The Hidden Wealth of Nations The Scourge of Tax Havens - Gabriel Zucman & Teresa Lavender Fagan (Translator) & Thomas Piketty (Foreword)

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Here is a summary of the key points from The Hidden Wealth of Nations:

• Tax havens have grown significantly in scale and importance over the past century, undermining tax systems and facilitating capital flight and tax evasion. They may be responsible for 8% or more of global wealth being hidden offshore.

• Gabriel Zucman uses statistical anomalies and inconsistencies in global financial data to estimate the minimum scale of offshore wealth, which could be substantially higher, especially in developing countries.

• Tax havens threaten democracy by allowing some to opt out of paying their fair share of taxes, undermining the social contract. They contribute to rising inequality.

• While countries like the US have taken some actions like FATCA, more coordinated global action is still needed and tax havens continue to grow in importance.

• Zucman proposes the creation of a worldwide public register of financial ownership, taking control of existing private central security depositories. This would allow governments and tax authorities to identify true ownership and combat tax evasion on a global scale.

• If implemented, a global public registry could significantly curb the power and scale of tax havens, boosting tax revenues and supporting fairer and more just tax systems internationally.

• The author argues that countries should come together to implement a common minimum wealth tax (e.g. 0.1% of individual net wealth) that could then be supplemented by higher progressive tax rates set by individual countries.

• Historically, property registration and taxation systems helped build modern states in the 18th-19th centuries, but they did not account for modern financial assets the way they do today. Income tax systems in the early 20th century tried to tax profits and dividends, but it is difficult to properly tax income from assets without also having registration and taxation of the underlying assets.

• The author proposes creating a worldwide registry of financial wealth ownership, combined with automatic exchange of information between tax havens and other countries. Sanctions should also be levied proportionately to costs imposed by tax havens on other countries, such as trade tariffs.

• Corporate taxation needs to be reformed, moving from country-by-country reporting of profits (which are manipulated) to taxation based on consolidated worldwide profits. This could increase corporate tax revenues by about 20%.

• Strong coordinated international pressure is needed to shift incentives for tax havens to cooperate, as politely asking has not been effective. Data and sanctions are needed to measure problems and ensure progress in fighting tax evasion.

• In the 1920s, following World War I, many countries significantly increased income tax rates to fund public debt and veterans benefits. This gave rise to the tax evasion industry.

• Switzerland was well-positioned to become a tax haven due to its stable neutrality, developed banking sector, and high bank profitability ensured by the Swiss National Bank. Swiss banks saw an opportunity in managing wealth for evading taxes in other countries.

• Tax evasion works by depositing untaxed wealth and securities from other countries into secret Swiss bank accounts through anonymous shell companies. This allows the wealth to grow tax-free and spend the money abroad secretly through techniques like “Lombard credits.”

• For much of the 20th century, it was easy to evade taxes this way because financial wealth was represented by physical bearer securities that could be anonymously deposited in Swiss banks. This allowed Swiss banks to build huge unknown caches of illegally obtained wealth.

• During the early 20th century, wealth held offshore in Swiss banks saw extraordinary growth, increasing over tenfold between 1920-1938 to around 125 billion Swiss francs on the eve of WWII. This contrasted with stagnating wealth levels in European countries.

• Most of this offshore wealth (over 50%) belonged to residents of France. The rapid growth phases in the 1920s coincided with France increasing its tax rates, not the enactment of Swiss banking secrecy laws in the 1930s as claimed by banks.

• The wealth consisted primarily of foreign securities like stocks and bonds from Germany, the US, UK, etc. - not Swiss assets. Swiss banks simply held these foreign investments, playing an intermediary role.

• The main reason for depositing assets in Swiss banks was tax evasion, by not reporting foreign holdings to domestic tax authorities.

• After WWII, offshore wealth levels decreased due to war destruction and economic turmoil. Additionally, Switzerland now faced pressure from allies like France, US, and UK to do away with banking secrecy.

• In the late 1940s, France and the US pressured Switzerland to help identify French assets held in Swiss banks, many of which consisted of American securities. The US had frozen these assets, suspecting Switzerland of aiding the Axis powers.

