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by G Zucman, H Schumann & F De Masi
Tuesday, Nov. 21, 2017 at 6:27 AM
Behind closed doors, a powerful industry has developed worldwide since the 1980s: tax avoidance. Taxes that are avoided must be compensated by higher taxation of households with lower incomes.
DRIVING FORCE OF GLOBAL INEQUALITY
Tax evasion: the super-rich make nearly 10% of world wealth disappear. That is theft and the rest of us pay the price
By Gabriel Zucman
[This article published on 11/8/2017 is translated from the German on the Internet, www.freitag.de. Gabriel Zucman is a professor of economics at the University of California in Berkeley.]
Behind closed doors, a powerful industry has developed worldwide since the 1980s. If one follows the money streams, great losses for the economies of other countries stand out.
The numbers published by the tax havens are often hardly understandable. Our system has many problems in apprehending wealth and the profits of multinational corporations. Still, patterns can be identified and part of the secrecy broken that has surrounded activities in tax havens for decades through exact data analysis.
First, let us consider the tax avoidance by mammoth multinational companies. These business groups assign profits to different subsidiary firms as though they were independent entities. They trade goods and services among each other according to the prevailing market prices. However, in praxis, the intra-group transactions are routinely manipulated by offshore tax consultants to increase global profits in low-wage countries. Moreover, multinationals increasingly locate business divisions in favorable locations to gain profits from the countries where they are actually generated.
"Double Irish, Dutch Sandwich"
One example – that may be the most spectacular – is the Google-mother alphabet. In 2003, less than a year before its first stock market trading in August 2004, Google shifted its search- and publicity technology to "Google Ireland Holdings," a subsidiary company founded in Ireland that for reasons of the Irish tax system has its headquarters in Bermuda.
Since then, all the profits have landed in Bermuda after a (tax-free) roundabout way through the Netherlands – through the notorious tax loophole "Double Irish, Dutch Sandwich." In 2015, Alphabet claimed profits of .5 billion in Bermuda where the corporation tax is at a moderate 0 percent. This is as though every Bermuda resident (of whom almost no one works for Google) earned 0,000 profit for the business.
With my colleagues Thomas Topslov and Ludwig Wier, I combined the data published by tax havens all over the world to estimate the costs of artificial shifting of profits. Miniature countries like the Bermudas do not provide any significant statistics. In contrast, the real tax paradises of the EU while non-transparent in many regards must at least comply with the statistical guidelines of Euro-stat.
Our research shows that the six European tax havens (Luxemburg, Ireland, the Netherlands, Belgium, Malta, and Cyprus) skim off a total sum of 350 billion euros every year. That is the sum of the profits generated in EU countries with skyrocketing prices – after they were manipulated by an array of tax consultants in Luxemburg and the Netherlands – normally between 0 and 5%. Globally, the numbers indicate that more than 600 billion euros are shifted annually to the tax paradises of the world by multinational corporations.
Losses of 60 Billion Euros
Who are the losers? The losers are mainly the US and large European countries where most of the co-workers and consumers of the multinationals live. Through tax havens, 60 billion euros per year escape from the EU.
Every country has the right to choose its tax system. But when the Netherlands tailors models for mammoth international companies or Switzerland hides the wealth of corrupt elites in its vaults, they steal the revenue of other nations. While we lose, they win through fees, influence, and even though actual tax revenues (which is the greatest irony).
Now let us consider Ireland. Thirty years ago – with a corporate tax rate of 50% -, the share of business tax revenue in the national economy was lower than the share in the US or the whole EU. Ireland's revenue skyrocketed since the tax was lowered to 12.5% in the 1990s.
Did the low taxes stimulate the local economy, employment, and growth? Not at all. The additional tax revenues came from fictional profits parked by multinational concerns in Dublin or Cork, profits amassed by employees in other countries. The Irish government receives more money for streets and hospitals. Other countries receive less. Nothing in the logic of the free market justifies this theft.
