Key Messages
What Is A Tax Haven, And How Can It Be Stopped?
Taking a step into the murky waters of the world’s tax havens can give you a glimpse into an often unseen part of the global economy.
Tax havens are places where people can store their money, without having to pay any taxes.
In fact, this practice has become so popular that it has actually removed money from the treasuries of governments throughout the world.
So how does this system work?
The Hidden Wealth of Nations book explains that new tax havens began appearing in the 1980s and provides insight into how we can make an educated guess about all the wealth hidden away in these secret places around the world.
It also explores FATCA (Foreign Account Tax Compliance Act), which is a U.S law that sets an example for other countries to follow when combating tax havens and recovering money lost through them.
While it may seem like something out of a movie, tax havens are very real and their existence should not be taken lightly.
All governments should have safeguards in place to ensure they don’t lose out on important revenues due to those with deep pockets avoiding hefty taxes though these means.
How Tax Havens Started: Moving Money Across Borders To Avoid High Income Taxes In Europe
The story of tax havens began after World War I, as countries across Europe scrambled to rebuild their societies and assist veterans.
In an effort to increase income taxes, France raised its top rate from two percent all the way up to a staggering 72 percent.
Wealthy Europeans responded by secretly moving their money abroad – and Switzerland became the most attractive option.
As a neutral nation during the war that was unaffected by combat, it offered a well-established banking network with competitive interest rates.
By 1938, Swiss banks had stored ten times more foreign wealth than in 1920 – equalling around $130 billion today.
In the early 1980s, when Margaret Thatcher introduced financial deregulation in the UK, cities like London and locatites such as the Virgin Islands quickly became rivals with Switzerland in terms of private wealth management.
Tax havens soon spread across other European nations including Ireland and Luxembourg, providing even more options for people to move their money elsewhere.
Unfazed, the Swiss banking sector has actually ended up going from strength to strength — in 2015 almost $2.3 trillion were held there ($1.3 trillion belonging to Europeans), representing 10% of European citizens’ total wealth.
It’s safe to say that tax havens have been quite popular over the years!
The Hidden Costs Of The World’S $7.6 Trillion Tax Haven Money
We know that in 2014, the world was dealt a financial crises when Greece suffered $350 billion in public debt.
But even more concerning was the estimated amount of money kept in global tax havens–$7.6 trillion dollars!
If that amount could be accounted for, it would make up 8% of our global wealth in 2014.
How exactly did this large sum reach these tax havens? To understand this, let’s take a look at a French investor buying stocks in a German corporation like BMW.
The transaction would be recorded as a liability by German accountants, because it will involve BMW making payments to the French investor.
However, any assets received from BMW are tracked and taxed by France.
But if the French investor transfers these stocks into an anonymous Swiss bank account, then neither country can track or record them as assets or liabilities respectively.
This creates a global imbalance where liabilities heavily outweigh assets–as much as $6.1 trillion!
Plus another $1.5 trillion from anonymous bank deposits which pushes us to the estimated total of $7.6 trillion hidden away from taxes.
And bear in mind that we can’t even conclude just how much non-financial high value items such as yachts and jewelry could make up since it’s impossible to determine their true worth!
The wealthy gain a lot sure but stand to cause significant damage not only to countries but also individuals who might have made use of those finances had they been properly documented and taxed.
The Impact Of Tax Havens On European Economies: Huge Losses In Tax Revenue Causing Further Inequality And Slowing Economic Growth
Tax havens have a hugely detrimental impact on governments and citizens around the world.
It’s estimated that in 2014, offshore tax havens cost world economies an estimated $200 billion in revenue.
This money lost through tax avoidance could have been used to improve economic growth, pay back public debt, and provide vital services to those who need it most – middle-class and working families.
But instead of helping those who need it, the wealthy are free to tuck ten percent of their earnings away in Swiss bank accounts.
In 2014 alone, Europe had an estimated $1.3 trillion stored away in Switzerland – this is an enormous loss of potential revenue for governments struggling with debt and budget cuts.
France saw a particularly damaging effect from tax havens as an estimated $300 billion was lost in 2014 due to offshore accounts.