• To unlock the assets, the US demanded declarations from Switzerland on asset owners and from France verifying tax declarations. But Swiss banks duped authorities by falsely certifying assets belonged to Swiss or Panamanian entities, not French. This set a precedent for future tax evasion facilitation.

• The 1950s-1970s were a “golden age” for Swiss banking secrecy. An estimated 5% of European wealth was hidden in Swiss vaults. US surveys in 1974 showed Switzerland held about a third of foreign-owned American securities, more than any other country.

• New offshore centers emerged from the 1980s on, like London, Hong Kong, Singapore, but Switzerland remained dominant due to its historic reputation and secrecy advantages over new competitors. The portion of hidden European wealth held in Switzerland declined gradually but the total assets managed continued growing.

• Swiss banks held $2.3 trillion in foreign wealth as of 2015, the highest level ever. This contradicts claims that Swiss banks are declining.

• Much of the wealth management has moved offshore to places like Luxembourg, the Cayman Islands, and Panama. However, these locations often operate in symbiosis with Swiss banks rather than competition.

• Investments are now typically managed through funds domiciled in tax havens like Luxembourg, Ireland, and the Caymans for tax avoidance purposes. However, Swiss banks still play a role in advising clients.

• Secrecy has shifted from numbered Swiss bank accounts to uses of structures like shell companies, trusts and foundations typically based in other tax havens like the British Virgin Islands and Cayman Islands but set up with Swiss bank assistance.

-STATISTICS UNDERESTIMATE TOTAL AS STATS DON’T SEEK TRUE BENEFICIARIES. While cooperation is increasing for some, secrecy remains for ultra-wealthy individuals from developing countries. Overall flows continue increasing rather than decreasing for Swiss banks.

• The global cost of offshore tax evasion is difficult to estimate precisely due to imperfect data, but a reliable estimate can be made through analysis of available statistics.

• An estimated 8% of the world’s household financial wealth of $95.5 trillion, or about $7.6 trillion, is held in tax havens based on anomalies seen in countries’ international investment position data.

• About one-third ($2.3 trillion) of the total offshore wealth is held in Switzerland. The rest is distributed across other major tax havens like Singapore, Hong Kong, Bahamas, Cayman Islands, and Luxembourg.

• Much of the wealth held in other tax havens is actually managed by Swiss banks. Only Switzerland provides direct information on offshore wealth held through its banks.

• Wealthy individuals use tax havens not just for savings but primarily to invest in financial securities like stocks, bonds and mutual funds on international markets from their offshore accounts. This causes distortions in countries’ reported international investment positions.

• Estimating the total offshore wealth allows calculating how much taxes governments could gain by better addressing offshore tax evasion. Though imperfect, this analysis provides a reliable estimate and concrete step towards fighting tax evasion.

• The passage raises an anomaly - global financial accounts often show more liabilities than assets, as if some wealth was held by another planet.

• This gap could reflect money held offshore for tax evasion purposes.

• Looking specifically at Luxembourg, the statistics office says $3.5 trillion in mutual funds are domiciled there. But only $2 trillion of ownership of those funds is recorded globally as assets.

• This $1.5 trillion gap likely reflects ownership of the funds through offshore accounts, which are recorded as liabilities in Luxembourg but not claimed as assets by any country.

• Similar gaps exist for Ireland and Cayman Islands, the other main domiciles for mutual funds.

• When ownership of these funds is traced back to investments made through secret Swiss bank accounts, it fits the pattern of being recorded as liabilities but not assets.

• Therefore, the global accounting gap of $6.1 trillion provides a reasonable estimate of total wealth held offshore for tax evasion purposes through financial investments.

So in summary, it uses discrepancies in global financial account ownership data to estimate the scale of wealth held secretly offshore, particularly through investments in Luxembourg and other mutual funds.

• The passage discusses different forms of wealth held offshore and the challenges in estimating their total amounts. It focuses on wealth held in tax havens like Swiss banks, Luxembourg insurers, and other assets like real estate and artwork.

• The author estimates the total amount of offshore household wealth is around $7.6 trillion, with about 80% ($6.1 trillion) estimated to be undeclared to tax authorities.

• This undeclared offshore wealth costs governments around the world an estimated $200 billion in lost tax revenue each year.

