firms, 107; tax treaty with Luxembourg, 27; transfer-prices manipulation and, 103