The Hidden Wealth Of Nations: The Scourge Of Tax Havens
The HiddenWealth ofNationsThe Scourge of Tax HavensGabriel ZucmanTranslated byT er e sa Lav en der Fag anWith a Foreword byT homas P i ke t t y2015 [2013]The University of Chicago PressChicago and London
g a br i e l z u c m a n is assistant professor at the Londonschool of economicsCONTENTSThe University of Chicago Press, Chicago 60637The University of Chicago Press, Ltd., London 2015 by The University of ChicagoForeword 2015 by Thomas PikettyAll rights reserved. Published 2015.Printed in the United States of America24 23 22 21 20 19 18 17 16 15FOREWORDINTRODUCTIONby Thomas PikettyVIIActing against Tax Havens112345ISBN-13: 978-0-226-24542-3 (cloth)ISBN-13: 978-0-226-24556-0 (e-book)DOI: 10.7208/chicago/9780226245560.001.0001Originally published as La richesse cachée des nations: Enquête sur les paradis fiscauxx Editions du Seuil et la République des Idées, 2013Library of Congress Cataloging-in-Publication DataZucman, Gabriel, author.[Richesse cachée des nations. English]The hidden wealth of nations: the scourge of tax havens / Gabriel Zucman; translatedby Teresa Lavender Fagan; with a foreword by Thomas Piketty.pages; cmIncludes bibliographical references and index.ISBN 978-0-226-24542-3 (cloth: alk. paper) — ISBN 978-0-226-24556-0 (e-book) 1.Tax havens. 2. Tax evasion. I. Fagan, Teresa Lavender, translator. II. Piketty, Thomas,1971–, writer of foreword. III. Title.HJ2336.Z8313 2015336.24'16—dc232015019946This paper meets the requirements of ANSI/NISO Z39.48-1992 (Permanence ofPaper).ONEA Century of Offshore Finance8TWOThe Missing Wealth of Nations34THREEFOURFIVEMistakes56What to Do?: A New Approach75The Tax Avoidance of MultinationalCorporations 102CONCLUSION115NOTES117INDEX123
fundamental social contract: everybody has to pay taxes on aFOREWORDThomas Pikettyfair and transparent basis, so as to finance access to a numberof public goods and services. Of course, there is ample roomfor disagreement about what “fair” and “transparent” taxationmeans. But if some of the wealthiest individuals and some ofour largest corporations use tax havens and fiscal dissimulationin such a way that they avoid paying taxes almost entirely, thenf you are interested in inequality, global justice, and the fu-it is our basic social contract that is at stake. If middle-classtaxpayers feel that they are paying higher effective tax ratesthan those at the top of the pyramid, if small and medium-sizeture of democracy, then you should definitely read this book.The Hidden Wealth of Nationss by Gabriel Zucman is probablythe best book that has ever been written on tax havens andbusinesses feel that they are paying more than our largest companies, then there is a serious risk that the very notion of fiscalconsent—which—is at the core of modern democracies——willwhat we can do about them. It is nontechnical and lively, andit achieves three different goals in a very concise and efficientmanner.First, it provides a fascinating history of tax havens: howfall apart altogether. And if a rising fraction of the population,at the bottom and in the middle of the pyramid, feels that thesystem is not working for them, and that they are not beingIthey came into existence in the interwar period, and how theygradually acquired the prominent role that they have today.Next, it offers the most extensive and rigorous quantitativewell treated by the global economy or by their government,then many might reject the very notion of interclass solidarity and of a fair fiscal and social state. Some might becometempted by nationalist solutions, ethnic divisions, and theevaluation ever proposed of the global financial significance oftax havens in today’s world economy. Finally, and most important, it sets a precise and realistic course of action for change,politics of hatred.But what makes Zucman’s book so important is that it isnot only about abstract principles and dangerous threats: it iswhich has at its core the creation of a worldwide register offinancial wealth recording who owns what in stocks and bonds.Tax havens with their financial opacity are one of theabout data and solutions. There are systematic inconsistenciesin international financial statistics. In particular, there arealways more liabilities than financial assets reported by thekey driving forces behind rising wealth inequality, as well asa major threat to our democratic societies. Why is this so?Quite simply because modern democracies are based on aworld’s financial centers. By analyzing these statistical anomalies in a systematic and innovative manner, Zucman offersone of the most credible evaluations to date of the global imviii