This amount could have boosted their GDP by 15 percent – which would’ve made a huge difference in fighting financial inequality lessen the burden on individuals affected by budget cuts.
Overall, it’s clear that when it comes to tax havens, the rich keep getting richer while everyone else suffers the consequences of decreasing governmental resources and increased financial inequality.
The Failure Of Groundbreaking Initiatives Demonstrates We Must Do More To Combat Tax Havens
It’s clear that the majority of laws put in place to combat tax havens have failed.
It’s no surprise; many of them simply weren’t strong enough.
Take for example, when the G20 met in 2009, they declared an agreement which would allow governments to demand financial information from banks in other countries.
This sounded good on paper, however it was a disaster in practice as governments needed to provide evidence of tax fraud before receiving any information- and without access to the required financial records it was virtually impossible.
As a result, 25 percent more personal wealth is now held offshore since then despite these noble efforts.
Unfortunately, many politicians used these weak regulations to their own advantage too; The French Minister of the Budget Jérôme Cahuzac resigned after his own secret offshore bank account was revealed.
But don’t lose faith yet!
Recently the US has successfully passed the Foreign Account Tax Compliance Act (FATCA) which ensures international banks disclose financial information when requested by US authorities and will impose economic sanctions on those who do not comply.
This law seems to be having a positive effect so far with regards to combatting illegal offshore accounts as set out in its goal.
Despite this being insufficient resolution, it’s certainly a start- and hopefully there will be follow up initiatives that will have more success in eradicating offshore accounts!
The Author Proposed A Two-Fold Solution To Combating Tax Havens: The Imposition Of Global Fatca And The Creation Of An International Wealth Database
Getting rid of tax havens requires effective and forceful solutions.
As The Hidden Wealth of Nations author suggests, a two-fold approach is necessary to ensure that nations continue to act as responsible members of the global community.
First, a global FATCA should be introduced so that countries identified as acting as tax havens are faced with proper economic sanctions and trade levies if they fail to comply with tax fraud investigations.
This way, not only would these nations face financial penalties for non-compliance but they would also be met with trade tariffs on commercial goods and services that they rely on.
To make this approach successful, cooperation between different states such as those in Europe and the G20 is crucial.
Second, there needs to be more stringent compliance when it comes to enforcing laws related to taxes and money-laundering activities.
To facilitate this effort, an international wealth database should be created which will contain comprehensive details about international ownership of stocks and bonds.
Having such a database would give international tax authorities an easier time verifying bank statements and cracking down on fraudulent activities perpetrated by banks who withhold critical information from their clients.
What’s more, it could also help in keeping track of money laundering and terrorism-related financial activities.
We Must Reimagine Global Taxation To End Corporate Tax Evasion
If our ultimate goal is to truly combat tax evasion, we must also look at the practices of multinational corporations.
They have a number of legal methods to dodge paying their fair share – including strategic placement of branches in tax havens such as Ireland and the manipulation of transfer prices.
In fact, nations like the US lose out on up to $130 billion due to corporate tax avoidance every year.
In light of this, G20 nations have attempted to impose regulations on transfer prices, yet this has resulted in little success so far.
Therefore a more holistic approach needs to be taken whereby global taxes are placed where they belong – according to proportionate market shares.
For example, if 50 percent of Apple’s products are sold within the US then 50 percent of their profits should be taxed by US authorities, making it much harder for them to evade their responsibilities.
#N/A
The Hidden Wealth of Nations by Gabriel Zucman focuses on the harms caused by tax evasion and tax havens.
Zucman’s key point is that hidden wealth has been growing at an alarming rate, with $7.6 trillion stored in offshore tax havens – making up eight percent of global household wealth!
This has major repercussions, decreasing government revenue and contributing to ever increasing economic inequality.
That’s why it’s time for nations to join forces and create effective, forceful measures to end the scourge of tax havens.
In his book, Zucman concludes that these initiatives need to contain strong sanctions against companies and individuals who don’t comply with regulations and should be backed up with cooperation between governments and international enforcement agencies for a maximum effect.
This way we can put an end to this morally bankrupt form of wealth hoarding – once-and-for-all!
