A paper published by the US National Bureau of Economic Research with the title ‘Who Owns the Wealth in Tax Havens?‘ reveals that the UAE tops the list of wealth held offshore as a proportion of GDP, followed by Venezuela, Saudi Arabia, Russia and Argentina.
In Europe, Germany, the UK and France all have above-average holdings.
Conversely, the US is slightly below average.
Source: National Bureau of Economic Research, September 2017
Not easy to explain
The paper’s authors – Annette Alstadsæter of the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen and Gabriel Zucman of the University of California, Berkeley – observed that the size of offshore wealth is not easily explained by tax or institutional factors.
“Among countries with a large stock of offshore assets, one finds autocracies (Saudi Arabia, Russia), countries with a recent history of autocratic rule (Argentina, Greece), alongside old democracies (United Kingdom, France),” they write.
“Among those with the lowest stock of offshore assets, one finds relatively low-tax countries (Korea, Japan) alongside the world’s highest tax countries (Denmark, Norway).”
However, according to the academics, there are a few factors that are closely associated with a high share of offshore wealth-to-GDP.
“Proximity to Switzerland – the first country that developed a cross-border wealth management industry, in the 1920s – is associated with higher offshore wealth, as is the presence of natural resources, and political and economic instability post-World War II,” they write.
Correlation
In a separate study, titled ‘Tax Evasion and Inequality‘, the researchers found that tax evasion rises sharply with wealth.
Overall, data from the paper shows it is only those in the top 5% of global earners who are most likely to skip out on taxes by stashing their wealth offshore, with the amount avoided increasing as their wealth gets larger.
Source: National Bureau of Economic Research, September 2017
At nation level, in the UK, Spain, and France, about 30% to 40% of the wealth of the richest 0.01% of households is held abroad.
Russia’s richest stand out by holding as much as 60% of their wealth overseas.
At the same time, high tax rates aren’t necessarily a driver – Denmark and Norway, for instance, are very low on the offshore wealth-to-GDP list.
Source: National Bureau of Economic Research, September 2017
“On average, about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45m in net wealth.”
Other striking takeaways from the research show the market share lost by Switzerland in recent years to Asian tax havens, especially Hong Kong, whose assets under management “have been multiplied by a factor of six” between 2007 and 2015.
Source: National Bureau of Economic Research, September 2017
This development is probably attributable to the rise of the super-rich in China and to increased international pressure on long-established tax havens, such as Switzerland.
“We also find that after reducing tax evasion – by using tax amnesties – tax evaders do not legally avoid taxes more,” the researchers suggested.
“This result suggests that fighting tax evasion can be an effective way to collect more tax revenue from the very wealthy.”
New data
The researchers relied on new data from the Bank for International Settlements (BIS) on a number of bilateral bank deposits held outside each country.
“First, we construct estimates of the amount of wealth held by each country in all the world’s offshore tax havens” they explained in the report, detailing the methodology of their research.
“More precisely, we use the newly disclosed BIS bilateral banking statistics to allocate the global amount of estimated offshore wealth to each of the world’s country.
“These series are retrospective and go back in most cases to the early 2000s, or even earlier. As a result, we now have access to time series for the value of the bank deposits owned by, say, Russian residents in Switzerland, or by Germans in Jersey.”
In 2016, most offshore centres authorized the BIS to disseminate bilateral data. As a result, the study is the first of its kind to quantify tax avoidance by nation.
“To our knowledge, it is the first time that such country-by-country estimates of offshore wealth are computed,” the analysts wrote.
The academics also backchecked their findings with data leaked from large offshore financial institutions – HSBC Switzerland (“Swiss leaks”) and law firm Mossack Fonseca (the so-called “Panama Papers”).
Both papers were circulated by the National Bureau of Economic Research and haven’t been peer-reviewed.