• The largest components of this lost tax revenue are estimated to be $125 billion from lost income tax on interest and dividends, $55 billion from lost inheritance tax, and $10 billion from lost wealth tax.

• Offshore wealth has grown significantly since the 2008 financial crisis, estimated at around 25% higher now, fueled both by market gains and new inflows from developing countries.

• Methods of hiding offshore wealth are also becoming more sophisticated through increased use of shell companies, trusts, and other legal structures.

• The real rate of return on investment portfolios averaged around 5-6% over the past decade when accounting for inflation. Hedge funds averaged above 10%.

• An estimated $125 billion in annual tax revenue was lost globally due to tax evasion on offshore investment income in 2014 based on a 5% assumed real rate of return.

• Additional tax losses of $55 billion came from inheritance tax evasion and $10 billion from wealth tax evasion, totaling around $190 billion annually lost to tax havens.

• Europe loses the most in total sums - around $78 billion annually according to estimates. However, developing countries lose a larger share (20-30%) of overall wealth to offshore havens.

• Combating offshore tax evasion could help governments reduce debt burdens and institute less austerity, especially in European countries struggling with high debt. For example, collecting taxes on hidden French wealth could yield $300 billion, equal to 15% of French GDP.

Here are three key mistakes from past attempts to curb offshore tax evasion according to the passage:

1. Lack of constraints. Early international agreements and treaties for information exchange relied too much on voluntary cooperation from tax havens and banks. There were no meaningful penalties or constraints to force compliance if a tax haven refused to provide information.

2. Lack of verification. Policies like the on-demand exchange of information required tax authorities to already have evidence/suspicions of fraud before getting information from tax havens. This puts the cart before the horse and makes it almost impossible to uncover undisclosed foreign accounts without some initial information.

3. Partial/piecemeal approach. Aggressively pursuing tax evasion only in some tax havens and countries, while leaving many loopholes, is counterproductive as it simply shifts funds to less cooperative jurisdictions. A truly global and comprehensive approach is needed to be effective. Early attempts were undermined by only addressing the problem partially with selective agreements.

In 2012, Jerome Cahuzac was the French budget minister in charge of fighting tax evasion. However, leaked recordings showed he had a hidden Swiss bank account at UBS. When French authorities used a cooperation agreement with Switzerland to investigate, the Swiss said Cahuzac had no account there. It was later discovered the money had been transferred to Singapore, leading to Cahuzac’s resignation.

Around the same time, the US passed the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA requires foreign banks to automatically disclose US client accounts and income to the IRS every year, without needing suspicion of wrongdoing. Failure to comply results in a 30% tax on US-sourced dividends and interest.

FATCA helped shift the standard to automatic information exchange globally. Many tax havens now agree to this, seeking to avoid sanctions. However, challenges remain as some tax havens may resist and opacity through shell companies can hide true owners. Stronger enforcement is still needed to ensure compliance in practice versus just in policy. FATCA showed taxes and transparency can be increased through credible threats of substantial penalties against noncooperative jurisdictions and institutions.

• The US awarded Bradley Birkenfeld $104 million for revealing tax evasion practices at his former employer UBS. However, relying solely on whistleblowers may not be effective long-term policy for combating tax havens.

• Large banks may engage in behaviors that hinder enforcement, believing they are “too big to indict”. For example, HSBC and Credit Suisse faced fines but no criminal charges for money laundering violations.

• The EU savings tax directive, which aimed to automatically exchange bank interest information between countries, was ineffective due to mistakes. Luxembourg and Austria were exempted, undermining the directive’s credibility. It also only applied to interest, not dividends or capital gains.

• In practice, the directive encouraged Europeans to transfer wealth to shell companies and foundations to avoid the 35% withholding tax. Swiss bank data showed accounts held directly by Europeans dropped from 50% to 15% after the directive, while shell company accounts rose from 25% to 60%.

• The directive failed due to lack of sanctions for non-participating tax havens, ability to hide wealth through shell structures, and over-reliance on banker cooperation. Stronger enforcement is still needed for future automatic information exchange agreements to be effective.

• New approaches are needed to effectively combat offshore tax evasion, including concrete sanctions on uncooperative tax havens that are proportional to the costs they impose on other countries.