Why the practices continue is clear. Given the enormous shifted profits, tax havens only need a tax rate of a few percent to earn massive sums in comparison to their economy. The offshore financial centers will not simply abandon this lucrative business as long as they are not faced with heavy sanctions. Unfortunately, no government has shown great courage or resolution in this matter up to now. Therefore, the artificial shift of profits grows year after year. International US businesses have 63% of their foreign profits in six tax havens with the Netherlands being the most important. This is 20% more than in 2006.
A New Loophole is Always Found
A new loophole is always found when a tax paradise is forced to close a loophole. When Ireland announced the discontinuance of the "Double Irish" model in 2010, Apple rushed to configure a similar tax model in the future through Jersey.
Tax havens are a central driving force of global inequality since the main profiteers are the shareholders of the businesses that use them. Most investment capital of the world belongs to very rich people. Thus avoiding corporation taxes only enriches a small group of persons. The taxes avoided by companies must be compensated by higher taxation of households with lower incomes. If the taxes are not raised, public spending must be reduced. The revenues that escape EU countries correspond to half of public spending on higher education. Therefore tax paradises, like climate change, are the cause of an enormous wealth transfer between the generations that makes the older richer and the younger poorer.
However, tax havens promote inequality in a much more direct way alongside the avoidance of business taxes. They enable some super-rich persons to hide their wealth – from the taxman, business partners, spouses or judges. The equivalent of 10% of the global gross domestic product is offshore in the possession of rich persons as bank accounts, stocks, investment fund shares, mostly in the names of faceless mail-box firms, foundations, and trust companies. Until recently, we had no clear overview of who owned this wealth. But thanks to the leaks of the last years, my colleagues Annette Alstadsaeter, Niels Johannson and I could make advances in this cause.
The analysis of the date of the HSBC commercial bank and the Panama Papers has shown the affluence of the typical users of tax havens. The extent to which the offshore wealth is concentrated in only a few hands is shocking. Around 50% are households with a net worth of more than 50 million euros, persons called "Ultra High Net Worth Individuals" in the bank jargon. These super-rich represent around 0.01% of the population of industrial nations.
This has dramatic consequences for a country like Russia where the large part of the country's wealth is parked abroad. In Britain, Spain, Germany, and France, 30 to 40% of the wealth of the richest 0.01% of households is invested abroad.
Global Inequality Grows
Even in the US, the use of tax havens leads to inequality. However, the effect is less intense than in Europe because the wealth in the US is very strongly concentrated. In any case, our standard statistical toolbox for measuring inequality is inadequate for the reality of capitalism in the 21st century. The problem constantly intensifies.
While global inequality grows, the offshore tax law offices strongly concentrate their interest on a smaller but more affluent clientele. Around 155 billion euros escape governments annually through the veiling of wealth.
The veil of secrecy over tax haven practices is lifted a little. A large part of the data is still missing. A growing part of the offshore wealth (more than 60% of the money managed in Switzerland) is hidden in mailbox firms, trusts, and foundations that veil the real owners of the assets. Seriously fighting tax fraud is hardly possible in such a statistical fog. Fines are imposed on some big banks like Credit Suisse and HSBC by the US. But the fines are often seen as a business expense or overhead and are small compared to the profits. Threatening with the withdrawal of the bank licenses would be a more effective deterrent.
Much is at stake. Most countries already have a real estate register. We should first improve this to identify the economic owners. How can we allow a large part of Manhattan and London to be owned by mailbox firms behind which are hidden potential criminals and money launderers? A worldwide financial register would deliver a fatal blow to financial secrecy. It would supply inestimable information about wealth distribution that is a prerequisite for serious debates about government policy. In my opinion, such a register must be the main goal of advocates of financial transparency in the coming years.
The French economist Gabriel Zucman is an Assistant Professor at the University of California at Berkeley.
‘PARADISE PAPERS": HOW THIS TAX EVASION COULD BE ENDED
The scandal around tax evasion will end when all banks and businesses with offshore firms lose their licenses in the euro zone. A commentary.
By Harald Schumann
[This article published in 11/6/2017 is translated from the German on the Internet, www.tagesspiegel.de.]
