New study underscores how tax evasion by wealthy fuels inequality

HSBC Bank in Geneva (Credit: Manuel Schmalstieg / Flickr)

Researchers in the U.S. and Scandinavia have compared leaked evidence of global tax evasion with officially reported tax records in their countries to show how wealth concentration by the super rich is both under-reported and fueling inequality.

In 2015, a global team of journalists released a report on a massive tax evasion scheme among more than 100,000 clients of HSBC Private Bank Switzerland, based on complete internal records extracted by a former employee. They called it the “Swiss Leaks.”

The next year, another published leak called the “Panama Papers” revealed the identities of the shareholders of shell corporations created by the Panamanian law firm Mossack Fonseca.

Both leaks dominated headlines at the time as they revealed the magnitude of fraud and tax evasion committed by the world’s wealthiest politicians, celebrities and even criminals. Now, a team of economists have used data in the leaks and compared it to official tax records, income reports and audits to dig a bit deeper – and find the problem is perhaps larger than previously estimated.

“This sort of analysis of the data which is not only hidden from surveys but hidden from tax authorities is the next step towards truly understanding the degree of income and wealth inequality,” said Alex Cobham, chief executive of the Tax Justice Network, in an interview with Humanosphere. Cobham was not an author of the study.

According to the study done by Norwegian, Danish and American economists, measurements of inequality based just on tax records and random audits, while crucial, have largely underestimated the rise in wealth concentration over the last several decades. The lead researchers were  Annette Alstadsæter (Norway), Niels Johannesen (Denmark) and Gabriel Zucman (USA).

The authors compared the leaked data with a “large sample of Norwegian and Swedish households who voluntarily disclosed previously hidden wealth in the context of a tax amnesty” and against wealth records in Norway, Sweden and Denmark.

They found that the reported wealth of the top 0.01 percent in Norway – about 300 of the wealthiest households – should be 30 percent higher if tax evasion is taken into account. The revised estimates also revealed that wealth concentration has not fallen as much as previously reported.

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Additionally, the study found that tax evasion is largely practiced by the wealthiest, and not equally represented across income levels. The top 0.01 percent in Scandinavia – households with more than $40 million in net wealth – evades about 30 percent of personal taxes, compared to 3 percent on average. Among the individuals revealed in the Swiss Leaks who the authors of the study were able to match to a tax return, about 95 percent did not report their Swiss bank account.

Tax evasion fuels wealth concentration, the authors contend, and this form of wealth inequality also motivates banks to only supply tax evasion services to the wealthiest. The more clients Swiss banks serve, the higher their chance of being caught if they assist in tax evasion. Therefore, the researchers say, banks try to limit their risk by limiting tax avoidance services just to those at the top.

For those in the fight for tax justice, the study in many ways confirms what they’ve estimated all along – high levels of criminal evasion among the wealthiest.

But because this study only looked deeply at this practice in Norway, Sweden and Denmark – three countries that are consistently near top of rankings on tax compliance, social capital, social trust and strong tax administrations – the analysis should be expanded to other countries to determine the extent of the problem.

“If we’re looking at 30 percent evasion at the top end of the distribution in these countries, your expectations – all other things being equal – is that it’s even higher in countries where tax administration capacity is lower and/or where social capital, tax compliance, tax morale is lower,” Alex Cobham with Tax Justice Network.  “That suggests even higher levels of offshore asset loss than the $10 trillion to $30 trillion range that you normally think about between our estimates and Zucman’s.”

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The study similarly noted that most Latin American, and many Asian and European economies have much more wealth offshore than Norway.

“The limitations are clear: We’re viewing data from one Swiss bank and one Panamanian law firm,” Cobham said. “However, to the extent that both HSBC Switzerland and Mossack Fonseca were highly integrated parts of a global structure of evasion and avoidance, it’s reasonable to think that this isn’t going to be completely unrepresentative in terms of behavior.”

If behavior in this system of tax evasion is consistent, then another behavioral finding in the study should be carefully considered as well: “After voluntarily reducing [criminal]tax evasion, tax evaders do not legally avoid taxes more, despite ample opportunities to do so,” the report said.

“Instinctively, I think that’s not actually that surprising a finding,” Cobham said. “Everywhere, every study that’s ever been done finds that people in walks of life pay much more tax than you would predict on a basic economic model of the chances of being caught and the penalties if you get caught. And the reason for that [is]that paying tax…is a social act. It’s something we do because we’re part of society.”

Therefore, fighting tax evasion can be an effective way of collecting more tax revenue from the wealthy, if they’re not actually seeking out additional legal avenues to avoid taxes.

“In terms of policy responses, at the core of both [criminal tax evasion and legal tax avoidance]is a lack of transparency,” Cobham said. “And that lack of transparency gives rise both to revenue losses and political damage,” such as when rich dictators and their cronies steal from developing countries and stash it offshore.

Without understanding inequality, Cobham says, we can’t fully address poverty. However, because of systems, like tax evasion, that fuel inequality, we are just now beginning to understand the magnitude of the problem.

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About Author

Joanne Lu

Joanne Lu is a South Carolina-based writer and editor dedicated to global development, poverty alleviation and social justice. After a year in Rwanda, she now covers the Asia-Pacific and economics. Find her on Twitter @joannelu or email joanne@humanosphere.com.