Tax havens a scourge on efforts to eliminate income inequality

By J. Bradford DeLong and Michael M. DeLong  / 

Fri, Oct 02, 2015 - Page 9

Tax havens are by design secretive and opaque. The entire point of their existence is to conceal the wealth hidden within them. 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 people are likely to obtain about the amount of money stored in tax havens. He estimates that 8 percent of the world’s financial wealth — about US$7.6 trillion — is hidden in places such as 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 critical consequences, as it represents money that should be in the tax base. If rich countries in Europe and North America 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 book relies on the unproven assumption that there are important data to be found in what is usually classified as “errors and omissions.” However, there is good reason to believe his figures are approximations. Switzerland’s central bank reports that foreigners hold US$2.4 trillion in Swiss banks alone. While Switzerland might 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 most of the Middle East — many officials might view tax havens not as a revenue problem, but as an attractive part of the job.

Even in the US, policies have all too often been deliberately designed to enable — rather than to discourage — tax avoidance via tax havens.

One former senior official in former US president George W. Bush’s administration said: “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-New Jersey governor Woodrow Wilson convinced the state legislature to get out of the corporate-tax-haven business. As soon as it did, US corporations picked up their legal headquarters and moved next door to Delaware.

However, what those who say that coordinated international policy is impossible do not 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 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 said, 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 society is ever to combat inequality effectively, truly progressive taxation would have to be a part of the policy mix. However, unless tax havens are eliminated now, there is likely to be a lack of ability to implement it.

J. Bradford DeLong is a professor of economics at the University of California at Berkeley and a research associate at the US National Bureau of Economic Research. Michael DeLong is a community organizer for Ceasefire Oregon.

Copyright: Project Syndicate