The Hidden Wealth of Nations

1. Tax havens enable massive wealth concealment and corporate tax avoidance

Tax havens are at the heart of financial, budgetary, and democratic crises.

Wealth concealment: Tax havens allow wealthy individuals to hide their assets from tax authorities, enabling them to evade taxes on income, capital gains, and inheritances. This practice undermines the social contract of fair taxation and exacerbates inequality.

Corporate tax avoidance: Multinational corporations use tax havens to shift profits and reduce their tax liabilities. They employ techniques such as:

• Intragroup loans to load subsidiaries in high-tax countries with debt
• Transfer pricing manipulation to move profits to low-tax jurisdictions
• Exploitation of intellectual property rights and intangible assets

The scale of tax avoidance is massive:

• US firms alone avoid an estimated $130 billion in taxes annually
• 55% of US corporate profits made abroad are booked in tax havens
• The effective corporate tax rate for US firms has fallen from 30% to 20% since the late 1990s

2. Switzerland pioneered offshore banking, still holding $2.3 trillion in foreign wealth

Up until the end of the 1990s, the amount of wealth held in Swiss banks was one of the best kept secrets in the world.

Historical development: Switzerland's rise as a tax haven began in the 1920s, coinciding with increased taxation in other European countries. Key factors in its success included:

• Banking secrecy laws enacted in 1934
• Political neutrality and stability
• Sophisticated wealth management services

Current status: Despite increased competition from other tax havens, Switzerland remains a dominant player:

• $2.3 trillion in foreign wealth held as of 2015
• 6% of European households' financial wealth
• Continued growth despite international pressure (18% increase from 2009 to 2015)

Swiss banks have adapted to maintain their position by:

• Focusing on ultra-high net worth clients
• Utilizing shell companies and trusts to maintain secrecy
• Shifting some operations to other tax havens like Singapore

3. 8% of global household financial wealth ($7.6 trillion) is held in tax havens

Out of this total, I estimate that 8%, or $7.6 trillion, is held in accounts located in tax havens.

Distribution of offshore wealth:

• Switzerland: $2.3 trillion (30% of total offshore wealth)
• Other major tax havens: Singapore, Hong Kong, Bahamas, Cayman Islands, Luxembourg, Jersey

Composition of offshore wealth:

• Financial securities (stocks, bonds, mutual funds): $6.1 trillion
• Bank deposits: $1.5 trillion

Regional variations:

• Europe: 10% of financial wealth held offshore
• United States: 4% of financial wealth held offshore
• Africa: 30% of financial wealth held offshore
• Russia: 52% of financial wealth held offshore

The concentration of offshore wealth highlights the global nature of tax evasion and the disproportionate impact on developing countries.

4. Tax evasion costs governments $200 billion annually in lost revenue

By my estimate, the fraud perpetuated through unreported foreign accounts each year costs about $200 billion to governments throughout the world.

Breakdown of tax revenue losses:

• $125 billion from evaded taxes on investment income
• $55 billion from evaded inheritance taxes
• $10 billion from evaded wealth taxes (in countries that have them)

Impact on different countries:

• Europe: $78 billion in annual revenue loss
• United States: $35 billion in annual revenue loss
• Developing countries: Disproportionately affected due to higher percentages of wealth held offshore

Consequences:

• Reduced funding for public services and infrastructure
• Increased tax burden on law-abiding citizens
• Exacerbation of wealth inequality
• Undermining of fiscal consent and social cohesion

5. Previous attempts to curb tax havens have largely failed due to lack of enforcement

To believe that they will spontaneously give up managing the fortunes of the world's tax dodgers, without the threat of concrete sanctions, is to be guilty of extreme naïveté.

