Very wealthy people may be hiding even more assets from tax authorities than previously estimated, research suggests. Recent leaks of individual account information, including the release of the Panama Papers and leaked information from the Swiss subsidiary of the bank HSBC are making it possible to get a more accurate picture of who evades taxes, and how much wealth they conceal.
Using leaks and data from tax-evasion amnesty programs to study tax evasion in Scandinavia, “we find that the top 0.01 percent of the wealth distribution—a group that includes households with more than $45 million in net wealth—evades about 25 to 30 percent of its personal income and wealth taxes,” write researchers Annette Alstadsæter of the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen, and Gabriel Zucman of the University of California at Berkeley. Overall, 3 percent of personal taxes are evaded in Scandinavia, but the number is much higher for those at the very top because “most people only earn wages, retirement income, or investment income in domestic banks, which are almost impossible to hide from the tax authority; while by contrast, a large offshore industry supplies tax avoidance and sometimes evasion services to the very rich,” Zucman says.
The findings have significance for our understanding of how wealth is distributed. Much research into wealth inequality relies on tax data to measure wealth; if “the probability to hide assets offshore rises sharply with wealth,” as the researchers find, the picture that the data provide is likely incomplete. For instance, factoring in wealth hidden offshore increases the wealth share of the top 0.1 percent of households in Norway from 8 to 10 percent. “Tax data may significantly underestimate the rise of wealth concentration over the last four decades,” the researchers write.
Traditionally, tax officials have turned to random audits to estimate tax evasion, but they fail to capture more-sophisticated forms of evasion, according to the researchers. So Alstadsæter, Johannesen, and Zucman worked with the tax authorities in Norway, Sweden, and Denmark to combine leaked data from HSBC’s Swiss subsidiary with individual random audits in order to better estimate tax evasion among Scandinavian households. “Combining random audits, leaks, and macroeconomic statistics makes it possible to obtain a more comprehensive picture of tax evasion than was available until now,” they write.
Thanks to the Paradise Papers, and the earlier Panama Papers, the world of offshore tax havens is getting international attention.
Saudi and Russian Residents Have among the Most Offshore AssetsThere’s evidence that tax evasion costs developed economies a significant sum in lost tax revenue. In separate research, Alstadsæter, Johannesen, and Zucman find that the equivalent of as much as 60 percent of GDP in Russia is held abroad, and the offshore wealth of several other countries exceeds 50 percent of GDP. Most of that wealth goes untaxed, they say.
But examining what happens when tax evaders come clean through amnesty programs, the researchers observe that amnesty recipients don’t simply replace illegal tax evasion with legal methods of tax avoidance—there is a sharp and durable increase in the wealth they report and pay tax on. It appears, therefore, that fighting offshore tax evasion is likely a worthwhile endeavor for most governments.
Zucman hopes to continue using leaks, such as the recently released Paradise Papers, and random audits to understand evasion in other developed countries where these types of data are available. With tax compliance lower outside of Scandinavian countries, including in the United States, accurately gauging evasion is critical. “The results may be even more striking and spectacular in countries like France or the United States because these countries have even more wealth in tax havens,” he says.
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