When the Panama
Papers were leaked in May of 2016, the scheming of the super-rich to avoid
paying taxes by hiding their identities offshore was thrown into headlines around
the world. Some journalists, scrambling to make sense of the 11.5 million
documents,
set about trying to uncover the identities of the shadowy figures behind the
web of deceit, while others valiantly tried to explain the complex financial mechanisms.
What the public needed was an overview by an expert, a clear analysis of how
tax havens work, in simple language, with enough detail to make the picture
complete yet without being too technical.
In
The Hidden Wealth of Nations: The Scourge of Tax Havens, Gabriel Zucman
has done that brilliantly—and much more. Eschewing scandals and the naming of
individuals, he provides a clear description of how the system works,
revealing, perhaps surprisingly, that it is, at its core, rather simple. But he
goes much further, calculating the true extent of tax evasion, in dollar terms,
by crunching publicly available economic numbers in ways that have not been
used before. (Tax evasion, in his analysis, includes what lawyers call “tax
avoidance,” the legal exploitation of loopholes, since both evasion and
avoidance exist only to dodge the taxman.) He shows that more than 8% of global
financial wealth, consisting of stocks and bonds, shares in mutual funds, and
bank deposits, is hidden from tax authorities, amounting to 7.6 trillion
dollars. That enormous figure is a minimum, because it does not include
non-financial forms of wealth such as real estate, gold, jewelry, art, etc. Now
that governments are at long last in possession of real numbers, they are much
better placed to address the problem of tax havens and lost taxes. Finally,
Zucman presents a simple plan for bringing global tax cheating to an end. It’s
a breathtaking achievement to do so much in a book consisting of only 120
pages. But is it to be believed? In the foreword no less a luminary than Thomas
Piketty, author of the monumental Capital in the Twenty-First Century,
calls The Hidden Wealth of Nations “probably the best book that has ever
been written on tax havens and what we can do about them.”
While
the book is certainly an important handbook for policy makers, and while it
might yield deeper insights to readers with a background in business and
finance, Zucman has written it with the layperson in mind. Because governments,
he says, “have not been stellar” in fighting the scourge of tax havens, an
informed and mobilized public is needed to drive the campaign against tax
havens to its conclusion.
What
do his numbers reveal? Nine percent of Canadian financial wealth or US$300 bn
is held offshore by Canadian citizens, resulting in an annual loss of US$6 bn
in tax revenue. If back taxes were collected and penalties assessed for not
declaring assets, the government would reap an enormous windfall. Even more,
these numbers do not include losses incurred when governments had to lower tax
rates to slow the flight of capital to tax havens. Four percent of U.S. wealth
is held offshore, representing $1,200 bn in annual lost tax revenue. Ten
percent of the financial wealth of Europe is held offshore, depriving European
governments annually of $87 bn. The numbers for Russia show the extent of the
oligarchy, with 52% of financial wealth held offshore. Sadly, Africa, which
needs its tax revenue sorely for basic services and development, has 40% of its
financial wealth hidden from tax authorities.
After
tracing the history of tax havens from the end of World War I, when governments
instituted progressive taxes in order to offset their huge debts and provide
benefits to veterans, and following a chapter on the failed efforts of
governments to address the problem of tax havens, Zucman proposes a
straightforward solution, a global financial register. Such a record, listing
who owns all financial securities in circulation—all stocks, bonds, and shares
in mutual funds worldwide—perhaps managed by the IMF, would strip tax cheaters
of their anonymity and enable nations to collect the taxes due to them.
Reporting must be automatic, leaving bankers in tax havens with no discretion
to falsify information about their clients, as Swiss bankers did on a huge
scale at two critical points in the past. Also because of past failures to
eliminate tax havens, Zucman insists that countries tempted to continue
operating as tax havens must be compelled to participate through sanctions. In
plain economic terms he demonstrates how the threat of carefully crafted trade
tariffs against recalcitrant countries, designed to capture lost tax revenue,
would leave tax havens no choice but to surrender, and he points out that such
a move is allowed under current treaties.
Fiscal
dissimulation does not end with wealthy individuals; there is also the problem
of corporations avoiding taxes through profit shifting. Various accounting
tricks are used to ensure that branches in high tax countries show little or no
profit, while most of the company’s profits show up in countries with low
taxes, Luxembourg being a favourite destination because of its
“modest”`corporate tax rate of 0%. Again Zucman provides numbers: 55% of
foreign profits of U.S. firms are declared in tax havens; and U.S. tax losses
amount to 20% of all U.S. profits. Rather than asking governments to play cat
and mouse with the corporations over their profits (the tax department of GE
consists of almost 1,000 employees), Zucman proposes that corporate profits not
be approached country by country; rather, the worldwide profit of a corporation
should be calculated. Each country would then be assigned a weighting based on
sales, capital, and employees, and based on its weighting the country could
then assess taxes according to the rate of its choice. This corporate solution,
he explains, would be easier to implement than the global financial register
for individuals. He even proposes a method for ensuring that corporations would
pay up.
For
all his proposed solutions, Zucman preempts objections that they are “utopian”
by demonstrating how they are currently operating successfully in smaller
jurisdictions.
The
big surprise about large-scale tax dodging is how essentially simple it is,
resting entirely on anonymity, and how relatively straightforward the solutions
are. While the G20 summit in 2009 made a good, if unsuccessful, effort at
eliminating the scourge of tax havens, Zucman`s book may make it possible that
we truly will one day see the much sought-after “end of banking secrecy.”
