Spotlight on tax havens reveals inequality link

With a slim new book that has the feel of Piketty’s bestselling Capital in the 21st Century, Zucman, a 28-year-old University of California-Berkeley economist, is taking his own swing at global capitalism. His target: tax havens that he says hide $7.6-trillion — about 8% of the world’s net financial wealth.

With his book, The Hidden Wealth of Nations, Zucman is positioning himself as this year’s Piketty, whose opus renewed a debate about inequality last year.

Both titles play off economics classics — one by Karl Marx, the other Adam Smith.

“Almost nobody in economics is talking about tax havens,” Zucman says. “People haven’t really made the link between tax evasion and rising inequality.

“They see big companies and the very wealthy avoiding taxes, but they don’t understand how this is part of this dramatic increase in inequality. My hope is to bring more attention to this.”

There has never been as much wealth sitting in tax havens as there is today, Zucman says, whether it’s Apple funnelling billions in profits through a tiny Irish unit or a French cabinet minister using secret accounts to cheat on his taxes.

For multinationals, he found the majority of foreign profits reported by US firms are attributed to a handful of havens.

For individuals, Zucman estimates that at least $2-trillion held in Swiss banks is still undeclared by account holders to their home countries.

In 2009 the Group of 20 Nations declared the end of banking secrecy. Since then, the amount of money in Switzerland — “the heart of the offshore tax evasion industry”, Zucman called it — has risen 18%.

His calculations are conservative because he can’t count assets such as art, jewellery or real estate, but he’s still able to come up with big numbers. He highlights two of them: tax evasion by individuals costs governments $200bn a year, and havens used by US multinational companies cost $130bn annually.

Zucman is one of several mini-Pikettys spreading the word on inequality.

Piketty’s website at the Paris School of Economics lists more than a dozen students he advised who are now teaching at institutions ranging from the University of Chicago to the London School of Economics.

“Gabriel’s book is probably the best book that has ever been written on tax havens and what we can do about it,” Piketty says. “I think it complements my book very nicely and powerfully.”

Zucman, born, raised and educated in Paris, says Piketty encouraged him to expand his interest in taxes to look for clues into its role in inequality.

During his research, Zucman had a eureka moment. For years, economists have puzzled over a mystery in obscure economic data: financial liabilities across the world consistently outstrip the reported financial assets held by investors — by trillions of dollars. Sifting through central bank data from various countries, he seemed to find the answer. Those trillions were missing because they were showing up as shares of mutual funds incorporated in tax havens, primarily in Luxembourg, Grand Cayman and Ireland. His theory: wealthy global investors have used the investments, often made through Swiss bank accounts, to hide their wealth.

Switzerland comes in for harsh criticism in Zucman’s book. The country is responsible for nearly a third of the globe’s total hidden financial wealth, he says.

He estimates as much as 30% of the wealth owned by the richest in Africa and Latin America is held offshore. In Russia, it’s as much as 50%.

What is to be done? Zucman says there needs to be a central global register of the owners of the world’s wealth, similar to various registries for real estate holdings. Such a database doesn’t have to be public, but it must be available to regulators. The government can no longer rely on “the goodwill of bankers” for sharing information, he says.

For companies, taxable profits should be allocated between countries based on real factors such as where the sales or employees are. He also suggests imposing tariffs or similar sanctions on tax havens that resist reform.

“If a significant fraction of rich people can evade taxes and if the rest of the population feels taxes are not fairly enforced, then the willingness to pay taxes will disappear,” he says.