Trillions in tax havens: big news or not?

Recently I came across reports of a study by an outfit called the Tax Justice Network, which said that a huge fraction of the world’s financial wealth—more than I had ever suspected—is hidden in the world’s tax havens, and is for all practical purposes exempt from taxation or the law.

The research team led by James S. Henry, former chief economist for the McKinsey & Co. consulting firm, concluded that at least $21 trillion and possibly as much as $32 trillion of the world’s financial wealth was hidden in tax havens.  The lower bound estimate is more than the 2010 GDP of the United States and Japan combined.  The Tax Justice Network estimated that if that wealth earned a 3 percent return, and the return were taxed at a 30 percent rate, that would be enough to resolve most of the current debt crisis facing poor countries.

Click to enlarge. The MM abbreviation is a million million; that is, a U.S. trillion.

If you do the arithmetic, the chart shows that the world’s billionaires hide more than 43 percent of their wealth in tax havens, and the super-rich hide more than 58 percent.

I am astonished at these facts, and can’t understand why they have received so little coverage in the American press.  I also was disappointed that my post on this subject received relatively few views.   To call attention to the post, I changed the headline, put a link to the post near the top of my links menu and e-mailed a link to the post to everyone I could think of.

Below are some of the responses to my e-mail.

Tax havens are used not only by “high net worth individuals” (=the rich) but also by corporations and affiliates of corporations.
In fact, transfer pricing and tax department of accounting and consulting and legal firms are used by corporations to minimize taxes, through rampant use of offshore financial centers (many of which not “off shore” but in countries such as Luxembourg, Hong Kong, Macau, etc.).

For a good analysis for tax evasion and avoidance, see these two articles:

Tax avoidance, evasion and administration PDF

http://elsa.berkeley.edu/~saez/course/Slemrod,Yitzhaki%20PE%20Handbook%20chapter.pdf

Why pay more? Corporate tax avoidance through transfer pricing in OECD countries PDF

http://www.feweb.vu.nl/ESI/bin/pdf/873.pdf

(The articles are technical, but you can get the main ideas by looking at the outlines and conclusions).

Michael Beruman pointed out that the problem is not illegal tax avoidance, but what can be done within the law.

… … Though the U.S. has one of the higher corporate tax rates, globally, that awful fact to RomneyRyan-ites does not tell the whole story, however, for the reality is that a great many corporations do not pay taxes at all.  For example, according to a GAO study several years ago, Citigroup, alone, reportedly had 427 subsidiaries in off-shore havens….Bank of America had 115 and Morgan Stanley had 273. [Click on U.S. Subsidiaries in Offshore Tax Havens.] That gives one just a very small indication of how much tax is being avoided, and quite legally, I might add.

Entire departments in corporate America…and elsewhere…are formed around legal tax avoidance, as [was] suggested earlier.  Reinsurance carriers are a very good case in point, … and some of them are not even in the business of marketing reinsurance to to others, but constructed simply to offload self-funded, catastrophic risks of individual corporations large enough to self-insure (health and casualty insurance, primarily).  Offshore reinsurance companies are also very good places to hide grossly overstated claims reserves, which are more strictly regulated by the states.  

On a somewhat different, but related subject, much is made of the additional encumbrance small business would incur if the tax rate were raised by several points to pre-Bush levels for incomes of $250K or more.  It is of course nonsense that this would be a major impediment.  Firstly, most small businesses that are not C-corporations (which are taxed differently) don’t produce that kind of income.  Secondly, it is very easy to shelter money under the guise of a business expense, and small businesses are very adept at doing this, so its negative impact on individual business owners is grossly exaggerated.  I have not researched this, but I strongly suspect that in terms of total dollars, most illegal tax evasion occurs amongst individuals and the vaunted small business.  Larger interests can get away with it…or avoidance… legally.  

The tax system (in the U.S.) is a disaster…not only is it grossly unfair, one that favors the wealthy, it is so complicated that it requires teams of different specialists to understand and “work” the system.  Some corporations make a living off of this complexity, which is why there are huge lobbies working against substantive tax reform….most notably the insurance and consulting industries, which at the highest levels makes its living by helping individuals and corporations shelter money…and not just off-shore (for example, tax-free,inside-build up in life insurance policies, etc.).  Simplifying the tax system makes sense to most of either a liberal or conservative political persuasion, and one hears a great deal of talk about it by politicians on both sides.  Expect very little to actually happen.  

Someone pointed out that the Tax Justice Network’s report was bigger news outside the United States than it was here.

This may not be much publicity, but the tax evasion thing was widely publicized in Finland in July (although that may have been partly because it’s usually quite silent on the news front in our July); if I remember correctly, the figure that was mentioned here was “17 billion euros”, i.e. something like $21 trillion. The source was Tax Justice Network.  A former official of the Finnish Ministry of Justice said that even Finland behaves in certain respects like the notorious tax havens, primarily because of the availability of non-transparency for foreign investments in Finland.

We think of “offshore” tax havens as tiny nations and jurisdictions like the Cayman Islands, Mauritius, Luxembourg or Panama, but big banks in Zurich, London and New York function as tax havens, too.  The United States is a tax haven for wealthy foreigners while the government tries—I’m not sure with how much zeal—to track down American tax evaders.  [Update: Note that Europeans call a million millions a “billion” and Americans call it a “trillion,” so that 17 billion euros does indeed equal $21 trillion US.]

Kiersten Marek was good enough to reblog my post on the Kmareka.com web log.  She is a social worker in Rhode Island and, together with a friend who uses the handle Ninjanurse, produces this excellent blog, which you also can find on my blog menu.

Click on The Price of Offshore Revisited press release PDF for the Tax Justice Network’s press release and summary of its report

Click on The Price of Offshore Revisited: New Estimates of “Missing” Global Private Wealth, Income, Inequality and Lost Taxes PDF for the full report.

Click on How the global elite escape taxation and the law for my original post.

[Update 8/15/12]  It’s a little off topic, click on What happened to the British billion? and Is trillion the new billion? for the changing British definitions of billions and trillions.  Hat tip to Jack Clontz for this.

Tags: Tax Avoidance, Tax Havens