The world's super-rich have taken advantage of lax tax rules to siphon
off at least $21 trillion, and possibly as much as $32tn, from their home
countries and hide it abroad – a sum larger than the entire American economy.
James Henry, a former chief economist at consultancy McKinsey and an
expert on tax havens, has conducted groundbreaking new research for the Tax Justice Network campaign group – sifting through data from the Bank for International
Settlements (BIS), the International Monetary Fund (IMF) and private sector
analysts to construct an alarming picture that shows capital flooding out of
countries across the world and disappearing into the cracks in the financial
system.
Comedian Jimmy Carr became the public face of tax-dodging in the UK
earlier this year when it emerged that he had made use of a Cayman
Islands-based trust to slash his income tax bill.
But the kind of scheme Carr took part in is the tip of the iceberg,
according to Henry's report, entitled The Price of Offshore
Revisited. Despite the professed
determination of the G20 group of leading economies to tackle tax secrecy,
investors in scores of countries – including the US and the UK – are still able
to hide some or all of their assets from the taxman.
"This offshore economy is large enough to have a major impact on
estimates of inequality of wealth and income; on estimates of national income
and debt ratios; and – most importantly – to have very significant negative
impacts on the domestic tax bases of 'source' countries," Henry says.
Using the BIS's measure of "offshore deposits" – cash held
outside the depositor's home country – and scaling it up according to the
proportion of their portfolio large investors usually hold in cash, he
estimates that between $21tn (£13tn) and $32tn (£20tn) in financial assets has
been hidden from the world's tax authorities.
"These estimates reveal a staggering failure," says John
Christensen of the Tax Justice Network. "Inequality is much, much worse
than official statistics show, but politicians are still relying on
trickle-down to transfer wealth to poorer people.
"This new data shows the exact opposite has happened: for three
decades extraordinary wealth has been cascading into the offshore accounts of a
tiny number of super-rich."
In total, 10 million individuals around the world hold assets offshore,
according to Henry's analysis; but almost half of the minimum estimate of $21tn
– $9.8tn – is owned by just 92,000 people. And that does not include the
non-financial assets – art, yachts, mansions in Kensington – that many of the
world's movers and shakers like to use as homes for their immense riches.
"If we could figure out how to tax all this offshore wealth without
killing the proverbial golden goose, or at least entice its owners to reinvest
it back home, this sector of the global underground is easily large enough to
make a significant contribution to tax justice, investment and paying the costs
of global problems like climate change," Henry says.
He corroborates his findings by using national accounts to assemble
estimates of the cumulative capital flight from more than 130 low- to
middle-income countries over almost 40 years, and the returns their wealthy
owners are likely to have made from them.
The struggles of the authorities in Egypt to recover the vast sums
hidden abroad by Hosni Mubarak, his family and other cronies during his many
years in power have provided a striking recent example of the fact that
kleptocratic rulers can use their time to amass immense fortunes while many of
their citizens are trapped in poverty.
The world's poorest countries, particularly in sub-Saharan Africa, have fought long and hard in recent years to receive debt forgiveness
from the international community; but this research suggests that in many
cases, if they had been able to draw their richest citizens into the tax net,
they could have avoided being dragged into indebtedness in the first place.
Oil-rich Nigeria has seen more than $300bn spirited away since 1970, for
example, while Ivory Coast has lost $141bn.
Assuming that super-rich investors earn a relatively modest 3% a year on
their $21tn, taxing that vast wall of money at 30% would generate a very useful
$189bn a year – more than rich economies spend on aid to the rest of the world.
The sheer scale of the hidden assets held by the super-rich also
suggests that standard measures of inequality, which tend to rely on surveys of
household income or wealth in individual countries, radically underestimate the
true gap between rich and poor.
Milorad Kovcevic, chief statistician of the UN Development Programme's
Human Development Report, says both the very wealthy and the very poor tend to
be excluded from mainstream calculations of inequality.
"People that are in charge of measuring inequality based on survey
data know that the both ends of the distribution are underrepresented – or,
even better, misrepresented," he says.
"There is rarely a household from the top 1% earners that
participates in the survey. On the other side, the poor people either don't
have addresses to be selected into the sample, or when selected they misquote
their earnings – usually biasing them upwards."
Inequality is widely seen as having increased sharply in many developed
countries over the past decade or more – as described in a recent paper from the
IMF, which showed marked increases in the so-called Gini
coefficient, which economists use to measure how evenly income is shared across
societies.
Globalisation has exposed low-skilled workers to competition from cheap
economies such as China, while the surging profitability of the financial
services industry – and the spread of the big bonus culture before the credit
crunch – led to what economists have called a "racing away" at the
top of the income scale.
However, Henry's research suggests that this acknowledged jump in
inequality is a dramatic underestimate. Stewart Lansley, author of the recent book The Cost of Inequality, says: "There is
absolutely no doubt at all that the statistics on income and wealth at the top
understate the problem."
The surveys that are used to compile the Gini coefficient "simply
don't touch the super-rich," he says. "You don't pick up the
multimillionaires and billionaires, and even if you do, you can't pick it up
properly."
In fact, some experts believe the amount of assets being held offshore
is so large that accounting for it fully would radically alter the balance of
financial power between countries. The French economist Thomas Piketty, an
expert on inequality who helps compile the World Top Incomes
Database, says research by his colleagues
has shown that "the wealth held in tax havens is probably sufficiently
substantial to turn Europe into a very large net creditor with respect to the
rest of the world."
In other words, even a solution to the eurozone's seemingly endless
sovereign debt crisis might be within reach – if only Europe's governments
could get a grip on the wallets of their own wealthiest citizens.
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