Ben Chu
The Independent
LONDON: Shady people are hiding money and financial assets in sunny tax havens. We’ve known this for a long time. The leaked Panama Papers simply ram it home.
But just how much money is squirrelled away, often out of sight of the tax authorities? What’s the scale of this? We can’t possibly know that because these tax havens are utterly opaque. Right? Up to a point.
It’s true these regimes are intensely secretive about their clients. But, in fact, we can have a rather decent guess.
National accounts are powerful tools for economic detectives. Statisticians in almost every country in the world have been trained to measure, on a regular basis, the financial assets and liabilities of the three sectors of any economy: government, companies and households. This enables us to see the balance sheet of an entire national economy.
Yet look at these balance sheets side by side and there are discrepancies. The aggregate financial assets of the world seem to be smaller than the world’s aggregate financial liabilities.
This doesn’t make sense. Assets, logically, have to match liabilities; no one can have a financial asset without someone else also having a corresponding financial liability. If I lend my friend money, she has a personal liability. And her loan is my asset. So what’s going on? The answer is that the national accounts have a significant blind spot. Let’s imagine a rich person living in the UK has money in a secret bank account in the Bahamas.
The money in the Bahamas account is used to buy shares in a mutual investment fund based in the British Virgin Islands. And let’s imagine this fund invests in European company shares. The shares rise in value and the dividends are paid into the Bahamas bank account.
The mutual fund shares are picked up by local statisticians as financial liabilities for a company registered in the British Virgin Islands. But the assets are not owned by a British Virgin Islands resident, so they are ignored. These shares ought, logically, to be recorded as an asset for the UK household sector since they are owned by a rich person in Britain. But UK statisticians have no way of picking up the asset’s existence. And the British Virgin Islands and the Bahamas don’t, of course, inform our own tax authorities or the Office for National Statistics (ONS).
The London School of Economics researcher Gabriel Zucman, author of The Hidden Wealth of Nations, has carefully measured discrepancies between global financial assets and liabilities – and he argues that the discrepancy is a rough proxy for the value of all the funds held in offshore tax havens.
Zucman estimates that around 8 percent of global wealth is held offshore, roughly $7.6 trillion. That is a serious amount of money, equivalent to around 10 percent of the entire value of goods and services produced each year in the global economy.
These sums are large enough to have a profound impact on the picture of national balance sheets and data on cross-border flows of money. One of the mysteries of modern global economics is that it appears the poorer countries of the world are effectively lending money to richer states such as the US and Europe.
This seems to defy common sense since it ought to be the other way around. But adjust the raw figures for the hidden wealth identified by Zucman and this paradox of water running uphill largely disappears.
The significance of tax havens for most of us lies in the issue of fairness. The hidden flows quantified by Zucman also have a serious impact on global and national wealth inequality measures.
Most measures of the assets of the very wealthy by national statisticians are unreliable because the very rich don’t tend to disclose all their assets when asked to do so. The ONS has reported a largely flat trend for UK wealth inequality over the past decade – a trend which has prompted some to argue that the rich are not, in fact, getting richer.
Yet the picture is very different if one factors in offshore wealth. The flat trend in rich countries such as the UK will, in a likelihood, turn out to be an illusion.
Zucman estimates that the value of offshore wealth has shot up by 25 percent in the past five years alone. Given that it is the wealthy who predominantly use tax havens, that will be the wealth of the very rich which has grown so sharply.
And fairness? Consider foregone tax revenues. Not all the money held offshore is there to avoid or evade tax. But it’s fair to assume that a very large chunk of it is.
There are no obvious advantages for most people to hold assets in different countries.
For those who want to minimise their tax bills or keep dirty money hidden from the authorities, the advantages are large.
Estimates of foregone tax are inevitably speculative, but for what it is worth Zucman thinks tax havens are responsible for around $200bn of unpaid tax to national exchequers around the world – money that is sorely missed at a time of austerity in many countries.