Have you ever used a tax-avoidance strategy like the “double Irish,” the “Dutch sandwich,” or the “Swiss cheese”? (Only one of those is made up.) Almost certainly not. But some slender, rich proportion of American individuals and companies has, and a new book by a University of California, Berkeley professor is casting the curtain on those fat cats wide open.
The book is The Hidden Wealth of Nations by Gabriel Zucman, and it is a slender, infuriating, and surprisingly readable text about the gnarly topic of tax evasion. Moreover, it is one that is being lauded as the data-driven, inequality-stoking heir to the research of the now-famed French economists Thomas Piketty and Emmanuel Saez.
It all starts with a mystery. The sum of the world’s financial liabilities and financial assets should be precisely the same: Company A issues a bond and makes payments, Company B buys the bond and receives payments. But for decades, economists have noticed a strange thing showing up in the accounts. The liabilities side of the ledger has come in higher than the assets side of the ledger, as if the Earth as a whole were trillions of dollars in debt to Mars, in Zucman’s memorable turn of phrase.
The reason, he shows, is that the wealthy people and corporations holding those earthly assets are tremendously good at hiding them — at least $8 trillion of them, or around 8 percent of all financial assets. They get socked away in accounts in Switzerland, Bermuda, the Cayman Islands, Luxembourg, Singapore, Panama, and elsewhere. Their earnings often never get properly reported to the tax authorities.
Worse, this shocking sum is but a lower bound. In the text, Zucman only looks at things like stocks and bonds. Add in real assets (houses, commercial buildings, land, art, yachts, gold, jewelry, and so on) and cash and you would end up with an even bigger and currently unknowable number. “Think about real estate held by offshore trusts in London and New York and other cities,” he told me. “It’s booming! But there’s basically no macroeconomic data or evidence on that.”
No matter their exact value, the riches held in havens have profound ramifications for all taxpayers, Zucman told me. “In the book, I want to explain how big this is and also why we should care,” he said. “In the United States, I’m struck by the extent of corporate tax avoidance by these Bay Area tech giants. And they seem to totally get away with it! People don’t seem to care.”
That consequence is this, he argues: Big, multinational firms that maneuver themselves into low effective tax rates increase taxes on small, domestic firms. “That’s very contrary to the notion of free-market competition here in the Bay Area,” Zucman noted. And the same goes for wealthy taxpayers. They hide their wealth and shirk Uncle Sam, leaving everyone else paying more.
Much more. Zucman estimates that the use of tax havens by households costs the United States government about $35 billion a year. That might not sound like much, given the government’s $1.5 trillion overall annual personal-income tax haul. But think about it this way: The wealthiest 0.1 percent of taxpayers pay about $200 billion in taxes. Evasion is reducing their annual tax bill by as much as 15 percent. And when it comes to corporate taxes, offshore accounts cost the government $130 billion a year.
The problem is yet worse abroad. Only about 4 percent of the United States’ wealth is held offshore, Zucman shows. Those figures rise to 10 percent for Europe, 22 percent for Latin America, 30 percent for Africa, 52 percent for Russia, and a whopping 57 percent for the Gulf countries. That amounts to billions lost from government coffers every year.
Ultimately, such evasion might exacerbate the inequality plaguing the high-income world, Zucman said. “It’s not intuitive,” he told me. But “the impact on inequality is very big and could be even bigger down the road.” The reason is again the shifting of the tax burden. “The effective tax rate on wealth and capital is a key determinant of wealth inequality in the long run,” he said. The after-tax rate of return to wealth gets higher than the after-tax rate of return to work. Wealth naturally becomes more and more concentrated in the hands of the wealthy.
What is worse is that the world’s bureaucrats have attempted to tackle tax evasion, and their efforts have largely proven ineffectual. In 2009, in the midst of the global financial crisis, the Group of 20 countries promised a crackdown. The OECD created new rules. Nicolas Sarkozy, then the president of France, declared the “end of tax havens.” But since then, the total proportion of foreign wealth managed in Switzerland has increased 18 percent. Across all tax havens, it is 25 percent. Whistleblowers remain a crucial way to identify tax evaders in the first place. Little has changed, and if anything, things seem to have gotten worse.
But that does not have to be the case, Zucman argues. A global financial register could ensure compliance with tax law, and scofflaw havens could face heavy sanctions. Political pressure around the salience of tax havens to the big debate on inequality could also help bring about that change. “People don’t realize the extent,” Zucman told me. “They think, ‘We know companies avoid taxes, but that’s good for American businesses.’ They don’t understand.”
That might be why populist politicians like Bernie Sanders have seized on the issue of tax evasion, and why many more might do so as campaign season heats up. And it is the eventual, infuriating lesson of this nerdy book. The rich avoiding taxes might seem like a benign, gray-area form of elite wrongdoing. But it’s ultimately you and me left holding the bag.