New data on tax havens, from Gabriel Zucman

by on April 12, 2014 at 12:53 am in Data Source, Economics, Law | Permalink

Here is the new paper (pdf):

This article shows that official statistics substantially underestimate the net foreign asset positions of rich countries because they fail to capture most of the assets held by households in offshore tax havens. Drawing on a unique Swiss data set and exploiting systematic anomalies in countries’ portfolio investment positions, I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the world’s second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries. I provide concrete proposals to improve international statistics.
The original pointer was from Paul Krugman.  Yesterday I was at an IMF forum with Jeff Sachs and he too was placing great stress on this issue.

Curt F. April 12, 2014 at 12:58 am

On the basis of plausible assumptions, the sun revolves around the Earth and maggots spontaneously form in rotting meat. Phrenology and phlogiston theory all follow quite naturally once you make a few plausible assumptions.

david April 12, 2014 at 1:42 am

Some of his assumptions do seem more reasonable than others. The deduction of just how much illicit wealth there is seems justified. The argument over the distribution is much more dubious, simply because depositors from certain countries are more eager to hide their wealth than others, and this is correlated with just how much wealth they wish to hide.

jpe April 12, 2014 at 10:03 pm

Just because it’s offshore doesn’t mean it’s illicit.

Alexei Sadeski April 12, 2014 at 1:32 am

Am under impression that for wealthy US citizens, not reporting money in tax havens is near suicidal…

Anon April 12, 2014 at 5:19 am

Not really ; at worst you get lower votes in a Presidential election.

Artimus April 12, 2014 at 8:17 am

Actually, it’s not just the wealthy that need to report overseas assets. Anyone with over $10,000 in an foreign bank or institution is required to report it to the Treasury Department using the FBAR form. Failure to report and I believe the penalty is about 33% of the assets in that account. More than a few middle class expats working overseas have not reported and been penalized. The U.S. Government has been cracking down and going after overseas citizens lately.

jpe April 12, 2014 at 10:00 pm

He did report it to the IRS, and that’s how the account was discovered.

archer April 12, 2014 at 1:59 am

Um, Yves Smith wrote about this “new” paper on March 6. more than a month ago. Might help if you read blogs that are faster out of the gate.

http://www.nakedcapitalism.com/2014/03/tax-havens-make-us-europe-look-poorer-exaggerate-size-global-imbalances.html

Olaf Alex April 12, 2014 at 4:03 am

Query: What is the relevance, for any purpose, of “net foreign asset positions of rich countries” consisting of “assets held by households in offshore tax havens”?
Since it is clear that the respective countries will receive no information on it and will not be able to tax or confiscate it, why should it be attributed to the country for any statistical or calculatory purpose? It would seem to make no difference if the owners of that wealth changed domicile or passport. From the perspective of “their” countries, they are not rich. All I can derive from it is that there are rich people, hiding their wealth, having predominantly certain passports and temporary domiciles…but what does it tell me if those passports and domiciles are say European? How does that make Europe any more wealthy or less (net) indebted?

Adrian Ratnapala April 12, 2014 at 6:56 am

Suppose there is capital flight out of, say, Germany. Then the panic will be less bad that otherwise if rich Germans start drawing down their invisible accounts in order to keep their businesses going.

derek April 12, 2014 at 10:08 am

Somewhere, if we look for it enough, there is enough money hidden to allow us to do everything we dream of. This is the left of center wet dream.

Yancey Ward April 12, 2014 at 11:26 am

Yeah, when you cut through it all, this pretty much explains why papers like this get written.

BC April 12, 2014 at 1:09 pm

It’s interesting. Tax havens are inherently unfair because assets in those havens receive different treatment than those in on-shore tax (hazards?). The immediate assumption (by some) is that we should try to hunt down and tax those assets in the off-shore havens which, as many have pointed out, might prove quite difficult. However, a simpler solution that would equalize the playing field for everyone would be to stop taxing the investment income in the on-shore tax hazards, especially since such taxation is already multiple taxation on the same income/consumption anyways.*

Just as we could ask why “nudges” are usually used as arguments for more paternalism rather than for converting hard paternalism to soft paternalism [http://econlog.econlib.org/archives/2013/07/nudge_policy_an.html], it also seems fair to ask why tax havens are (almost) always used as arguments for more regulation and more taxes rather than less regulation and elimination of taxes.

*To see why taxing investment income in on-shore tax hazards is double taxation, consider wages of P dollars taxed at rate t. If consumed immediately, one can consume P*(1-t). If invested at tax-free return r for N periods before consuming, one can consume P*(1-t)*(1+r)^N. In each case, taxes reduce consumption by t, so the effective tax rate is the same. That’s *before* leveling additional taxes on the investment “income”. See [http://www.thebigquestions.com/2010/09/14/getting-it-right/] for additional arguments.

dearieme April 12, 2014 at 5:17 am

In the days when interest rates were high my wife held some cash offshore. All legit, and all income reported on her tax return. I suppose such legit holdings are easily accounted for – I’m sceptical of the success of any attempt, however intelligent, to estimate illicit sums of money.

RR April 12, 2014 at 5:22 am

Can someone explain how this would impact GDP . Would GDP be under reported in cases where unreported Assets are in Tax havens?

spencer April 12, 2014 at 12:17 pm

GDP is a flow concept while foreign assets are a stock, so it probably has a very, very small impact of GDP.

BC April 12, 2014 at 1:26 pm

There could be some small indirect effects. For example, if tax haven assets are constrained in some way (to protect their haveness), then they may be invested less optimally than if the owners were not worried about hiding those assets. On the other hand, since the haven assets are not subject to the same multiple taxation that may discourage savings and investment in on-shore tax hazards, they may actually reduce distortions. On balance, though, because the assets are such a small percentage of global financial wealth (8%), the effect probably is very small.

Duracomm April 12, 2014 at 8:51 am

Tax havens show that tax rates are too high.

TMC April 12, 2014 at 9:57 am

“Drawing on a unique Swiss data set”

I’d be worried about extrapolating conclusions from this. The Swiss has a unique history regarding tax havens.

Ray Lopez April 12, 2014 at 12:31 pm

“U.S. And Global Imbalances:Can Dark Matter Prevent A Big Bang?” by Ricardo Hausmann and Federico Sturzenegger of Harvard (2005) – is what this reminds me of, a sort of alternative, crypto- economics.

Adam Smythe April 12, 2014 at 2:06 pm

You are taking your sweet time on the Piketty review. Let Tyrone write this one. Worldstar, worldstar. Find this Frenchman in a ZUS and play the knockout game.

GJJD April 14, 2014 at 12:55 pm

Where does the Foreign Account Tax Compliance Act come into play within this dialogue? Currently 80+ countries, beginning with Switzerland, have agreed to reveal account data with the United States on all their American financial account holders. This is happening at the sovereign level as well as the level of individual foreign financial institutions.

http://www.brighttax.com/8/post/2013/09/happiness-is-a-fatca-sandwich.html

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