The wealthy have a high propensity to evade taxes using offshoring, and on-average it's almost half of their wealth
Luckily my hunch from yesterday to start my delve into my research interests with Gabriel Zucmanās body of work was correct.Ā
Because Iām in the midst of reading two books centering around money laundering and offshoring: one focusing on the journalistic, sensational criminal activities of kleptocrats like the prior Ukrainian President Viktor Yanukovych and other PEPs (Moneyland), and the other focusing more on the relationships between the ultra-high net worth individuals and high net worth individuals that perform offshoring activities (Spiderweb Capitalism), I was led to look into economic studies centering around tax evasion and offshoring.Ā
I began with a Zucman paper that is general in nature, entitled āTax Evasion and Inequality.ā Just from the introduction of this paper and some google searches, I have determined that the specific subfields of economics this research covers are public economics and inequality. All of my interests and work come back to inequality somehow.Ā
This paper hits what Iāve been reading about on the nose: wealthy individuals using offshore techniques to evade taxes. And it acknowledges that there is an industry that exists to specifically facilitate this process.
But what specific research question does the paper answer?
The paper is specifically asking the question: is there a class difference between who uses off shorting to evade taxes?
It also highlights that there is discourse surrounding who the primary tax evaders are in developed economies. Some think that the rich use offshoring and tax avoidance methods to ultimately evade paying large amounts of taxes, while others believe that lower-class people take advantage of tax credits to evade higher proportions of taxes.
The authors specify, however, that ndividuals in wealthy countries cannot offshore their money to avoid taxes (or really evade many taxes at all) as their income comes from wages, pensions, and investments that are automatically reported to tax authorities. For the wealthy, their income comes from wealth, and there is an industry that helps them manage it.Ā
And the self-employed are a separate group of interest with potential to evade taxes more effectively than low-class people, but there is more variability among the incomes and situations of self-employed people.
The most interesting quality of this paper is the data that the authors utilize: data from the Panama Papers, Swiss Bank Leaks, and Tax Amnesties.
Investigating tax evasion is supremely difficult. The only data that is widely available is that of tax audits, which are not concentrated among the rich and very limited in scale. The Panama Papers and Swiss leaks are both unicorns of insight into how the wealthy manage their assets and wealth, in concentrations we have not seen before.
[Note: It's also so interesting how these leaks came out haha. For the Swiss ones, a systems engineer at HSBC literally just pulled the account data for 30,000 people from the bank's systems and reported it to the French authorities. Like what? So hardcore I need to know this guy's story .]
The paper specifically studies individuals who claim residence in Scandinavian countries, so there is likely difference in analyses among different countries and regions.
The key findings of this study are striking:
The probability of hiding assets offshore rises sharply and significantly with wealth
The fraction of one's true wealth hidden abroad is high (around 40%)!!! (and this does not vary with amount of wealth)
In tax havens, the top 0.01% of people own about 50% of the wealth
*The top 0.01% evades about 25% of its tax liability by concealing assets and investment income abroad
The next paper I will probably look at is Allingham & Sandmo (1972), as it is widely cited as a foundational theoretical economic model of income tax evasion.
