New Estimate of Offshore Wealth Shows Big Increase Since 2004
by Kenneth Thomas
New Estimate of Offshore Wealth Shows Big Increase Since 2004
A new report by the Tax Justice Network, “The Price of Offshore Revisited,” shows that the amount of wealth held in tax havens has increased enormously since 2004, and confirms what I previously wrote about the huge cost to tax coffers of money hidden offshore.
The report was authored by the former Chief Economist of McKinsey and Company, James Henry. Its findings advance our understanding of tax havens and demonstrate that typical estimates of wealth inequality are significantly understated.
The major finding is that offshore financial holdings now come to some $21-32 trillion, compared with the estimate in TJN’s 2005 report of $9.5 trillion (this excludes non-financial wealth, such as real estate). James makes a very conservative estimate of how much governments lose in taxes of $189 billion a year, based on earning just 3% on this $21 trillion, taxed at 30%. How conservative? This is actually less than the $255 billion annually estimated in the first TJN report, but that is based on earning 7.5% annually on offshore wealth. We can get an idea of how conservative this estimate of lost taxes by seeing how sensitive it is to changing the rate of return and wealth estimate used:
Rate of Return Wealth Estimate Lost Taxes
3% $21 Trillion $189 billion (Henry’s actual estimate)
4% $21 Trillion $252 billion
5% $21 Trillion $315 billion
6% $21 Trillion $378 billion
3% $32 Trillion $288 billion
4% $32 Trillion $384 billion
5% $32 Trillion $480 billion
6% $32 Trillion $576 billion
Note that none of these hypothetical estimates use an earnings rate for offshore wealth as high as the original TJN report’s 7.5%.
Since these assets are hidden, we of course have no way of knowing how much the money is earning. I think it is fair to say that Henry’s estimate is more likely low than high.
On the inequality of financial wealth, Henry says:
By our estimates, at least a third of all private financial wealth, and nearly half of all offshore wealth, is now owned by world’s richest 91,000 people – just 0.001% of the world’s population. The next 51 percent of all wealth is owned by the next 8.4 million, another trivial 0.14% of the world’s population.
In the companion report on inequality by Nicholas Shaxson et al., the authors asked a number of well-known experts on inequality if they thought these data showed inequality has been underestimated. The answer from Thomas Piketty (of Piketty and Saez, the most widely quoted set of papers on inequality that I know of) was blunt: “Yes, definitely.”
Despite Felix Salmon’s characterization of the report as “long on hyperbole,” I find no reason to disagree with its conclusion that tax havens are a “black hole,” one which costs the middle class (through uncollected taxes on the super-rich) untold billions of dollars and increases inequality around the world.
cross posted with Middle Class Political Economist
These statistics come up almost on an annual basis. There is no such thing as sharing the wealth, fair distribution or compassion in the capitalist world, but don’t worried…there is even less in the communist state.
I’ve argued for a while that we should use our military to take over tax havens. Better ROI than taking out poverty stricken patches of dirt and mountain in the Middle East or Africa.
If you want to deal with this problem, deal with it head on.
Some of our new found commenters seem to have left reality based discussion. First we have the standard position of extremes. Unbridled capitalism has limitations based upon the apparently natural selfishness of man. Solution? None because communism suffers the same disfunctions. how about capitalist economy within a body of laws governing taxation and the sequestering of assets?
Use the military to take over Switzerland? I like it a lot as one of the least useful concepts in modern global politics. How about taxing the money before it gets a chance to escape? How about redifining what and who is an US citizen and entitled to the protections of our government based upon the totality of one’s commitment to the US economy. How difficult would it be to twist the arms of the Cayman Island government for disclosure, as athe Swiss did not too long ago. No amnesty. Go straight to jail. Do not collect any additonal money.
Our problems are not unsolvable. Our Congress is a waste of money and activity. Our Executive isn’t that much better and the alternative offered is frighteningly selfish and short sighted.
Jack:
We do tax income before it flees the country. It’s because of those taxes and the prospect of them going up the rich feel it’s necessary to diversify their holdings geographicly.
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Yes, all the reason more for the automatic transaction tax. That money does not leave the country via the carrying of US greenbacks to those tax havens. It’s all digital.
An automatic transaction tax takes care of it. Gets to the black market money too.
Sally
The money gets out in large quantity because it is initially taxed at an artificially low rate, in most cases 15%, while the rest of the payers cough up 20%-30%. And then when the money is off the shore its earnings are far more difficult to track and can be the means by which on shore earnings may be transferred off by a variety of transfers between accounts. All very subtle, tricky and malevolent. That it is within the letter of the law only proves Dickens’ contention that the law is an ass.