Pay Attention to Gabriel Zucman on Tax Havens

J. Bradford DeLong and Michael M. DeLong

Over at Project Syndicate: Pay attention to U.C. Berkeley’s newly-hired Gabriel Zucman, author of the just-released The Hidden Wealth of Nations: The Scourge of Tax Havens (Chicago: University of Chicago Press)

His figures are the hardest figures about tax havens–Switzerland, Bermuda, the Cayman Islands, Singapore, Luxembourg, and so forth–and about the quantity of money stored in them that we are likely to get. His estimate? 8% of the world’s financial wealth. $7.6 trillion. That is more wealth than is owned by the poorer half of the world. And this is money that is not in the tax base, but should be in the tax base–and would be if we had sufficient international tax harmonization to close off loopholes that allow for (legal) tax avoidance and sufficient cooperation and enforcement to make (illegal) tax evasion not worth the risk. READ MOAR

Zucman’s estimates are largely based on discrepancies in the international accounts we have. He is undertaking the hazardous leap of assuming that what are usually classified as “errors and omissions” have meaning. So how solid are his estimates? The Swiss Central Ban reports that $2.4 trillion in funds are held by foreigners in Swiss banks. Switzerland is the jurisdiction that has made living as a tax haven for the longest period of time, but it is not the most advantageous place for a plutocrat to park money. Thus we can be confident that $7.6 trillion is in the ballpark.

The North Atlantic has no chance of using national governments’ taxing powers to preserve social democracy and offset the great upward leaps in income and wealth inequality that have afflicted it over the past generation and continue to afflict it if its governments cannot tax. Emerging markets have no chance of instituting the progressive taxes needed to fund social democracy if they cannot find their plutocrats’ money. Tax havens are right now a small problem for a center or a left-of-center government in North America. They are a significant problem for Europe. But they are an enormous problem for the Middle East, for Russia, and for China. Or perhaps they are not a problem for these last three but an opportunity? To the extent that the executive of the modern state is little but a committee for managing the affairs of the ruling class, international tax havens are not a bug but a feature.

And even in the United States it is the case that too often in the past generation policy details have been deliberately constructed to enable rather than to discourage tax avoidance via tax havens. In the words of one former Bush 43 senior staffer: “it is, ultimately, about freedom”. This is a big chunk of the 1/3 fall in the effective reach of the U.S. corporate income tax since the late 1990s.

A century ago, when the First Gilded Age was at its height, noted American Progressive Louis Brandeis famously said that “sunlight is the best disinfectant”. Thus the creation of transparency is the first task–Zucman favors a single global registry, a publicly-accessible database of the ownership of financial instruments. If that is the first step, the shifting of the corporate tax base from profits reported to have been earned in a country to sales made in a country is the second. The point would still be to tax corporate profits–it does nobody any good to tax corporations that are truly losing money. But opportunities for tax havens would be greatly reduced if profits were apportioned among countries by the share of wages and of sales made in a country. As Zucman stresses, a corporation can move its legal headquarters and transfer-price its internal transactions, but it has a much much harder task in moving its employees across national borders, and it cannot move its customers.

It is fashionable to say that nothing can be done–that national sovereignty is too strong a meme, and that today’s plutocrats have too much political power both over elected politicians and even more so over appointed civil servants who expect someday not too far distant to go through the revolving door. It is fashionable to recall that, more than a century ago, then-Governor Woodrow Wilson of New Jersey convinced his legislature to get New Jersey out of the corporate-haven business. And America’s corporations picked up their legal headquarters and moved next door to Delaware.

Those who say that international policy coordination is impossible are always right–until, someday, things change and they are wrong. Why, right now it looks as though international policy coordination is very possible when it comes to ISDS: investor-state dispute settlement. But if we do not get the transparency and prepare the ground for formula apportionment now, someday the opportunities to make the taxation of our Second Gilded Age’s global plutocracy genuinely progressive when those opportunities will be at hand, yet we will fail to grasp them.

829 words

September 28, 2015


Brad DeLong
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