Income inequality and offshore tax dodging: The rich are richer than we thought

 
British Virgin Islands
Money kept in offshore tax havens, like the British Virgin Islands, can disguise the extent of income inequality. (Matt Briney/Unsplash)
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It’s difficult to assess the net worth of the world’s super-rich. Havens like the Cayman Islands, Switzerland and Hong Kong are happy to stash their cash, offering privacy and a shelter (often perfectly legal) from taxes. And without knowing how rich the rich are, we can’t make an accurate assessment of income inequality.

But new sources of data, including leaks such as the Panama Papers, are helping researchers shine light on these shelters.

That is the impulse behind two new working papers for the National Bureau of Economic Research by Annette Alstadsæter of the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen, and Gabriel Zucman of the University of California, Berkeley. The team shows that measuring income by tax declarations alone is misleading – since so many people dodge their taxes – and that income inequality in many countries is far worse than previously thought.

In the first paper, “Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality,” researchers use statistics released for the first time in 2016 by the Bank for International Settlements – the Basel-based arbiter for central banks – to estimate global offshore wealth for each country. These data show, for example, the total deposits of French nationals in Hong Kong or Kazakh citizens in the British Virgin Islands and date back to the early 2000s.

Building on a 2013 paper by Zucman, the team estimates that the equivalent of almost 10 percent of global economic output – or $5.6 trillion in 2007 – is held offshore, where it is out of the taxman’s sights.

The authors focus their estimates on 2007 because the use of shell companies (a way to obscure a company’s beneficiaries) has accelerated since the mid-2000s, when new European regulations tried to tax offshore holdings. The researchers’ “snapshot of offshore wealth on the eve of the global financial crisis” is intended as a starting point for future research on the offshore holdings and tax avoidance of the super-rich. Some of their findings:

  • Globally, offshore wealth increased by over 35 percent between 2007 and 2015.
  • Accounting for offshore assets increases the richest families’ wealth substantially, demonstrating rising levels of inequality in most countries since the 1980s, including the United States and Europe.
  • The share of wealth owned by the top 0.01 percent in the U.S. has reached levels last seen in Europe when the continent was ruled by emperors.
  • While the equivalent of about 10 percent of global economic output (GDP) is held offshore, there is wide variation across countries. “The size of offshore wealth is not easily explained by tax, financial or institutional factors.” Instead, “proximity to Switzerland — the first country that developed a cross-border wealth management industry, in the 1920s – is associated with higher offshore wealth, as is the presence of natural resources [such as oil], and political and economic instability post-World War II.”
  • Countries with the largest amount of wealth, relative to GDP, held abroad are Israel, Kenya, Kuwait, Russia, Saudi Arabia, United Arab Emirates, Venezuela and Zimbabwe. Citizens of each have offshore wealth worth over 40 percent of GDP.
  • Globally, about 80 percent of offshore wealth belongs to the top 0.1 percent of richest families; about 50 percent belongs to the top 0.01 percent.
  • In Russia, offshore wealth has “dramatic implications” for income inequality. According to the authors’ calculations, Russians’ offshore wealth was worth around 60 percent of GDP in 2015. (The methodology used to examine Russia, a complicated case because so many of its wealthy keep their assets abroad, is discussed here.)
  • A boom in Hong Kong’s private banking industry since the financial crisis suggests “China’s offshore wealth has increased.”
  • The findings are robust when checked against the data made available by the 2016 leak of the so-called “Panama Papers,” which were the subject of a Pulitzer Prize-winning investigation by the International Consortium of Investigative Journalists.

There are limits to the findings. The data made available by the Bank for International Settlements include deposits, not stock portfolios or tangible assets like art and real estate. Moreover, a growing amount of wealth is held by shell corporations in places like the British Virgin Islands and Panama, obfuscating the ultimate owners.

In a second paper, “Tax Evasion and Inequality,” the team drills down, looking more specifically at tax evasion by the super-rich in Scandinavia, a region with high taxes but also high social trust and respect for the rule of law. The authors examine Scandinavia because of the availability of several data sets and believe that tax evasion among the wealthy is higher elsewhere.

  • Scandinavians evade, on average, about 3 percent of their personal taxes. This number rises to 30 percent for those in the top 0.01 percent (households with over $45 million on net wealth). “Tax evasion rises sharply with wealth.”
  • Using data from a 2008 leak of account information from HSBC Private Bank Switzerland, the authors found over 90 percent of Scandinavians with accounts there did not declare them to their own tax authorities as required by law.
  • Households with $10-12 million in assets are twice as likely as households with $5-6 million to conceal them from tax authorities; households with over $45 million are four times more likely.
  • Thus, the wealth in offshore tax havens is “extremely concentrated”; the top 0.01 percent of households own about 50 percent of it.
  • For the top 0.1 percent of households, accounting for accounts offshore increases their wealth by a third.

Other resources:

The Gini coefficient is a common measurement of inequality in a country. The World Bank publishes comparative data here and the United Nations here. A value of 0 indicates perfect equality, whereas a value of 1 represents absolute inequality.

The Economy, a free online textbook by some of the world’s top economists, has an excellent chapter on income inequality.

The World Wealth and Income Database, run by Zucman and other academics, allows for quick comparisons of inequality across countries.

Journalist’s Resource has featured many scholarly approaches to income inequality, including how retirement planning plays a role, the growing support for government action in America, the place of labor unions and how globalization enriches executives.

Last updated: September 15, 2017

 

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Citation:
  • Alstadsæter, Annette; Johannesen, Niels; Zucman, Gabriel. “Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality.” NBER Working Paper, September 2017.
  • Alstadsæter, Annette; Johannesen, Niels; Zucman, Gabriel. “Tax Evasion and Inequality.” NBER Working Paper, September 2017.