Trillions of dollars have sloshed into offshore tax havens. Here’s how to get it back
The Paradise Papers made for riveting reading when they spilled into public view this fall, a huge cache of secret documents offering a rare glimpse into the hidden world of offshore tax havens.
Here was Nike registering its iconic Swoosh trademark in Bermuda, and Uber stashing the rights to its ride-hailing app in a shell company of its own. Queen Elizabeth was implicated in the papers. Madonna, too.
And there was the case of the Formula One race car driver who arranged to touch down on the Isle of Man in his $27 million candy-red luxury jet as part of an elaborate scheme to skirt European taxes.
Each tale was colorful in its own right — and, for the working stiff who settles up with the Internal Revenue Service every April, maybe a little infuriating.
But the Paradise Papers were just the latest in a string of leaks from law firms and other professional services outfits that help the uber-rich store their money overseas. The Panama Papers came before them. Swiss Leaks before that. And Luxembourg Leaks, or LuxLeaks, even earlier. Never mind the individual anecdotes; it’s the sheer volume of the tax dodges buried in these documents — layered atop a growing body of academic research on offshoring — that tells the real story.
No longer can we think of overseas tax shelters as just a vehicle for a handful of rich people to outwit the tax man. What’s clear, now, is that they are a powerful engine of inequality — a way for the ultra-wealthy to hoard resources on a scale that policy makers have only recently come to understand.
That understanding owes much to the work of economists like Gabriel Zucman of the University of California, Berkeley, who has developed some of the first reliable estimates for the scale of the phenomenon. In a clever bit of detective work, Zucman has scoured national balance sheets from all over the globe and identified enormous “holes” — huge sums of money that have essentially disappeared from the ledgers. He estimates that an astonishing $8.7 trillion, or 11.5 percent, of global household financial wealth resides in tax havens. And shielding that money deprived world governments of approximately $170 billion in tax revenue in 2016 alone — with the United States Treasury taking a $32 billion hit.
That sort of tax evasion, by super-wealthy individuals, is often illegal. But multinational corporations can move money overseas lawfully. And they’ve taken full advantage. In 2016, American companies skipped out on roughly $130 billion in taxes they would have otherwise paid to governments around the world, Zucman’s research shows — about $70 billion of which would have flowed to Washington.
A loss of $70 billion won’t bankrupt Uncle Sam. But it’s real money — equivalent to about one-fifth of the corporate income tax collected by the United States on an annual basis, and triple what the federal government spends on child nutrition programs each year.
This isn’t elites taking advantage of loopholes in the tax system. It’s elites financing a private system all their own — a gilded escape pod they can move from island to island, as circumstances require.
Tighten up the rules in a tax haven like Ireland, the Paradise Papers show, and Apple just moves its billions to the English Channel isle of Jersey, where the standard corporate tax rate is zero.
It’s disheartening stuff for anyone who cares about the wealthy paying their share. And the new GOP tax bill does little to improve the situation. Indeed, analysts say a one-time tax holiday allowing companies like Apple to bring home billions in overseas profits at sharply reduced rates will probably just encourage more offshoring in the future.
But tax specialists say lawmakers could permanently eliminate shelters if they wanted to. As it turns out, we’ve dealt with this problem before — more than a century ago, right here in the United States, when a new breed of border-crossing corporate behemoth presented tax collectors with familiar questions of wealth, power, and geography.
DIGNITARIES FROM Maryland, Virginia, and Pennsylvania looked on as Charles Carroll, the last surviving signer of the Declaration of Independence, stuck a shovel in the ground and turned a spadeful of dirt. The ceremony, that July 4, 1828, marked the start of construction on the first chartered railroad in the United States, the Baltimore and Ohio. And the significance of the moment wasn’t lost on the featured guest. “I consider this among the most important acts of my life,” said Carroll, then 91, “second only to my signing the Declaration of Independence — if even it be second to that.”
Over the next couple of decades, the Baltimore and Ohio and dozens of other railroads would crisscross the country, carrying the Industrial Revolution out West and supercharging the American economy.
The heaving growth had everyone struggling to keep up — not least the state and local officials who had to figure out how to tax railroads and other far-flung enterprises with assets in a large number of jurisdictions.
The railroad barons wanted to keep it simple: Slap a levy on the rails that run through your county — so much tax, for so much iron — and leave it at that. But over time, tax authorities took a more expansive view.
You can’t just consider a piece of track in isolation, they argued. You’ve got to see it in context. You’ve got to see it as a critical part of a larger system. That local piece of track is connected to another piece of track, which is connected to yet another. Together, they shuttle cargo and passengers all the way to Chicago — making the railroad far more valuable than the sum of its parts.
Ultimately, the Supreme Court sided with the tax collectors. Destroy a short stretch of track, the court reasoned in an 1875 ruling, and you bring the whole railroad to a standstill — damaging the system’s value “out of all proportion to the mere local value” of the rail and ties.
The only thing to do, then, was to calculate the overall value of the railroad and divide it into discrete chunks. If the stretch of track in your county comprised 1 percent of the railroad’s length, it would be assigned 1 percent of the overall value of the railroad — and it would be taxed accordingly.
It’s an approach accountants call “formulary apportionment,” and it’s still in wide use today — with state authorities using sales figures and other data, rather than railroad tracks, as a guide. Experts say the same model could be applied to international taxation.
If Apple sold half its iPhones and laptops in the United States, then half of its profits would be subject to the American corporate income tax. Simple as that.
