Since the 1980s, a powerful industry has developed out of sight in the Cayman Islands, Luxembourg, Hong Kong and similar tax havens. Financial, accounting and law firms located in these countries cater to wealthy individuals and multinationals from around the world. They provide a variety of services to these individuals and multinationals, many of which are legal, but most of which reduce tax revenue in other countries, increase inequality and foster financial instability. By exploring macroeconomic statistics and following the money in minute detail, we can start to grasp the costs that tax havens impose on other countries. Granted, the data that offshore centers publish is far from comprehensive, and our system for measuring household wealth and multinationals’ profits has many weaknesses. But it is improving, and by analyzing the data carefully, we can detect consistent patterns. The starting point of my investigation is the astounding amount of profits that corporations pretend they make in a handful of tiny, largely unpopulated islands and enclaves. On average around the world, for every euro paid in wages, corporations make around 50 cents in profits. This ratio is observed in places like the United States, Germany and France. But consider now the case of a country like Luxembourg where, for every euro they pay in wages, corporations claim they earn a handsome 3.5 euros in profits. Who knew the workers in the Grand Duchy were so productive? They are not, of course, and the reason corporations appear to be so profitable in Luxembourg is because they cook their books by shifting their profits. In principle, multinationals are supposed to allocate their profits across their various subsidiaries as if these offshoots were independent entities, trading goods and services among themselves at the prevailing market prices. In practice, however, the prices of intragroup transactions are routinely manipulated by offshore law and accounting firms to make their global profits appear in low-tax jurisdictions. Moreover, a growing number of multinationals locate their algorithms, trademarks and logos in tax havens to strip earnings away from the countries, such as Germany or the U.S., where they are generated.

Multinationals shift more than 600 billion euros each year to tax havens

A case in point – perhaps the most spectacular one – is Google Alphabet. In 2003, less than a year before its initial public offering in August 2004, Google USA transferred its search and advertising technologies to “Google Holdings,” a subsidiary incorporated in Ireland. Under Irish tax law, the company can shift the tax burden for its profits to Bermuda. In 2015, Google reported $15.5 billion in profits in Bermuda, where the corporate tax rate is a modest zero percent.



Google is far from an isolated case. Together with my colleagues Thomas Tørsløv and Ludvig Wier, I have Read the study herecombined the dataRead the study here published by tax havens all over the world to quantify the cost of the artificial shifting of profits to tax havens. Tiny countries such as Bermuda do not produce meaningful statistics, but the European Union’s own tax havens do. These six countries alone -- Luxembourg, Ireland, the Netherlands, Belgium, Malta and Cyprus -- siphon off a grand total of 350 billion euros each year. The money ends up in these countries after being manipulated by armies of highly paid accountants. Globally, multinationals artificially shift more than 600 billion euros to all the world’s tax havens each year.

Who loses from these shenanigans? By and large, the U.S. and the big EU countries, where most of the multinationals’ workers and consumers are located. Tax havens deprive the EU of the equivalent of one-fifth of the corporate tax revenue it currently collects, representing a cost of 60 billion euros per year. For Germany alone, the bill adds up to 17 billion euros.

Each country has the right to choose its forms of taxation. But when the Netherlands offers tailored tax deals to multinational companies, when the British Virgin Islands enables money launderers to create anonymous companies for a penny, when Switzerland keeps the wealth of corrupt elites out of sight, they are all stealing the revenue of foreign nations. And while the rest of us lose, the tax havens win: fees for their services, tax revenue (even if minimal) and sometimes even greater influence on the international stage. Take Ireland, a chief villain in this story. Thirty years ago, when its corporate tax rate was 50 percent, Ireland collected less revenue from companies measured against its gross domestic product (GDP) than the U.S. or the rest of the EU. Since it cut its rate to 12.5 percent in the 1990s (although, in practice, the rate applied to some multinationals is way lower, sometimes close to zero percent), it has collected way more than high-tax countries. Is it because low taxes have spurred healthy growth? Not at all. Rather, it is because all the extra revenues that go to the Irish taxman originate from the profits that foreign multinationals park in Dublin or Cork. These profits have been generated by workers in other countries, and only exist in Ireland on paper. The Irish government thus gets more revenues that it can spend on roads or hospitals, while other countries get less. Nothing in the logic of free exchange justifies this. It is simple to understand why it nonetheless persists. Given the enormous amount of profits shifted offshore, tax havens only need to impose taxes of just a few percent to collect big sums relative to the size of their economy. As long as large sanctions are not imposed on them, there is no chance offshore financial centers will spontaneously abandon this lucrative business. Unfortunately, governments have not thus far distinguished themselves with boldness or determination. As such, the artificial shifting of profits keeps growing. U.S. multinationals now make 63 percent of all their foreign profits in six tax havens. In 2006, that figure was only around 40 percent.