• Financial sanctions like withholding taxes on interest/dividends paid to uncooperative countries could be used, as the U.S. did with FATCA. However, financial flows can be easily circumvented.

• Imposing trade tariffs on uncooperative havens is better justified, as they rely heavily on international trade. Tax havens deprive governments of ~$200B annually through financial secrecy. Tariffs would compensate for this negative externality.

• However, retaliation is a risk. Coalitions of large countries are needed to apply enough pressure without triggering trade wars. International pressure combining countries that weigh heavily in a haven’s trade is most effective. Alone, countries can achieve little, but together more can be accomplished. An international register would also help transparency.

• Countries can form coalitions to impose trade tariffs on tax havens equal to the costs of financial secrecy (lost tax revenue). Small coalitions are easier to form but risk escalation, while large coalitions pose little escalation risk but are harder to form.

• Germany, France, and Italy imposing a 30% tariff on Swiss imports would recover the estimated €15 billion in annual tax revenue they lose due to untaxed Swiss bank accounts. This would force Switzerland to cooperate on financial transparency.

• Luxembourg poses a unique problem as an EU member protected by trade treaties. It has transformed from an industrial economy to a massive offshore finance center, undermining EU efforts against tax evasion. Its special EU status deserves reconsideration given this transformation.

• In general, relatively small coalitions of major countries can use credible tariff threats to force transparency from tax havens, even without having to implement the tariffs if they achieve cooperation. The goal is cooperation, not long-term protectionism.

• Luxembourg’s GDP fluctuates wildly based on international finance. Between 2007-2009, GDP per worker fell 10% (vs. 2% in France) and has not increased much since.

• The ruling family, the Nassaus, have governed since 1783, transferring rule between branches. The Christian Social People’s Party has provided the prime minister since WWII, except for a brief period in the late 1970s.

• Luxembourg’s workforce is aging and it lacks unique industries like steel, wealth management, or prestigious universities.

• Luxembourg has succeeded as a financial center by “commercializing its own sovereignty” - allowing companies to set their own tax, regulatory, and legal terms starting in the 1970s. This attracted many investment funds and shell companies.

• Currently over 150,000 people commute into Luxembourg daily from neighboring countries.

• One-third of Luxembourg’s production pays salaries to cross-border workers and owners of banks/funds abroad. Its GNP is only two-thirds of its GDP.

• This level of income sent abroad is unique for an independent nation. Puerto Rico is the only comparable territory as it is not fully independent from the US.

• Luxembourg’s status in the EU and role in blocking decisions is questionable if it is no longer truly a nation. Its financial model also threatens EU stability.

• Transparency and cooperation on tax issues is needed to fix this, which may cost Luxembourg 30% of its GDP. A global financial register is also proposed to verify cooperation.

• A global financial register that tracks ownership of all financial assets like stocks, bonds, derivatives, etc. would be very useful for combating money laundering, bribery, terrorism financing, and monitoring financial stability.

• Similar registers already exist at the national level and are run by private companies like DTC, Euroclear, Clearstream. The proposal is to combine these existing registers into a single global public register.

• Creating this global register would involve merging the data from existing national registers like DTC, Euroclear, Clearstream and others. The IMF may be well-suited to take on this role initially given its technical capabilities and global mandate.

• A key challenge is identifying the ultimate “beneficial owners” behind financial assets that are often held through layers of intermediaries like funds. International rules now require tracing ownership back through intermediaries.

• While some privacy concerns exist, most countries already have public land/property records, so a financial register would not be unprecedented. Access could initially be limited to authorities to verify tax reporting.

• The register would start with traditional assets but aim to eventually include derivatives which currently have no comprehensive registration. This is important for regulation and preventing tax evasion.

• The financial register would support proposals for a global wealth tax by providing data on ownership of taxable assets worldwide.

• Multinational corporations are able to shift profits to offshore tax havens through techniques like intragroup loans and transfer pricing manipulation. This allows them to avoid taxes in high-tax countries.

• Intragroup loans involve loading debt onto subsidiaries in countries with high corporate tax rates to reduce profits there and shift them to low/no-tax places like Luxembourg or Bermuda.

• Transfer pricing manipulation involves setting transfer prices for goods, services, and intellectual property transferred between subsidiaries. Profits can be shifted by having a subsidiary in a tax haven charge a high price for these transfers.