Failed approaches:

1. On-demand exchange of information: Ineffective due to high burden of proof for requesting countries
2. Voluntary disclosure programs: Limited impact, often exploited by tax havens
3. EU Savings Tax Directive: Easily circumvented through use of shell companies and trusts

Reasons for failure:

• Lack of sanctions for non-compliance
• Insufficient mechanisms to verify accurate information sharing
• Continued use of shell companies and trusts to obscure beneficial ownership
• Focus on specific types of income (e.g., interest) while ignoring others (e.g., dividends)

Lessons learned:

• Need for automatic information exchange
• Importance of addressing financial opacity and beneficial ownership
• Necessity of credible sanctions for non-cooperation

6. Automatic information exchange and financial sanctions can combat tax havens

Only combined international pressure can truly have an effect, by shifting the incentives of tax havens.

Automatic information exchange:

• FATCA (Foreign Account Tax Compliance Act) in the US as a model
• Global implementation of similar measures by OECD countries

Financial sanctions:

• Withholding taxes on payments to non-cooperative jurisdictions
• Trade tariffs proportional to the costs imposed by tax havens

Implementation strategy:

1. Form coalitions of major economies to exert pressure
2. Set clear benchmarks for cooperation and transparency
3. Apply graduated sanctions for non-compliance
4. Continuously monitor and adjust measures as needed

Potential impact:

• Increased tax revenue for participating countries
• Reduced incentives for tax havens to maintain secrecy
• Improved global financial transparency and cooperation

7. A global financial register would enable effective wealth taxation and transparency

To create a world financial register, the first step would involve merging the computer data of the DTC (for American securities), Euroclear Belgium and Clearstream (for stateless securities), Euroclear France (for French securities), and of all the other national central depositories.

Key components:

• Comprehensive database of financial asset ownership
• Integration of existing national and private security registries
• Identification of beneficial owners, not just intermediaries

Benefits:

• Enable verification of information reported by financial institutions
• Facilitate implementation of wealth taxes
• Improve detection of money laundering and illicit financial flows
• Enhance financial stability monitoring

Implementation challenges:

• Coordination among multiple countries and institutions
• Addressing privacy concerns
• Overcoming resistance from financial industry

Potential administrators:

• International Monetary Fund (IMF)
• Network of national central banks

8. Corporate tax avoidance can be addressed by taxing global consolidated profits

A promising solution consists in starting from the global, consolidated profits of firms, which cannot be manipulated.

Current system flaws:

• Reliance on separate entity accounting
• Manipulation of transfer prices and intragroup transactions
• Exploitation of differences in national tax laws

Proposed solution:

1. Calculate global consolidated profits for multinational corporations
2. Allocate profits to countries based on objective factors (e.g., sales, employment, capital)
3. Allow individual countries to apply their chosen tax rates to allocated profits

Advantages:

• Eliminates incentives for profit shifting
• Simplifies tax compliance for multinational firms
• Preserves national sovereignty in setting tax rates

Implementation steps:

1. Adopt similar systems at regional levels (e.g., EU's CCCTB proposal)
2. Negotiate bilateral agreements between major economies (e.g., US-EU)
3. Gradually expand to global implementation

9. Citizens must mobilize to pressure governments to act against tax havens

To turn the page on large-scale fraud, the battle that must be fought is not just a battle between governments. It is above all a battle of citizens against the false inevitability of tax evasion and the impotence of nations.

Importance of citizen engagement:

• Governments have shown limited determination in tackling tax havens
• Public pressure is needed to overcome resistance from vested interests
• Citizen mobilization can shift political priorities and drive policy change

Action steps for citizens:

1. Educate themselves and others about the impact of tax havens
2. Demand transparency and accountability from political leaders
3. Support organizations and initiatives working to combat tax evasion
4. Vote for candidates committed to addressing offshore tax avoidance
5. Engage in public discourse and debate on tax fairness

Potential outcomes:

• Increased political will to implement effective measures
• Greater public awareness of the costs of tax havens
• Shift in social norms regarding tax compliance and fairness

Last updated: October 10, 2024