One of the most important books published in 2011 was Nicholas Shaxsons Treasure Islands. Shaxson, a veteran Financial Times reporter, gave some dimension and color to the inherently difficult-to-cover tax haven business, or what he called offshore. While its most famously associated with secret Swiss bank accounts and shady Caymans Islands corporations, the US and the City of London are at the apex of the offshore business, with Delaware corporations and Wyoming limited liability companies playing a significant role in the tax avoidance/secrecy game.
It was understandably hard for Shaxson to put hard overall numbers on the extent of tax haven activity and its macroeconomic implications. Peculiarly, despite the importance of this topic, a pathbreaking paper published in 2013 by Gabriel Zucman of the Paris School of Economics, The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors? (hat tip Dikaios Logos) has received perilous little attention. Perhaps thats because, among other things, it undercuts the Bernanke-flattering claim that global imbalances were a major driver of the financial crisis.
The article works back from a long-established, well-known anomaly: international fund flow statistics dont even remotely add up. Global statistics say, impossibly, that there are a lot more liabilities than assets, and in parallel, that more investment income is paid out than is credited.
Zucman looks into the notion that tax haven holdings by wealthy households explain this behavior. He uses a unique Swiss dataset and examines the way that various countries investment positions fail to reconcile. From his abstract:
I find that around 8% of the global financial wealth of households is held in tax havens, three-quarters of which goes unrecorded. On the basis of plausible assumptions, accounting for unrecorded assets turns the eurozone, officially the worlds second largest net debtor, into a net creditor. It also reduces the U.S. net debt significantly. The results shed new light on global imbalances and challenge the widespread view that, after a decade of poor-to-rich capital flows, external assets are now in poor countries and debts in rich countries.
Now think about that. With all the shift of wealth to the top 1% (now at around 40% in the US), 6% hidden away from the tax man is large in an absolute sense, and a significant percentage in the population wealthy enough to avail itself of these boltholes.
Here is the longer-form statement of Zucmans thesis:
the rich world now appears to be a sizeable net debtor in the official data, dragged down by the U.S. and Europe. While the literature has put forward possible explanations for the U.S. net debt and the rise in Chinas assets, the negative net positions of Europe and the overall rich world remain largely unexplained. Despite this, many observers have grown accustomed to the view that external assets are now in poor countries and debts in rich countries. In the public debate, the view that China owns the world has become particularly popular. Should it be correct, the implications for policymaking and open-economy modeling would be far-reaching.
My paper challenges this view. The negative net foreign asset position of the rich world, I argue, is an illusion caused by tax havens. International statistics fail to capture most of the assets held by households through tax havens: they overlook the portfolios of equities, bonds, and mutual fund shares that households own via banks in Switzerland and other countries with strict bank secrecy rules. This coverage gap explains many of the long-standing anomalies in global data. My computations find that around 8% of households financial wealth is held through tax havens, three-quarters of which goes unrecorded. This stock of unrecorded assets is double the recorded net debt of the rich world (Figure I). Since a body of evidence suggests that most of the wealth in tax havens belongs to residents of rich countries, accounting for it turns the rich world into a net creditor. Despite a decade of global imbalances, therefore, external wealth is still probably in rich countries overall: China does not own the world yet. Back in the 1980s-1990s the rich world had a large positive net position; over the last decade it has eaten some of its claims away; but today poor countries are still repaying their debts to advanced economies.
The implications are significant. It means the Europe as a whole is a net creditor, the US is less of a net debtor, and the level of global rebalancing needed is less than is pretty much universally assumed in macroeconomic circles.
Read more here:
Tax Havens Make US and Europe Look Poorer than They Are, Exaggerate Size of Global Imbalances