Tax havens are one of the key engines in the massive rise in global inequality. Because most of the world’s equity wealth belongs to very rich people, corporate tax avoidance only enriches a small group of the population. And the taxes that multinationals dodge have to be compensated for by higher taxes – mostly on middle- and working-class households -- making it harder for these groups to accumulate some wealth. If the shortfall isn’t compensated for by higher taxes, then public spending must fall. The revenue that EU states lose to tax havens represents the equivalent of about half of all their public spending on higher education. Tax havens are thus at the root of a massive intergenerational transfer of wealth – one that enriches the old and impoverishes the young.

But there is an even more direct way in which tax havens increase inequality. They enable a number of ultra-rich individuals to hide their wealth – from the taxman, business partners, spouses or judges. The equivalent of 10 percent of global GDP is held offshore by rich individuals in the form of bank deposits, equities, bonds and mutual fund shares – most of the time in the name of faceless shell corporations, foundations and trusts. The leaks that have occurred over the last few years have provided my colleagues Annette Alstadsæter, Niels Johannesen and I with a better Read the study hereoverviewRead the study here of who the assets belong to. Data revealed by the “Swiss Leaks” and the “Panama Papers” made clear the extent to which offshore wealth is concentrated in just a few hands.

About 50 percent of the wealth held in tax havens belongs to households with more than $50 million in net wealth. It’s a group that private bankers dub “ultra-high-net-worth individuals” and that they woo assiduously. These ultra-rich represent about 0.01 percent of the population of advanced economies. Many people believe that tax evasion has become somewhat more “democratic” over time. Data from Swiss Leaks in 2007 showed at the time how banks in that country served hundreds of thousands of customers. By that metric, the use of tax havens had indeed become widespread. But the wealth held by this myriad of moderately wealthy customers does not account for much compared to that owned by the ultra-rich. The consequence is clear: Because of tax havens, we underestimate the level and the rise of global inequality substantially because the complete lack of transparency makes it impossible to estimate how many or how few people the money parked there belongs to. The implications are dramatic for a country like Russia, where the majority of wealth at the top is held outside the country. In the United Kingdom, Spain, Germany and France, about 30 to 40 percent of the ultra-rich hold their wealth abroad. It has been estimated that wealth concealment deprives governments of around $170 billion a year.

As global inequality rises, the firms located in offshore financial centers refocus their activity on a smaller, but wealthier clientele. They find it more profitable to serve few but very rich clients rather than thousands of well-off investors, many of whom have been kicked out of Swiss banks in recent years. As inequality rises, offshore tax evasion is becoming an elite sport. Recurring scandals can give the impression that nothing can be done to fight offshore abuse. But this is wrong. Progress has already been realized over the last decade in fighting tax evasion, and much more could be done in the near future.

There is an effective weapon against tax havens

Before the global financial crisis of 2008-2009, most tax havens refused to disclose any meaningful statistics on their activities or to cooperate with foreign tax authorities. In 2016, however, a number of prominent offshore centers – including Luxembourg, the Channel Islands and Hong Kong – began disclosing data on the amount of deposits that foreigners hold in their banks. And beginning this year, many tax havens started exchanging bank information with foreign countries. Yet plenty of data is still lacking. A number of major tax havens, including Panama and Singapore, still do not disclose statistics on who holds deposits in their banks. Most importantly, a growing share of offshore wealth is held through shell corporations, trusts and foundations that all fulfill the same goal: that of making the ultimate owners of the assets untraceable. Tax havens always pretend that they fully cooperate with foreign countries, but they don’t have much incentive to do so, and we have no way of checking whether they keep their word (which they have never done in the past). Key to making progress is to impose stiffer penalties on the firms and the countries that facilitate financial crimes. Over the last five years, a number of big banks, such as Credit Suisse and HSBC, have had to pay fines in the U.S. But fines are often seen as the cost of doing business and are too small relative to the profits made by financial giants. Threatening to withdraw banking licences would be a stronger deterrent. Deterrence is one means, transparency the other. To turn the page on offshore abuse, we need a global financial registry. Offshore companies sometimes serve legitimate purposes with their services, but often they enable money laundering, insider trading, tax dodging and even sometimes the financing of terrorism. The most compelling way to dissipate the opacity that offshore companies generate would be to create comprehensive registries recording the beneficial owners of the world’s real estate and financial securities. Most countries already have registries for real estate. Despite this, large parts of Manhattan and London are owned by shell companies, which can be used to hide money launderers. These registries need to be improved. We should then extend these registries to cover financial assets. One common response to proposals for financial registries is that they would threaten individual privacy. Yet countries have had property records for land and real estate for decades. These records are public, and there seems to be little abuse. The notion that a register of financial wealth would be a radical departure from earlier practices concerning privacy is wrong. It would deal a fatal blow to financial secrecy. In my view, a world financial registry would thus be the most effective weapon for creating global financial transparency.

French economist Gabriel Zucman, 31, is an expert on tax avoidance and tricks used by large international corporations. Zucman seeks to expose the actual costs to countries of the offshore system. He doesn't view himself as being exclusively engaged in academic research. His work is often political in ways reminiscent of his doctoral adviser Thomas Piketty, the best-selling author of “Capital in the Twenty-First Century.”