• It’s difficult for tax authorities to determine appropriate “arm’s length” transfer prices, especially for intangible assets. Companies can effectively set their own prices.

• This allows companies like Google, Apple, and Microsoft to shift substantial profits to tax havens like Ireland and Bermuda.

• Estimates suggest US-based multinationals shift over $130 billion in annual profits to tax havens through these techniques, avoiding taxes in the US and other countries.

• Reforming the corporate tax system is needed to address these loopholes and tax profits where economic activity actually occurs.

• 55% of US corporate foreign profits, totaling $650 billion, come from six low-tax countries: The Netherlands, Bermuda, Luxembourg, Ireland, Singapore, and Switzerland. Very little actual production occurs in these tax havens.

• Profit shifting to tax havens reduces total US corporate tax payments by about $130 billion per year, or 18% of total corporate profits.

• As a result of increased profit shifting, the effective corporate tax rate paid by US firms has declined from 30% in the late 1990s to 20% today, even as the nominal tax rate has remained at 35%. About two-thirds of this decline is due to increased tax avoidance.

• The use of tax havens distorts macroeconomic data and national accounts. For example, it artificially inflates Ireland’s trade surplus to 25% of GDP through transfer pricing manipulation.

• Reform is needed because efforts to strengthen transfer pricing rules have not curbed the rise of profit shifting to tax havens. A proposed solution is to calculate corporate taxes based on worldwide consolidated profits apportioned to countries using a formula weighing sales, capital and employment.

• A tax on global corporate profits is feasible and comparable systems already exist regionally, such as within the EU and US. The EU is proposing a common consolidated corporate tax base (CCCTB) that would apportion taxing rights based on sales, employees and tangible assets in each country.

• An EU-US agreement on a common tax base for multinational profits would help curb widespread profit shifting to tax havens. The US and Europe could advance this together without waiting for global cooperation.

• Tax havens would be penalized under such formulas since they have few sales, employees or tangible assets. However, the current CCCTB proposal is still optional for companies.

• Citizens need to put pressure on governments to take bolder action on tax avoidance and evasion. Technical solutions exist but political will has been lacking. A global public register and automatic information exchange can help curb secrecy.

• In summary, the article argues that a tax on global corporate profits is feasible if the major economies cooperate, and that citizens should demand bolder action from governments on tackling tax avoidance.

Here is a summary of the key points from the passage:

• The passage discusses policies and efforts to combat offshore tax evasion and banking secrecy over time. It analyzes both successful and unsuccessful initiatives.

• One of the earliest efforts was the first international treaty allowing for automatic exchange of inheritance tax information between France and Germany in the late 19th century.

• After WWII, countries like France put pressure on Switzerland to end its banking secrecy in order to get tax revenues from assets hidden there.

• In the late 1990s and 2000s, some progress was made through initiatives like the EU Savings Tax Directive, but it had many loopholes that reduced its effectiveness.

• The U.S. Foreign Account Tax Compliance Act (FATCA) in 2010 has helped increase automatic exchange of information, but still faces challenges of compliance verification and countries dissimulating data.

• A Global Financial Register has been proposed to increase transparency, but setting it up faces challenges regarding individual privacy and identifying owners of assets.

• Overall, while policies to increase transparency and information exchange have progressed over time, fully ending offshore tax evasion and banking secrecy remains an ongoing challenge.

• Ownership wealth has increasingly moved to tax havens in the form of financial wealth like bonds, shares, bank deposits, etc. over the 20th century, primarily motivated by tax evasion.

• Switzerland has historically been the most dominant country for foreign wealth holdings, although new centers emerged after the 1980s like Singapore. Electronic fund transfers now make moving money more efficient.

• Estimates indicate trillions of dollars of assets are held in tax havens globally, undermining countries’ tax bases. The US, EU countries and Africa lose significant revenues to offshore tax evasion each year.

• Setting up shell corporations and using tax inversion and transfer mispricing allow multinational corporations and wealthy individuals to avoid paying full taxes in their home countries.

• Current international efforts at automatic exchange of information and trade sanctions against non-compliant tax havens have limitations and loopholes. A global financial register of ownership is proposed as a more effective means to combat offshore tax evasion.