Evan Horowitz | Quick Study

The cost of tax evasion

Tax evasion is a massive global industry. Of every hundred dollars people put in bank accounts and investments, eight are socked away in tax havens such as Switzerland and Singapore, according to work by the UC-Berkeley economist Gabriel Zucman.

While only the very wealthy can afford to play this international tax evasion game, it has substantial costs, depriving the US of billions in tax receipts each year.

And while countries are increasingly working together to stop tax evasion, it’s not an easy task. Those willing to flout the rules, and serve as tax havens, can gain big financial benefits. Plus, new international regulations often come with new loopholes, which high-end investors are well-positioned to exploit.

How widespread is tax evasion?


Given that tax evasion is a pastime of the very few, you might think that it couldn’t add up to much. But it does, because those few are among the richest people on earth.

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All told, about 8 percent of household financial wealth is hidden in offshore tax havens, amounting to over $7 trillion, or roughly the value of all the gold in the world.

Switzerland is famous for its role as a hub in this endeavor, but it’s hardly alone. Singapore, Hong Kong, and the Bahamas all play host to large numbers of discreet foreign investors.

And while most of those investors still come from wealthy countries, offshore accounts seem to be an increasingly popular option among the economic elite in developing countries.

Zucman finds that as much as 50 percent of the financial wealth in Russia and the Gulf countries is held in overseas accounts.

Is tax evasion common in the US?


The US, too, has its problems with tax evasion.

This is particularly clear if you look at investments in US stocks and mutual funds. In the mid-1980s only about 1.5 percent of these kinds of investments involved tax havens. Today, it’s nearly nine percent.

This results in a substantial loss of tax revenue for the US government.

When you park your money in a Swiss bank, you still owe taxes. Only it’s hard for the IRS to check up on you, since they may lack clear records of the earnings passing through that account.

Zucman estimates that the US government loses about $36 billion in taxes every year because of money hidden in offshore accounts. That’s not a huge number, compared to the $3 trillion the government collects overall, but it’s about as much money as we spend on Pell grants for lower-income college students.

Do tax havens increase inequality?


There are two ways that tax evasion can affect inequality. First, and most direct, they increase the amount of money wealthy investors get to keep in their pockets.

Second, and more subtle, they distort the statistics. The best estimates of income inequality come from tax data, but if the wealthiest actually have substantial, untaxed overseas earnings, than the real incomes of America’s richest are even higher than previously known.

How difficult is offshore tax evasion?

Really, it’s more expensive than difficult. Simply opening a bank account in Hong Kong and wiring money won’t do. To ensure your earnings can’t be traced, you need legal intermediaries, like shell companies, and a secure path for invisibly moving money around.

All that requires lawyers, wealth managers, and other forms of costly assistance, which only a select few can afford.

Is it possible to stop offshore tax evasion?

Efforts to curtail tax evasion are already underway. Both the US and European nations are working toward a system where asset information and bank transactions are automatically recorded and duly shared.

Zucman makes some additional suggestions in his new book on the topic. One is a tariff against countries that serve as tax havens, another a global database to track investments by owner and nationality.

Whatever the approach, you need to be pretty careful about unintended consequences. Tax evaders are an extremely motivated and well-heeled group of people, with the legal and financial resources to exploit even the smallest of loopholes.

A decade ago, the European Union introduced a rule requiring countries to work together to ensure capital gains taxes were fairly paid. As a result, the number of European investors with offshore accounts really did decline. However, the number of sham companies with offshore accounts jumped — by a very similar amount. The tax evaders hadn’t disappeared, in other words; they had merely disguised themselves as corporations.

When clamping down on tax evasion, this is the kind of slippery effect that’s very hard to predict, or control.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the US. He can be reached at Follow him on Twitter @GlobeHorowitz.