24 Nov 2013

Gabriel Zucman : The hidden wealth of nations

I've just finished reading a book by Gabriel Zucman called "La richesse cachée des nations : Enquête sur le paradis fiscaux" ("The hidden wealth of nations : an inquiry into tax havens"). Gabriel Zucman is a young assistant professor at the London School of Economics and a visiting scholar at Berkeley.

He has done a remarkable job at trying to get some hard numbers about the amount of wealth that is hidden in tax havens using previously untapped data.

Here are his basic conclusions that are given on page 45 of his book.

Global Financial Assets in 2013 : €78.0 trillion
  • "Onshore" Financial Assets : €67.2 trillion (92%)
  • "Offshore" Financial Assets : €5.8 trillion (8%)
Of the €5.8 trillion in tax havens
  • 30% (€1.8 trillion) are in Switzerland
  • 70% (€4.0 trillion) are in other tax havens (Singapour, Caymans....)
The €5.8 trillion figure is substantially smaller than another figure that was proposed in 2012 by James Henry who estimated the value at somewhere between $21 and $32 trillion - see his article entitled "The Price of Offshore Revisited".

Zucman's figure is probably safer because he obtained it by adding together all the bonds, stocks and shares and subtracting the amount that can be localised using the standard methods. The gap is the amount that he considers must be hidden in tax-havens.

He makes full use of the detailed information which is provided by the Swiss authorities, who provide a detailed breakdown of the €1.8 trillion managed by Swiss banks. Here is the breakdown from page 39 of the book:
  • Europe (€1 trillion)
    • Germany (€200 billion)
    • France (€180 billion)
    • Italy (€120 billion)
    • UK (€110 billion)
    • Spain €80 billion)
    • Greece (€60 billion)
    • Belgium (€60 billion)
    • Portugal (€30 billlion)
    • Others (€160 billion)
  • Gulf states (€160 billion)
  • Asia (€170 billion)
  • South America (€170 billion)
  • Africa (€120 billion)
  • North America (€90 billion)
  • Russia (€50 billion)
 The €1.8 trillion held on Swiss accounts can be broken down as follows in terms of where it is invested:
  • Investment Funds based in Luxembourg (€600 billion)
  • Investment Funds based in Ireland (€150 billion)
  • International Stocks (eg. US etc) (€400 billion)
  • International Bonds (German etc) (€450 billion)
  • Others (term deposits etc) (€200 billion)
Based on these figures, Zucman estimates that the loss of tax revenue per year is around €130 billion. He gets this from the €5.8 trillion figure for all taxhavens, subtracts the 20% (€1.1 trillion) that is declared, and then estimates that the three main types of evasion would amount to the following :
  • Tax fraud resulting from failure to declare revenues from dividends and interest payments : €80 billion
  • Fraud resulting from failure to pay inheritence taxes : €45 billion
  • Fraud resulting from failure to pay wealth taxes : €5 billion
In the case of France, he estimates that the losses in tax revenue are about €17 billion a year.

It's an impressive piece of detective work. He then proposes some concrete proposals for fixing the system. The first step would be to create a complete global registry of all financial holdings. Such registries exist already at the national level with organisations like the Depository Trust Corporation in the USA. The problem is that there is nothing equivalent at the international level. Once this registry is in place, Zucman proposes that taxes could be imposed at the global level and then redistributed.

It could work. But it will need a lot of coercion and lobbying to get the taxhavens to give in.

Those who have been following my blog since the beginning will perhaps know that I have another way out. The solution could be to abolish all the conventional taxes such as income taxes, taxes on company profits, inheritance taxes and wealth taxes of all sorts.Those taxes could in principle be replaced by a single variable rate financial transaction tax on all electronically mediated transactions. With at least $9 quadrillion in transactions per year at the global level, there is plenty of scope there. With such a system, the idea of a tax haven would no longer have any sense. 

It might be easier to move to a pure transaction tax based system that to try and fix the current loophole ridden system. I'd be interested to know what Gabriel Zucman would think about such a suggestion.

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