portance of tax havens. According to his benchmark estimate,Zucman warns us that the FATCA legislation still has a lotwhich should be viewed as a lower bound, around 8% of theworld’s financial wealth is held in tax havens. In developingand emerging countries, this percentage can be much higher,of holes in it and that the overall importance of tax havenshas continued to rise between 2008 and 2015. We might needwhich makes it even more difficult to build fiscal consentand trust in government and to address situations of extremeinequality. In Africa the share of financial wealth that is heldoffshore is estimated by Zucman to be around 30%. In Russiaand the oil-rich countries of the Middle East (probably themost unequal and explosive region of the entire world), theshare of offshore financial wealth appears to be above 50%.much larger sanctions than those that have been implementedso far in order to make real progress. For instance, accordingto Zucman’s computations, the benefits that a country likeSwitzerland gains from financial opacity are equivalent to thelosses that it would suffer from a 30% trade tariff imposed byits three biggest neighbors (Germany, France, and Italy). Ofcourse, we might choose not to apply these sanctions—butIn the United States, the share of offshore wealth certainly seems to be much less than in Africa or in Russia.then we should not complain when the problem gets biggerand bigger. Global financial opacity is a major challenge forall countries, and there is still a long way to go before we canOffshore personal wealth also appears to play a smaller rolein the United States than in European countries, which havebeen particularly bad at coordinating their policies to fightcurb these structural trends.According to Zucman, the key step should be the creationof a worldwide register of financial wealth, recording whotax havens. For instance, they had to wait for the US FATCAlegislation and the US sanctions against Swiss banks in orderto start moving in the direction of automatic informationtransmission.owns what in stocks and bonds. This global financial registerwould act as a central depository: it would be coordinatedby governments and international organizations, allowingnational tax administrations to fight tax evasion and to levytaxes on capital-income flows and wealth stocks.It would be a mistake, however, to underestimate the importance of tax havens for the US fiscal system. Accordingto Zucman’s conservative estimates, eliminating the US taxrevenue losses due to tax havens would be equivalent to anaverage tax increase of about 20% for all taxpayers withinthe top 0.1% income group. Also, while the United StatesSome might consider the very idea of a central depositoryas utopian. But it is not. In fact, central depositories for globalsecurities already exist. The problem is that these central depositories are not truly global (they are national or sometimesregional), and most important they are private, not public.may have less of an issue than Europe with offshore personalwealth, they have a bigger problem with corporate tax evasionby multinational companies. Finally, and most important,Starting in the 1950s and 1960s, securities were gradually dematerialized, and paper titles soon disappeared entirely. Thisis when modern central depositories were created, simplyixx
because there was a need to secure financial transactions andhigher progressive tax rates chosen by national governmentsto keep track of who owns what in a computer database (it isdifficult to do business if several financial institutions or eco-(or regional coalitions of national governments).It is worth noting that the development of centralizednomic agents in the world claim property rights over the sameasset). A number of private financial institutions developedin order to provide this service. The most well-known centraldepositories are the Depository Trust Company (DTC) inregisters for real estate and land property titles, together withthe creation of inheritance taxes and annual property taxes,played a key role in the building of the modern state and legalsystems during the eighteenth and nineteenth centuries. Thethe United States, and Euroclear and Clearstream in Europe.The problem is that these private institutions do not exchangeinformation with governments and tax administrations onproblem is that these legal and fiscal systems of property registration and taxation were developed at a time when financialassets and liabilities did not play the major role that they dotoday, and that they were never fully updated for the moderna systematic basis. Sometimes they even tend to exacerbateand to benefit from tax evasion and financial opacity (see, forexample, the Clearstream scandal in France) rather than toworld. In the early twentieth century, income tax systems werecreated in order to make new forms of wealth creation andpromote transparency.Zucman’s proposal is clear and simple: governmentsshould take control of these central depositories and grad-income flow—in particular, corporate profits and dividends—contribute to the tax system. One problem that we see todayis that it is difficult to properly tax and monitor the incomeually unify them into a global financial register. The UnitedStates, the European Union, Japan, and possibly the IMFshould play a leading role in this process, together with theemerging countries in Asia, Latin America, and Africa thatare currently losing a lot from tax