Sunlight on Tax Havens
BERKELEY – Tax havens
are by design secretive and opaque. The entire point of their existence
is to conceal the wealth hidden within them. And a new book by Gabriel
Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens, reveals, as never before, the extent of their role in the global economy.
Zucman examines
discrepancies in international accounts to provide the most precise and
reliable figures we are likely to obtain about the amount of money
stored in tax havens. He estimates that 8% of the world’s financial
wealth – some $7.6 trillion – is hidden in places like Switzerland,
Bermuda, the Cayman Islands, Singapore, and Luxembourg. That is more
wealth than is owned by the poorer half of the world’s 7.4 billion
people.
This figure has
important consequences, as it represents money that should be in the tax
base. If rich countries in Europe and North American cannot effectively
tax the rich, they have little chance of preserving social democracy
and offsetting the surge in inequality that has recently afflicted their
economies. Similarly, emerging economies have little hope of putting in
place progressive tax systems if they cannot find their plutocrats’
wealth.
To be sure, Zucman’s
relies on the unproven assumption that there are important data to be
found in what is usually classified as “errors and omissions.” But there
is good reason to believe his figures are in the ballpark.
Switzerland’s central bank reports that foreigners hold $2.4 trillion in
Swiss banks alone. And while Switzerland may be the world’s oldest tax
haven, it is not the most advantageous place to park one’s money.
One reason why tax
havens are difficult to eliminate is that not everyone in government
necessarily views them in the same way. Wherever corruption is endemic –
say, Russia, China, and much of the Middle East – many officials may
view tax havens not as a revenue problem, but as an attractive part of
the job.
Even in the United
States, policies have all too often been deliberately designed to enable
– rather than to discourage – tax avoidance via tax havens. One former
senior official in US President George W. Bush’s administration put it
this way, “it is, ultimately, about freedom.” The resulting lax
enforcement accounts for a large portion of the one-third decline in the
effective reach of the US corporate income tax since the late 1990s.
When it comes to tax
havens, it is fashionable to say that nothing can be done. National
sovereignty is deemed too important to be subordinated to international
tax laws. And the day’s plutocrats are seen as having sway over elected
politicians and civil servants. More than a century ago, then-Governor
Woodrow Wilson of New Jersey convinced the state legislature to get out
of the corporate-tax-haven business. As soon as it did, America’s
corporations picked up their legal headquarters and moved next door to
Delaware.
But what those who say that coordinated international policy is impossible don’t say is that coordinating international policy always
looks impossible, until suddenly the conditions change and everything
falls into place. Tax havens can be eliminated; all that is required is
to close the loopholes that allow legal tax avoidance and establish
enforcement mechanisms that make illegal tax evasion no longer worth the
risk.
The first step should
be increased transparency. As the saying goes, “sunlight is the best
disinfectant.” Zucman, for his part, favors a single global registry – a
publicly accessible database detailing the ownership of financial
instruments.
The
second step would be to shift the corporate tax base from profits
reported to have been earned in a country to sales made and wages paid
in that country. As Zucman points out, a corporation can move its legal
headquarters and use mechanisms like transfer pricing to shift its tax
burden, but moving its employees across national borders is more
difficult, and it cannot move its customers.
If we are ever to
combat inequality effectively, truly progressive taxation will have to
be a part of the policy mix. But unless we eliminate tax havens now, we
are likely to find that we lack the ability to implement it.
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