Around 8 percent of the world’s total financial wealth resides in tax havens — countries or territories where taxes are very low or even nonexistent, and where rules and regulations are lax, opaque, or preferential towards the wealthy. These places are usually small, affluent, and low-key on the international scene, such as the Cayman Islands, British Virgin Islands, Isle of Man, Jersey, and San Marino (not exactly household names, although the first two have by now become synonymous with wealth).
American citizens are among the biggest customers for tax havens, which is not surprising given that the U.S. economy is the largest in the world by a significant margin, with the biggest financial sector and greatest number of billionaires and millionaires (e.g., the sorts of folks who are most eager to stash their wealth out of reach from tax authorities).
According to research by economist Gabriel Zucman of the University of California, Berkeley, the richest Americans now have at least $1.2 trillion based in offshore accounts, with the volume of overseas wealth quadrupling over the last thirty years. Needless to say, most of the income generated by this wealth goes untaxed.
That has consequences not only for state and federal tax bases, which at least have greater leeway to seek out alternative sources of revenue (including borrowing), but especially for local governments, which have far fewer options. As The Nation reports, the lack of tax revenue could not be at a worse time:
According to the Center on Budget and Policy Priorities, funding for Community Service Block Grants—the federal aid program for services that have a measurable impact on the causes of poverty—has dropped 49 percent since 2000, and 63 percent since the program began back in 1982.
Zucman estimates that a crackdown on tax havens would produce an amount equivalent to raising taxes 20 percent on every wealthy American within the top 0.1 percent. These billions in new revenue could, in turn, underwrite a massive reinvestment in Community Service Block Grants.
Any serious crackdown would require, at the outset, a complete accounting of currently circulating stocks and bonds. No coordinated public register of such investments exists, and the absence of that information has enabled the proliferation of offshore tax havens and massive tax evasion. We can restore transparency, suggests Zucman, by combining the fragmented existing private registers of stocks and bonds and transferring them to public control. That step would deal “a fatal blow to financial secrecy” and allow tax collectors to find and tax hidden wealth.
Would tax havens cooperate with a new worldwide register of financial wealth? Not voluntarily. But the United States and other governments could levy sanctions that make cooperation more likely. Nations, for instance, could impose special custom duties on goods imported from tax-haven nations.
This is in line with Thomas Piketty’s argument in Capital in the Twenty-First Century for some sort of global wealth tax, perhaps via an international agreement or institution, although even he concedes that such an arrangement would be politically (not to mention logistically) difficult.
Whatever the solution, it seems woefully clear that the present tax system, like the U.S. economy overall, does not lend itself to sustaining social needs; across all levels of government, from towns to the nation as a whole, there are an abundance of problems related to lack of funding and public support — public education, health care, affordable housing, infrastructure, and more.
If members of the private sector are not taking it upon themselves to help fellow citizens — whether by investing in their labor force and/or paying their due taxes — what options do we have left? How can we keep communities from crumbling or failing to provide the environment most conducive to human flourishing? How do we make the most of this nation’s tremendous economic and financial resources?
I am not entirely sure of the best solution, but I do not think it starts with having over a trillion dollars sitting in opaque accounts halfway around the world.
What are your thoughts?