evasion and capital flightflow generated by an asset if we do not at the same time have aproper registration and taxation system for the stock of assets.This is the problem for modern nations: they still live with asystem to register property that was conceived more than twohundred years ago. The good news coming from The Hiddenand that are ready to join this cooperative effort. Participationin the global financial register would entail rights and duties,Wealth of Nationss is that we now understand this problem moreclearly, and we know that it can be solved.guaranteeing well-protected property rights and financialtransactions, in exchange for a commitment to transmit all information that is necessary to identify the actual owners of allassets. This registration system, Zucman argues, should cometogether with a common minimal registration tax (say, 0.1% ofindividual net wealth), which could then be supplemented byxixii
fluence on the international stage—while—the rest of us lose. InINTRODUCTIONActing against Tax Havensthe end, the taxes that are evaded have to be compensated forby higher taxes on the law-abiding, often middle-class households in the United States, Europe, and developing countries.Nothing in the logic of free exchange justifies this theft.What Is to Be Done?Tax havens are at the heart of financial, budgetary, andFor some, the battle against tax havens has been viewed asdemocratic crises. Let’s take a look: In the course of thelast five years alone in Ireland and Cyprus—two offshorecenters with hypertrophic financial systems—banks have gonelost from the start. From London to Delaware, from HongKong to Zurich, offshore banking centers are essential cogsin the financial machine of capitalism, used by the rich andalmost bankrupt, plunging thousands of people into poverty.In the United States, Congress has revealed that one of thelargest companies on the planet, Apple, avoided tens of billionspowerful throughout the world. We can’t do anything aboutthem, we’re told: some countries will always impose less taxand fewer rules than their neighbors. Money will always findin taxes by manipulating the location of its profits. In France,the budget minister had to resign because he had cheated onhis taxes for twenty years through hidden accounts. In Spain,the former treasurer of the party in power went to jail aftera safe haven: strike here, it will go over there. Capitalismwithout tax havens is a utopia, and a progressive taxation ofincome and fortunes is destined to fail, unless we choose thepath of protectionism.having revealed a hidden system of financing through accountsin Switzerland. Accepting the status quo seems irresponsible.Each country has the right to choose its forms of taxation.For others, the battle has almost been won. Thanks to thedetermination of governments and to multiple scandals andrevelations, tax havens will soon die out. From the harsh wordsBut when Luxembourg offers tailored tax deals to multinational companies, when the British Virgin Islands enablesmoney launderers to create anonymous companies for a penny,of large countries seeking new solutions ever since the financialcrisis, they have all promised to abandon banking secrecy, andmultinationals will finally be forced to open their books andwhen Switzerland keeps the wealth of corrupt elites out ofsight in its coffers, they all steal the revenue of foreign nations.And they all win—fees, domestic activity, sometimes great in-pay what they owe. This is the triumph of virtue.What is missing in this debate is data. Tax evasion by thewealthiest individuals and large corporations can be stopped,2
but only if we have statistics to measure it, to implement pro-the latest available information, in the spring of 2015 foreignportional penalties against the countries that facilitate it, andto monitor progress.wealth held in Switzerland reached 2.3 trillion. Since April2009, when countries of the G20 held a summit in LondonIt is with this goal in mind that I wrote this book, aneconomic study of tax havens. I gathered the available sourceson the international investments of countries, the balances ofpayments, the on- and off-balance sheet positions of banks, theand decreed the “end of banking secrecy,” the amount of moneyin Switzerland has increased by 18%. For all the world’s taxhavens combined, the increase is even higher, close to 25%.And we are only talking about individuals here.wealth and income of nations, the accounts of multinationalcompanies, and the archives of Swiss banks. Some of thesestatistics had never been used before, and this is the first timethat all this information has been collected, confronted, andCorporations also use tax havens. Corporate filings showthat US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a massive and growing scale.analyzed with a single objective: to expose the true activitiesof tax havens and their costs to foreign nations.Fifty-five percent of all the foreign profits of US firms arenow kept in such havens. Since multinationals usually try tooperate within the letter—if not