Once again in a leak, an anonymous researcher brought to light millions of documents from tax evasion centers. Once more, we learned how the super-rich and their corporations evade their tax duty on a large scale – as fronts camouflaged as custodians behind which they hide. Often they use special laws to transform taxable billions in profits into tax-free license- and patent fees. Like top managers, the owners of corporations acquire their private jets tax-free. Obviously, names and sums remain hidden in labyrinths of shadow firms that are formally registered in miniature states.
With this system of shadow finance, assets and profits around the world worth at least 20 trillion evade the tax obligation. This costs state treasuries of the world 300 billion euros a year in revenue, twice as much as all payments for development assistance.
This is outrageous but in no way surprising. Only the names and details are new. The methods have been known for decades. These disclosures are important and also depressing. The "Paradise Papers" document again the contempt with which the global economic elite treat the societies from which they owe their wealth. They verify the unbearable camaraderie with which democratically elected governments of the prosperous countries of the West aid and abet this mockery of the common good.
Legal Tax Avoidance
The official denial of the worldwide law offices and their customers is ever present. In unison, they announce they met their legal obligations and thus did nothing wrong. That is the real scandal: tax fraud in the billions occurs very legally.
The departing German Finance Minister Wolfgang Schauble gave the best excuse. "We live in a globalized world," he said, and tackling tax fraud is hard. "Two new heads of the hydra grow" after he and his colleagues cut off the head of the hydra."
That is absurd. The tax evasion centers are nothing but ex-territorial zones in the data bases of the banks. This parasitic business could be ended overnight if the political will existed in the US or in the euro zone. The parliaments only need to resolve to end any bank or business with firms on the Isle of Man, the Cayman Islands, and other tax-free miniature states so they would have no account with the European Central Bank or the Federal Reserve and no longer trade in euros or dollars. The nightmare would be ended as soon as all international banks ended this business. Former German chancellor Helmut Schmidt made this proposal over eleven years ago.
But this will never existed. Instead, past German governments were more concerned with the privacy of the super-rich. Up to today, there is no register on account of German resistance that could be obligatory across the EU and names the beneficiaries without exception to end the business with secret wealth.
Setting a sign would really be easy for the future German government together with French president Macron. Ultimately, the central protecting power of tax avoiders loses votes and headquarters with the Brits' exit from the EU. Do not let this chance expire so the latest disclosures fizzle out without consequences!
PARADISE PAPERS: STOPPING TAX TRICKS OF APPLE & CO
By Fabio De Masi
[This article published on 11/8/2017 is translated from the German on the Internet, www.fabio-de-masi.de. Fabio De Masi is a LINKE Party (the Left Party in the Bundestag) spokesperson on the financial markets.]
One tax scandal chases the next: the Offshore Leaks in 2013, Luxemburg Leaks in 2014, Swiss Leaks in 2015, Panama Papers and Bahamas Leaks in 2016 and now the Paradise Papers. The international consortium of investigative journalists (ICIJ) – a network of 200 reporters from 70 countries – evaluated millions of secret documents.
The super-rich and corporations lower their taxes to nearly zero. Companies shift profits over borders like Amazon packages. Firms like Apple or Nike establish mailbox firms with only one answering machine and deduct interests for fictional credits or license fees on their trademark rights. In Germany, for example, these interests are then deducted from the tax. In a tax haven like Luxemburg where the mailbox firm is located, the interests are declared dividends that remain untaxed. Companies are even obligated to their shareholders to use legal loopholes offered them by politics. This is really scandalous.
The large majority of the population is expropriated twice. The concentration of wealth and the growing business profits were realized as the wages in the last years lagged behind the growth of the economy. Now the oligarchs are working at lightning speed. The unequal distribution promotes the drug-related crimes of the financial elite and destroys democracy. Money creates an influence on laws in party gifts by businesses.
