One-Tenth Of Global GDP Is Now Held In Offshore Tax Havens

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Tyler Durden
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Accurately measuring the scope of global wealth inequality is a notoriously difficult undertaking – a fact that was brought to light last year when the International Consortium of Investigative Journalists published the Panama Papers, exposing clients of Panamanian law firm Mossack Fonseca. As the papers revealed, Mossack Fonseca, which is only the world’s fourth-largest provider of offshore financial services, boasted a client roster stacked with some of the world’s wealthiest and most politically connected individuals. The former prime minister of Iceland (who was forced from office because of the revelations), associates of Russian President Vladimir Putin, and the father of former UK Prime Minister David Cameron.

In a first-of-its kind study from the National Bureau of Economic Research, a team of economists has broken down rates of offshore wealth holdings as a percentage of GDP to identify countries with the largest, and smallest, percentages of wealth held offshore. The study’s conclusion suggests a reality that many readers probably suspected: the true scope of wealth inequality is far larger than the official statistics would suggest. The study found that as much as one-tenth of the world’s GDP is held in tax havens, though that percentage can vary widely from country to country. Here’s Bloomberg: “One-tenth of the world’s GDP is held in offshore tax havens, but that share jumps to as much of 15 percent for Europe and as much as 60 percent for Gulf and some Latin American countries, new research shows. When it comes to total offshore wealth as a share of GDP, the United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina lead the pack, while Germany, the U.K. and France all have above-average holdings. The U.S. is slightly below average.” Unsurprisingly, the countries with the largest offshore wealth holdings as a percentage of GDP are oil rich, with much of that wealth flowing through state-run companies. But some G-10 economies – notably in Europe – also have a larger than average percentage of wealth tied up offshore. “When it comes to total offshore wealth as a share of GDP, the United Arab Emirates, Venezuela, Saudi Arabia, Russia and Argentina lead the pack, while Germany, the U.K. and France all have above-average holdings. The U.S. is slightly below average.” According to the study, the US has a below-average percentage of wealth offshore. There are a handful of reasons for this. First, the study’s authors have found that countries where the rich hold a large chunk of their wealth offshore share three common characteristics: Proximity to Switzerland, the presence of national resources,  and political and economic instability. That could be why the U.S. is slightly below the average, according to economist Gabriel Zucman, one of the study’s authors.

Rise of Alternative Tax Havens, 2001 - 2015 - Click to enlarge

Because of the widespread tax avoidance associated with the practice, the sheer volume of wealth stashed away in offshore tax havens distorts social scientists efforts to measure the breadth of economic inequality in modern society. So much of that research, as it turns out, is based on tax data. Given that the distortion would be to obscure the true value of wealth in the hands of the 0.01% wealthiest, one can assume that wealth inequality has, in reality, returned to levels last seen during the gilded age.

“Offshore wealth boosts inequality when it’s factored into tax data, because it belongs mostly to the richest households.  In the U.K., Spain, and France, about 30 percent to 40 percent of the wealth of the richest 0.01 percent of households is held abroad. Russia’s richest hold as much as 60 percent of their wealth overseas. “The way that we measure inequality in economics, and the social sciences, is that we rely a lot on tax data,” Zucman said. “There’s the obvious problem that there is tax avoidance: if you only look at tax data there is risk that you’re going to underestimate the true concentration of wealth.”

As pressure on Switzerland, long the world’s most recognized tax haven, has intensified in recent years, Hong Kong has risen in popularity as a destination for overseas wealth, propelled in part by the super-rich in China.

The Panama Papers leaks prompted international outcry and lead to a flurry of tax-evasion investigations in the UK and elsewhere. Earlier this year, the firm’s founders were arrested in Panama City for alleged connections with Brazil’s sprawling Lava Jato corruption scandal.

But aside from a handful of prosecutions, little has been done to change the system. Even as Mossack Fonseca falters, other members of the offshore magic circle operate in relative anonymity.

Though, in an age where the theft of sensitive information is increasingly common, their clients are at least being forced to confront the question of whether the monetary benefits would outweigh any public-relations repercussions should their offshore holdings be exposed.