the spirit—of the law, thisLet’s say it from the outset: These statistics have manyimperfections, and the results of my study are thus in no waydefinitive. Our system for measuring world financial activityprofit shifting is better described as “tax avoidance” rather thanoutright fraud. But its cost is enormous— 130 billion a yearfor US firms alone—and since equity ownership is very con-has many weaknesses. But this is no reason not to use it. Inspite of any limitations, the available data shed an irrefutablelight on the activity of tax havens; and there is no foreseeableprogress in ending tax evasion without a quantitative pic-centrated, it essentially benefits only the wealthiest among us.An Action Planture of the extent of this fraud. Only on the basis of such anevaluation, however imperfect, will it be possible to imposesanctions and follow any progress in the fight against theTo effectively fight offshore tax avoidance and evasion, thisbook outlines a set of coherent and focused measures.scourge of tax havens.The main conclusion of my investigation is that, despitesome progress in curtailing it in recent years, tax evasion isThe first is to create a worldwide register of financialwealth, recording who owns which stocks and bonds. Financial registries already exist, but they are fragmentary anddoing just fine. There has, in fact, never been as much wealthin tax havens as today. On a global scale, 8% of the financial wealth of households is held in tax havens. According tomaintained by private companies such as the Depository TrustCompany in the United States and the Luxembourg bankClearstream. The goal would be simply to combine them,34
to enlarge the field of data, and to transfer ownership of thebenefit the large countries of Europe as well as the Uniteddata to the public. Combined with an automatic exchange ofinformation between the banks of all tax havens and foreigntax authorities, a financial register would deal a fatal blow toStates, where the kings of tax dodging—the Googles, Apples,and Amazons—produce and sell the most but often pay littlein taxes.financial secrecy.But how can all tax havens be compelled to cooperate? Itis not enough to politely ask them to abandon the financialopacity that allows them to prosper. The second dimension ofthe plan of action I propose is to levy sanctions proportional tothe costs that tax havens impose on other countries. Calls fortransparency, new laws, or more bureaucrats are insufficient.Only combined international pressure can truly have an effect,by shifting the incentives of tax havens. One type of possiblesanction is trade tariffs. The calculations presented in thisbook show that France, Germany, and Italy would be able toforce Switzerland to disclose all the assets held there by theirresidents by jointly imposing customs duties of 30% on thegoods that they import from Switzerland, because the costsfor Switzerland would then be more than the income derivedfrom its banks involved in tax evasion.Third, we need to rethink the taxation of companies. Thefixes recently proposed by the Organisation for Economic Cooperation and Development (OECD) are unlikely to enablemuch progress. Looking forward, the taxation of multinationalfirms should derive from their worldwide consolidated proffits, and not, as is true today, from their country-by-countryprofits, because those are routinely manipulated by armiesof accountants. A tax on consolidated profits would increasecorporate tax revenue by about 20%; this would essentially5The Symbolic Power of FinanceIf we believe most of the commentators, the financial arrangements among tax havens rival one another in their complexity.In the face of such virtuosity, citizens are helpless, nation-statesare powerless, even the experts are overpowered. So the generalconclusion is that any approach to change is impossible.In reality, the arrangements made by bankers and accountants, shown in the pages that follow, are often quite simple.Some have been functioning unchanged for close to a century.There have of course been innovations, sometimes esoteric.And we can’t deny that there are still aspects of the functioning of tax havens that no one really understands. But, as thisbook will show, we know more than enough to be able to actagainst the fraud they perpetuate.Economists share some of the responsibility for the senseof mystery that still surrounds tax havens. Academics have fortoo long shown little interest in the subject, with some notableexceptions. But progress has been made within the past tenyears, and we may rightfully hope for important advances inthe near future. The fact remains that most of the progress inunderstanding tax havens achieved up to now—remarkableprogress
revenue losses due to tax havens would be equivalent to an average tax increase of about 20% for all taxpayers within the top 0.1% income group. Also, while the United States may have less of an issue t han Euro pe with offshore personal wealth, they have a bigger problem wit h cor porate
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