With apportionment, it wouldn’t matter where a corporation put its money. Apple could stash its billions in a shell company on the island of Jersey or in a bank account in Jersey City. It’s the geography of consumers, not cash, that would control.
That makes the system much harder to game, says Kimberly Clausing, a Reed College economics professor. You can ship all your money to an exotic isle at the stroke of a pen, but “you can’t move all your consumers to Bermuda. Consumers are pretty sticky. They stay where they are.”
Of course, summoning the political support for this kind of change would be a challenge. Deep-pocketed corporations would fiercely guard their prerogatives — they’d be obligated to. CEOs have to seek maximum return for shareholders, after all. And powerful allies in Congress would undoubtedly stand by their side — particularly in the tax-averse Republican Party.
But the GOP is not in lockstep on this issue. Earlier this year, House Speaker Paul Ryan pushed a plan, known as the border-adjustment tax, that would curb tax havens much as formulary apportionment would. Ryan called it the “smart way to go,” pitching it as an America First-style proposal that would remove “all tax incentives for a firm to move. . . their production overseas.”
In the end, the speaker backed off the proposal in the face of opposition from corporate interests and other GOP lawmakers. But Clausing says she was encouraged to see House Republicans seriously consider it
And she can imagine the next American president — Democrat or Republican — folding an apportionment-style proposal into trans-Atlantic trade negotiations with the European Union. “It’s the kind of thing that [French president Emmanuel] Macron and [German chancellor Angela] Merkel would be really into, because they’re losing a lot of revenue to [tax shelters like] Ireland and Luxembourg,” she says.
Together, these world leaders could sell apportionment as “a trade plan that works for the people,” Clausing says. And an agreement between the United States and the European Union would force other major economies like Japan to adopt the idea. Otherwise, Japanese companies could dodge domestic taxes by stashing money in New York or Berlin, knowing that bulging bank accounts in those cities would be immaterial to American and European tax collectors. Again, in the United States and European Union, the geography of the financial institution would be irrelevant.
It’s one of apportionment’s biggest selling points. The system doesn’t require a grand agreement by every country on earth. A couple of powerful nations, or blocs, could essentially force it on everyone else.
GOVERNMENTS CAN only tax what they can see. And the wealthy individuals who stash their fortunes overseas — hedge fund managers, pop stars, and the like — have done a remarkable job of concealment. It’s very difficult for officials to know whose investments are buried in which anonymous trust.
Zucman, the UC Berkeley economist, has called for a sort of radical transparency around personal wealth — an international registry recording the true ownership of every financial security. It may sound like a far-fetched idea. But as Zucman notes, there are several privately held registries in place already.
Here in the United States, for instance, the Depository Trust Company records every sale of a security issued by an American company. The idea is to combine the scattered registries, and use them for the public good.
An international registry would undoubtedly raise privacy concerns, even if access was restricted to government officials. But Jeffrey Winters, a political scientist at Northwestern University who studies economic elites, says it’s hard to justify the continued secrecy around investment income when we have such elaborate systems for monitoring the pay of ordinary citizens. “You or I could move 10 different times, to 10 different states in the United States, and have 10 different jobs, and at the end of that year, the IRS would know every penny we made,” he says.
Of course, it’s easy to imagine impediments to an international wealth registry. Are Swiss bankers, who make their living protecting the identity of clients, really going to turn over information on who owns what?
But national governments could pry the information loose if they wanted to. And Zucman points to an American law — the Foreign Account Tax Compliance Act, signed by President Obama in 2010 — as a model.
The measure requires foreign banks to automatically share information with the IRS on American clients — everything those clients are holding in their accounts, and the income they’re earning on the holdings.
The key, Zucman argues, is that it’s automatic. The IRS doesn’t have to name specific clients or show cause for suspicion — preconditions that have neutered previous efforts at information-sharing. The agency just gets the data routinely. And if foreign financial institutions refuse to provide it, they face a steep penalty: a 30 percent tax on income from US sources.
The law has significant drawbacks. Some banks, eager to avoid the law’s strictures, simply refuse to serve Americans, visiting real inconvenience on US citizens with legitimate reasons to open accounts overseas.
But when it comes to the central question of disclosure, early indications are good. The United States has won the formal cooperation of most of the world’s tax havens and financial institutions, Zucman writes (though it’s still to be seen if that will translate into on-the-ground compliance).
And just as important, the law has spawned a wave of global disclosure rules — a new, international campaign to unlock the secrets of the mega-wealthy.
In this case, at least, the sort of worldwide cooperation on tax evasion long dismissed as utopian fantasy looks like a real possibility.
It’s not entirely clear, though, that this vision of a Washington-led crackdown will pan out.
While the United States insists that financial institutions in Switzerland and the Cayman Islands turn over information on American clients, it has proven reluctant to share its own bank information with other countries.
The United States, in other words, is resisting the global rules it inspired with passage of the Foreign Account Tax Compliance Act.
That resistance is fast turning America into the sort of tax haven it has long deplored. Money that once sat in Swiss bank accounts or shell companies in Bermuda is now migrating to lightly regulated states like Delaware and Nevada, which offer secrecy and stability in exchange for a steady stream of corporate registration fees.
“How ironic — no, how perverse — that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour,” wrote Peter A. Cotorceanu, a lawyer at a Zurich law firm, in a legal journal. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”
If the European powers hope to quiet that sound, they may need to get tough with the United States, just as the United States got tough with them — backing up their new rules with stiff financial penalties. And that may be the central lesson here: Shutting down tax havens is less a question of mutual cooperation, than of mutual confrontation.