Gabriel Zucman is an assistant professor of economics at the University of California (Berkeley) and the author of “The Hidden Wealth of Nations,” a book from the University of Chicago Press describing how individuals and businesses stash literally trillions of dollars off shore to avoid taxes. He is also one of the key experts figuring out the implications of the Panama leaks. We originally ran this interview with him on Sept. 15, 2015.
HF – Your book sets out to try to measure the amount of wealth that very rich people hide overseas in order to avoid taxes. How much global wealth is hidden in this way, and how did you figure out how to measure it, given that it’s hidden via shell companies, complicated accounting arrangements across multiple countries and so on?
GZ – According to my estimates, about 8 percent of the world’s financial wealth is hidden offshore. This is about $7.6 trillion in 2014. Of course, since tax evaders use sometimes complex arrangements to conceal their assets, measuring the wealth hidden in tax havens is fraught with difficulties.
Fortunately, one of the world’s biggest tax havens—Switzerland—publishes official, monthly statistics on how much wealth foreigners stash there. The latest figure puts the total at $2.4 trillion. In addition, one can have a sense of the global amount of wealth hidden all over the world, because offshore wealth leaves a clear footprint in global investment statistics. Offshore fortunes are duly recorded on the liability side of the balance sheets of nations, but not on their assets side.
As a result, more than 20 percent of the world’s cross-border equities have no identifiable owner: it is as if planet Earth was partly owned by Mars. It’s by dissecting these anomalies that I obtained the $7.6 trillion figure. Other estimates are larger, sometimes much larger.
HF – The U.S. and some other countries have been trying to stop international tax evasion through new OECD rules. However, your research suggests that the amount of hidden wealth has increased rather than decreased since this crackdown. Why is this so?
GZ – A lot has been done to better fight offshore tax evasion since 2009, but offshore wealth is still growing fast. There are two main reasons for this.
First, inflows from developing countries are booming, in particular because there is still no cooperation between tax havens and developing countries’ tax authorities. The elites of these countries can still conceal their assets with total impunity. More than half of offshore assets belong to residents of high-income countries today, but if the current trend is sustained, emerging countries will overtake Europe and North America by the end of the decade.
Second, there is a growing concentration of global wealth in fewer and fewer hands: the wealth of the global top 0.01 percent is booming. These “ultra high net worth individuals,” as bankers call them, can devote substantial resources to concealing their wealth and it’s unclear that they are much affected by the current enforcement effort.
HF – You also look at companies’ strategies, finding for example that 55 percent of American companies’ overseas profits are purportedly made in just six countries – The Netherlands, Bermuda, Luxembourg, Ireland, Singapore and Switzerland. None of these are countries that would jump to anyone’s mind as obvious major export markets for the U.S. So what’s going on?
GZ – U.S. firms report a disproportionate fraction of their profits in low or zero tax jurisdictions, because the current tax laws leave them ample room to strategically choose the location of their profits, irrespective of where they produce or sell goods. Today, we tax multinational firms as if their subsidiaries were independent entities, each subject to the tax rule of the country where they are incorporated. So if a subsidiary in Bermuda happens to own a lot of capital, like trademarks, algorithms, logos, etc., the income generated by that capital will be taxed in Bermuda, where the corporate tax rate is 0 percent.
There are a number of provisions in the U.S. tax code designed to prevent U.S. firms from shifting their assets to their offshore subsidiary, but the data show that these provisions are largely ineffective. Profit shifting is rising fast: in the mid-1980s, 15 percent of the foreign profits of U.S. firms were booked in the Netherlands, Bermuda, Luxembourg, Ireland, Singapore, and Switzerland; today the figure is 55 percent.
Because at the same time, the amount of foreign profits made by U.S. firms has been booming, close to 20 percent of all the profits—domestic plus foreign—of U.S. companies are now shifted to tax havens. This is the main reason why the effective corporate tax rate has declined so much in recent years, from 30 percent in the late 1980s to 20 percent today—far from the nominal rate of 35 percent that many pundits lament.
HF – How exactly can companies like Google make it look as though their major profits were earned in tax havens, and why is this easier for ‘new’ technology companies than for more traditional firms?
GZ – The way the shifting of profits to low-tax locales works is relatively easy. In principle, intra-groups transactions—like the sale of goods, services, logos, algorithms, etc.— should be conducted at the market price of the goods and services traded, as if the subsidiaries were unrelated.
In practice, with billions of intra-groups transactions every year, it is impossible for tax authorities to check that they are all correctly priced, and thus there is clear evidence in the data of “transfer mispricing.”
But more important, in many cases the relevant market prices simply do not exist, so firms can choose whatever transfer price will minimize their tax bill. What was the fair market value of Google’s technologies when it transferred them to its Bermuda subsidiary in 2003, before Google was even listed as a public company? Google’s proprietary algorithms were never traded between unrelated parties, so there was no way of knowing their market value. The tech industry has been particularly aggressive in moving assets to Bermuda or Cayman subsidiaries pre-IPO, exploiting the fact that a lot of the assets it creates are hard to value.
The way we tax multinational firms was invented a century ago; it is simply not adapted anymore to a world where intangible capital is growing in importance.