Eight persons on earth possess as much wealth as half of humanity or 3.5 billion people. The largest businesses like Facebook, Amazon, and Google are often owned by the richest families and oligarchs – whether in Washington, Berlin or Moscow. In Germany, the richest ten percent of households possess two-thirds of net assets while the bottom half of the population has only trifling wealth or debts. This is a sick development and has nothing to do with performance. Therefore, captains of industry were called robber barons.
Through legal and illegal tax tricks, EU states lack hundreds of billions of euros annually for investments in education, infrastructure or the social state. Criminals use tax havens and shadow financial centers to veil money-laundering, financial criminality, drug- and human traffic or terror-financing. Governments blame each other and simultaneously cut their internal revenue services. The US wants to drastically reduce its business taxes to bring back profits of US companies parked abroad into the country.
This is not even necessary. The US raises the claim of taxing US companies worldwide – wherever they gain their profits. If both the EU and the US would take away Apple & Co's sweatshops, there would quickly be pressure on the international plane to agree on fair rules. At the end, we all lose while the global money-elite can never get enough.
Once again, a large law office (Appleby) stands in the center of the Paradise Papers that like Mussack Fonseca from the Panama Papers sold services to companies. The (super-rich) mailbox firms are founded to veil the true identities of the owners and offer the best tax tricks worldwide. Since 1898, the Appleby business has been controlled from the British overseas island territory Bermuda. A brochure of the Left Party (Die Linke) in the European Parliament explains this trick in detail.
This fraud should be ended. The tax diplomacy in the scope of the OECD and the EU has failed since tax havens like Luxemburg, the Netherlands and Britain always block any advances. Even Germany builds a paradise for money-laundering – according to the president of the Federal Criminal Office – with laws on disclosing business profits and taxes for every country and public registers of the true owners of mailbox firms.
We do not have to wait until 28 EU states or 35 industrial countries agree in the framework of the OECD. Unilateral measures against tax havens and shadow financial centers are also possible. The US – itself a tax haven – has successfully fooled Switzerland and Lichtenstein. After the threat of taxes, the miniature states supplied bank data. Therefore, all penalty taxes, profits or payments like interests, licenses, dividends and insurance premiums will flow into Germany in the future. A double taxation can be avoided without problems.
Law offices and banks are distributors of the tax havens. The business license must be withdrawn with repeated tax fraud. A criminal law for corporations as in the US would help.
More transparency and sharper laws will only be effective when tax authorities and fiscal courts are able to enforce the law. For that, more personnel are needed, an end of tax competition between German states and a coordinated Federal financial police. Every average citizen in Germany must observe the rules. However, the super-rich
and corporations pay armies of lawyers and tax consultants who cover up their dirty tricks.
A wealth tax or a realistic inheritance tax for the super-rich is refused. Are there measures against the tax tricks of Apple & Co? No such luck! Hopefully, journalists and the general public will exert pressure to stop the predatory attacks of the rich and corporations. Then Germany will have a government that serves the majority.
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by Gabriel Zucman
Wednesday, Nov. 22, 2017 at 2:40 PM
WEALTH INEQUALITY IN THE UNITED STATES SINCE 1913:
EVIDENCE FROM CAPITALIZED INCOME TAX DATA*
Emmanuel Saez and Gabriel Zucman
This paper combines income tax returns with macroeconomic household balance sheets to estimate the distribution of wealth in the United States since 1913. We estimate wealth by capitalizing the incomes reported by individual taxpayers, accounting for assets that do not generate taxable income. We successfully test our capitalization method in three micro datasets where we can observe both income and wealth: the Survey of Consumer Finance, linked estate and income tax returns, and foundations’ tax records. We find that wealth concentration was high in the beginning of the twentieth century, fell from 1929 to 1978, and has continuously increased since then. The top 0.1% wealth share has risen from 7% in 1978 to 22% in 2012, a level almost as high as in 1929. Top wealth-holders are younger today than in the 1960s and earn a higher fraction of the economy’s labor income. The bottom 90% wealth share first increased up to the mid-1980s and then steadily declined. The increase in wealth inequality in recent decades is due to the upsurge of top incomes combined with an increase in saving rate inequality.
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