Jon Schwarz explains how much the elaborate tax evasion system that has been set up and that has been revealed in the Panama Papers costs the rest of us. Those revelations have claimed their first major casualty in that the prime minister of Iceland has resigned.
According to The Hidden Wealth of Nations, a recent book by UC-Berkeley economist Gabriel Zucman, the answer is that tax evasion costs governments about $200 billion per year.
Zucman also estimates that tax avoidance by U.S. corporations – which, unlike tax evasion, is generally carried out in the open and is technically legal — costs governments an additional $130 billion per year. (European and Asian corporations have the same incentives to avoid taxes, but there is not enough data to estimate its scale.)
So as a result of all the different schemes like the ones being unveiled by the Mossack Fonseca leak, governments around the world are dealing with at least a one-third of a trillion dollar annual shortfall that must be made up by cutting spending, borrowing, or taxing the rest of us more than they should.
Zucman’s estimates on tax evasion and avoidance are straightforward.
First, he conservatively calculates that, as of 2014, at least $7.6 trillion of the world’s financial wealth – or about 8 percent of the world’s total financial wealth of $95.5 trillion — was “missing.”
His reasoning is that the world’s assets should be an exact mirror image of its liabilities, but are not. If the U.S. sells $1,000 in government bonds to a foreigner, that $1,000 liability for the U.S. should show up as $1,000 in assets for the foreigner’s country. However, countries’ national balance sheets record much more in liabilities than assets.
This phenomenon is due to the financial engineering industry. As Zucman explains, imagine that a British citizen holds Google stock in a Swiss bank account. The U.S. correctly records that stock as a liability: a foreigner owns U.S. stock. Switzerland correctly does not record it at all, since the stock is not a liability or asset of Swiss citizens. But the U.K. incorrectly fails to calculate it as an asset of the British citizen.
Remember that the US and the West are very adept at putting the economic squeeze on countries and governments whose policies they dislike, using their control of the financial markets. They could easily do the same with those countries that provide tax havens and shut down the system, since they are usually small and powerless and part of the global financial system.
But the oligarchy wants more than anything else the ability to move capital freely across national borders so that they can take advantage of these schemes and so you can be sure that the governments will not shut them down. It is government of the rich, by the rich, for the rich.
Ray Mansell says
It is government of the rich, by the rich, for the rich.
Or perhaps more accurately: “It is government of the not-rich, by the rich, for the rich.’
The protests in Iceland were massive. It was truly impressive. It makes me a bit depressed that I doubt we would have something like that in America.
I’ve had discussions with many people where they claim that tax havens are something that you can’t really do anything about. But when you look into it, it’s actually quite easy for our government to enforce laws and prevent these tax havens from operating for Americans. There’s a very limited number of them, and it’s not difficult for agents to investigate claims of money laundering. It’s just that we deliberately choose not to.
Marcus Ranum says
There’s a very limited number of them, and it’s not difficult for agents to investigate claims of money laundering. It’s just that we deliberately choose not to.
The other thing about tax havens is that: they are full of money. It’s pretty easy to find out who has what money, where: nationalize the haven and see who comes screaming out of the woodwork.
I’m a bit confused by the repercussions here--in the example, is the fact that the UK fails to list that Google stock as an asset bad because that is now an untaxed asset? It’s not like the money isn’t actually there.
Nick Gotts says
Yes, that’s exactly it.
Marcus Ranum says
If the US collected what Yahoo! Google Boeing and Apple owed, we could have Canada-style health care.
I pulled that out of my butt, of course. But by saying that I am vastly more honest and probably far more accurate than most of the people in the non-discussion around this issue. Of course, vastly more rational would be to cut expenditures on the military and scale back the US Empire, which is also not under discussion (the US economy and therefore the US oligarchy depends way too much on the empire)
The wealthy take the money from the middle class, and ensure that they do not pay their fair share of taxes, while at the same time lowering the tax rate for high income earners. This is an important method to redistributing wealth to the upper class out of middle class pockets.
An interesting calculator:
Maybe it’s a lack of knowledge about the topic but I can’t help wondering if there’s a parallel to this in how exports were popularized in the US via trade agreements that ended up shipping manufacturing jobs and remote service jobs overseas. If you’re already moving money across borders and it’s ridiculously profitable to do so, moving production and services around sounds like a logical progression.