It was the most consequential leak in the history of the offshore world, providing journalists and the public an unparalleled view into a notoriously shadowy industry that shuttles secret wealth around the globe.
In 2007, an engineer extracted detailed records on the hidden wealth of more than 30,000 clients of HSBC Private Bank, the Swiss subsidiary of the British multinational banking giant, and secreted them to the French government. The data, which eventually became known as the “Swiss leaks,” ended up in the hands of other authorities and of journalists.
Now, that data, along with the Panama Papers — the records of a Panamanian law firm dealing heavily in offshore finance that were leaked to journalists last year — is providing academic researchers with a valuable look inside the opaque world of tax evasion and offshore holdings.
In a newly released paper, researchers in Scandinavia and the United States use the Swiss and Panamanian leaks to show that global tax evasion is likely much more prevalent than previously thought. Their estimates indicate that the top 0.01 percent of the wealth distribution own about half of all offshore assets and may be hiding roughly a quarter of their wealth offshore.
“Most of the tax evasion happens at the very, very top of the wealth distribution,” said Gabriel Zucman, one of the researchers.
Zucman has previously estimated that the equivalent of about 10 percent of global gross domestic product is hidden in tax havens. These countries, which often have laws that ensure the secrecy of offshore accounts, include Singapore, Hong Kong, Luxembourg, the Cayman Islands, the Bahamas, and, of course, Switzerland — which alone manages an estimated 40 percent of the world’s offshore wealth.
The researchers matched up individuals present in the leaks and in random tax audits with wealth records from Scandinavia. Those countries offer particularly detailed records on the wealth of their populations, allowing the researchers to figure out what the distribution of offshore accounts might look like among different economic classes.
Their estimates show that the wealthiest people are getting away with paying far less than their fair share. While about 3 percent of personal taxes are evaded in Scandinavia overall, households with more than $40 million in net wealth — or the top 0.01 percent of the wealth distribution — evade about 30 percent of their personal tax burden, they found. They caution that this figure might be much higher in other countries where the rule of law is weaker.
The chart below, from the paper, shows that, compared with all recorded wealth, the wealth hidden in HSBC's Swiss accounts — or revealed by the kind of amnesty programs that allow people to declare earnings they have previously hidden offshore — tends to belong to those at the upper end of the wealth distribution.
Tax evasion has been difficult for researchers to study because, as with all criminal behavior, people go to great lengths to keep their actions secret. The most common method for studying tax evasion is to look at random audits, but the researchers say these do not do adequately capture the extent of tax evasion at the top.
For one thing, the sample size of the ultrawealthy that are affected by random audits is quite small, making it hard to gather accurate data. For another, the superwealthy may have ways of evading taxes that are difficult for regulators to catch, like forming strings of shell companies around the world to disguise the real owner of valuable assets, like a property or a painting.
Previous researchers had theorized that tax evasion was likely much more common at the top of the wealth spectrum. Not only can the superwealthy afford expensive offshore services that help them hide their earnings, they are also less likely to have to disclose to the government in the first place.
Top earners are more likely to be self-employed, and thus have the burden of reporting their own income. In contrast, lower-income people typically earn wages, which in the United States are reported directly to the government by an employer in the form of W-2s. Among wage earners, rates of tax evasion are almost zero, Zucman says.
In addition to providing new insight into the nature of tax evasion, the researchers say their findings probably mean that economists have significantly underestimated inequality. If the top 0.01 percent have 30 percent more wealth than their tax returns indicate, that puts far more distance in the yawning wealth gap between the haves and have-nots.
“It increases measured inequality quite substantially,” said Zucman.
For Zucman, the findings imply that governments are missing out on a lot of revenue that is being hidden by the super wealthy. He says governments could recover more of these funds by cracking down on the kind of tax evasion services provided by the companies at the center of the Swiss and Panamanian leaks. To do so, countries would need to increase the penalties for facilitating tax evasion until what is now a very lucrative industry becomes too risky.
Despite the high profile leaks of the past few years, there hasn't been much progress on this front, Zucman says. “If it remains profitable for the providers of offshore services to facilitate tax evasion, tax evasion will continue.”