The Washington PostDemocracy Dies in Darkness

We now know who cheats on their taxes. (Hint: it’s not the poor or middle class.)

A security guard stands in front of the building that houses the law firm Mossack Fonseca & Co. (Joe Raedle/Getty Images)

Social scientists find it hard to study many important questions because they don’t have good data: Tax evasion is one of those questions. For obvious reasons, tax cheats don’t have any desire to announce themselves in public. Nor is it easy to study tax evasion based on the people who get caught; they may not be representative. This means that the recent spate of leaks has been a gold mine for scholars interested in the causes and consequences of tax evasion. A new paper by Annette Alstadsaeter, Niels Johannesen and Gabriel Zucman uses these new data sources to come to a stark conclusion: Rich people are much more likely to cheat on their taxes than poor or middle class people.

New data allows for new conclusions to be drawn

Alstadsaeter, Johannesen and Zucman draw on three new sources to estimate tax cheating. First and most valuable is a set of data from HSBC Private Bank (Suisse), a Geneva based firm, that was leaked in 2007. This data is valuable because it provides clear evidence of who is or isn’t cheating. According to the authors, people who have a Swiss bank account and do not declare it are almost certainly tax cheats. The HSBC data set also plausibly represents a much larger problem, and it doesn’t have the same issues of “selection bias” that other sources have. The scholars also draw on other sources of data — the Mossack-Fonseca leak of shell corporations, a Swedish amnesty program for former cheaters and random audits of Danish taxpayers. None of these data sources is perfect by any reasonable definition, but if they all point in the same direction, one can argue reasonably that they probably are pointing to something real. This kind of data doesn’t capture many forms of tax fiddling — e.g. people who decline to report their tips or occasional informal cash payments as income. It does capture the kinds of larger scale tax evasion that are plausibly more damaging.

Rich people are far more likely to cheat on their taxes

In Alstadsaeter, Johannesen and Zucman’s description, the data is unambiguous. The richer you are, the more likely you are to cheat big time on your taxes. As they put it, “the probability to hide assets rises very sharply with wealth, including within the very top groups.” Zucman has previously done work estimating the size of the offshore structures through which rich people hide their income. Combining his old data with the new information, the authors estimate that the top 0.01 percent of the wealth distribution own about 50 percent of all the wealth that is hidden offshore, and that this 0.01 percent hides approximately 25 percent of its wealth from the tax collector. The authors argue that these are conservative estimates — the actual rate of tax evasion is probably substantially higher in developing countries where tax enforcement is poor.

This is likely driven by inequality and supply of tax evasion services

The pattern of the data suggests that tax evasion is heavily concentrated among very rich people. Why might this be so? The authors hypothesize that it is driven by a combination of inequality and supply of tax evasion services by specialized banks, firms of lawyers and so on. If inequality is relatively high, then a relatively small number of rich people is going to own the lion’s share of taxable assets. The combination of low numbers of people and a high level of assets makes them attractive customers for these services, since they will provide high profits with a low risk of detection. However, moving down-market will be unattractive for such services. There are many more possible customers, but these customers are less profitable individually, and more likely to be caught en masse. Thus, you might expect to see an outcome like that which seems to have happened in real life — banks like HSBC that enable high levels of tax evasion among extremely rich people, but few firms, if any, willing to provide less wealthy people the same services.