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Conspicuous tax evasion

from David Ruccio

The release of the so-called Paradise Papers confirms, with additional names and more salacious details, what we already knew from the Panama Papers and other sources: the world’s wealthy increasingly use offshore tax havens to engage in conspicuous tax evasion.

That’s on top of their participation in conspicuous consumptionconspicuous philanthropy, and conspicuous productivity.

According to Annette Alstadsæter, Niels Johannesen, and Gabriel Zucman, in a study published before the release of the Paradise Papers, the equivalent of 10 percent of world GDP is held in tax havens globally—and that’s only counting bank deposits, not the portfolios of equities, bonds, and mutual fund shares that wealthy individuals entrust to offshore banks.

And, as it turns out, offshore wealth is extremely concentrated: the top 0.1 percent of richest households own about 80 percent of it, while the top 0.01 percent own about 50 percent of offshore wealth.

So, how does it work? There is a great deal of evidence that the vast majority of offshore wealth, both legal and illegal, is not reported on tax returns. That’s because offshore wealth is done “by combining trusts, foundations, and holding companies, so as to disconnect assets from their beneficial owners.” Thus, tax authorities won’t be able to observe or collect taxes on either the wealth or investment income earned or reported offshore, except in rare circumstances (e.g., a taxable and properly declared inter-generational transfer of assets).  

That means the tax burden is shifted onto the rest of us who don’t hold offshore wealth and aren’t able to—or choose not to—engage in conspicuous tax evasion.

wealth-no offshore

Not surprisingly, accounting for offshore assets increases the top 0.01 percent wealth share substantially. However, the magnitude of the effect varies a lot across countries.

wealth-offshore

In Scandinavia (Norway, Sweden, and Denmark, the blue lines in the charts above), which does not use tax havens extensively, the top 0.01 percent wealth share rises from about 4 percent to around 5 percent. Offshore holdings have a much larger effect on wealth inequality in Europe (the United Kingdom, France, and Spain, the red lines), where by the estimates of Alstadsæter et al. 30-40 percent of the wealth of the 0.01 percent of richest households is held abroad.

In the United States (the green lines in the charts), offshore wealth also increases inequality but the effect is much more muted than in Europe. That’s only because the U.S. top wealth share is already very high—9.9 percent, without offshore wealth in 2010, compared to 11.1 percent when offshore wealth is included.

Clearly, the world’s wealthiest individuals—including those who call Scandinavia, Europe, and the United States home—have plenty of opportunities via their offshore paradises to engage in conspicuous tax evasion.

  1. Benjamin Morgentau
    November 12, 2017 at 6:47 pm

    …but offshore systems always where an integral part in the lifes of the rich… it was so then and it is so today… it is no accident, it is all thought out and well planned. No one should be surprised. If not the rich would be as divided ans any other group i think that all of this would be even more perverting the lifes of the many.

  2. Alain Verbeke
    November 12, 2017 at 11:47 pm

    Great article! Two critical points. First, assets held abroad represent a ‘stock variable’ and should therefore never be compared with GDP data. Second, I am not sure that the tax implications of bank deposits are particularly high. Bank deposits typically generate returns close to zero. Analyzing wealth inequality is useful especially when reflecting on a proper taxation system for income generated by this wealth. But in this case, the data presented do not demonstrate that if the wealth considered were invested in bank deposits in Scandinavia, Europe and the US, much extra taxation income would be generated. So the potential income redistribution effects, associated with wealth repatriation of bank deposits, could be minimal. Unless, of course, the governments involved would simply want to tax the wealth itself…

  3. Garrett Connelly
    November 13, 2017 at 3:50 am

    Well stated. Clear and concise. Keep it up. People do remember the general idea. Thanks.

  4. dmf
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