Globalization and Tax Justice

Gabriel Zucman(UC Berkeley)

October 2017

How can we make globalization and taxjustice compatible?

One of the most pressing policy questions of our time

Clear by now that globalization is makingredistribution harder

Policy response so far: protectionism and/or let’s allbecome tax havens (Brexit, Trump, race to bottom)

Another route is possible, but it requires: (i) a goodunderstanding of the issues, (ii) creative policies

Why globalization and tax justice areconflicting

Tax havens severely affect national tax policies:

Multinationals’ artificial profit-shifting

Rising personal tax avoidance and evasion

Internalizing this, gov’t cut capital taxes & top rates

Cuts need to be offset by ↑ taxes elsewhere / lessspending

→ Does globalization have a future if it means ever lowertaxes for the rich, and higher for the rest of us?

Multinationals’ Profit-Shifting

to Tax Havens

A growing fraction of global profits aremade abroad

0%

5%

10%

15%

20%

25%

30%

35%

1930-39 1940-49 1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-16

% o

f U.S

. cor

pora

te p

rofit

s

The share of profits made abroad in U.S. corporate profits

Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). Foreign profits include dividends on foreign portfolio equities and income on US direct investment abroad (distributed and retained). Profits are net of interest payments, gross of US but net of foreign corporate income taxes. Source: author's computations using NIPA data, see Online Appendix.

63% of the foreign profits of USmultinationals are now made in havens

0%

10%

20%

30%

40%

50%

60%

1982

1984

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% o

f U.S

. cor

pora

te p

rofit

s m

ade

abro

ad

The share of tax havens in U.S. corporate profits made abroad

Singapore

Ireland

Netherlands

Luxembourg

Switzerland

Bermuda (and Caribbean)

Notes: This figure charts the share of income on U.S. direct investment abroad made in the main tax havens. In 2016, total income on U.S. DI abroad was about $450bn. 16% came from the Netherlands, 8% from Luxembourg, etc. Source: author's computations using balance of payments data, see Online Appendix.

The effective rate paid by US corporationshas been reduced by 1/3 since late 1990s

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25%

30%

35%

40%

45%

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55%

1950-59 1960-69 1970-70 1980-89 1990-99 2000-09 2010-16

% o

f US

cor

pora

te p

rofit

s

Nominal and effective corporate tax rates on US corporate profits

Nominal U.S. federal rate

Effective rate paid to US government

Effective rate paid to US and foreign gov.

Notes: The figure reports decennial averages (e.g., 1970-79 is the average of 1970, 1971, ..., 1979). In 2010-2016, over $100 of corporate profits earned by US residents, on average $16 is paid in corporate taxes to the U.S. government (federal and States) and $4 to foreign governments. Source: author's computations using NIPA data, see Online Appendix.

Globally, 40% of multinationals’ profitsare artificially shifted to tax havens

0

100

200

300

400

500

600

700

Profits shifted to tax havens Non-EU tax havens EU tax havens

€ Bn. Global amount of profits artificially shifted to tax havens

Rest of OECD Developing countries US EU

Note: This figure illustrates the amount of tax base wrongfully allocated to tax havens in 2015, as well as the regions from which it originates. The total profits shifted to tax havens is estimated at 627 billion Euros. The size of mis-allocated tax base is equal to the estimated "Excess Profits" of the havens. The profts are allocated to the countries of origin, proportionally to the sum of high-risk service imports and FDI interest payments by partner countries. Foreign income is defined as income made by non-tax havens on investments abroad. The foreign income in 2015 was 1.4 trillion Euros.

The EU loses 20% of its corporate taxrevenue due to tax havens

0%

5%

10%

15%

20%

25%

30%

35%

German

y

France

Hunga

ry Ita

ly

EU22

United

King

dom

Spain

Swed

en

Austri

a

Finlan

d

Estonia

Denmark

Portu

gal

Polan

d

Latvia

Croati

a

Greece

Slove

nia

Lithua

nia

Czech

Rep

ublic

Roman

ia

Slova

kia

Bulgari

a

Lost corporate tax revenue as a share of current corporate tax revenue

Shifted to non-EU tax havens

Shifted to high risk EU countries

Corporate tax rate (avg. 2010-2015)

Note: This figure illustrates the amount of tax revenue lost per country as share of current total corporate tax revenue in 2015. The bars are split into the share lost to EU-havens and non-EU havens. The green line shows the top statutory tax rates of the countries. The tax losses are allocated using the share of high risk imports and interest paid to tax havens (Our benchmark scenario).

Offshore Wealth

A high and growing amount of personalwealth is held in tax havens

0%

2%

4%

6%

8%

10%

12%

14%

2001

2002

2003

2004

2005

2006

2007

2008

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2010

2011

2012

2013

2014

2015

% o

f wor

ld G

DP

The global amount of household wealth in tax havens

Global offshore wealth (Our estimate)

Global offshore wealth (BCG)

Offshore wealth in Switzerland (Swiss National Bank)

From some countries, offshore wealth isas high as 50% of GDP

0%

10%

20%

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50%

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70%

Kor

ea

Pol

and

Chi

na

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mar

k Fi

nlan

d Ja

pan

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a N

orw

ay

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nesi

a C

anad

a Ira

n S

wed

en

Net

herla

nds

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zil

Aus

tralia

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exic

o U

SA

Aus

tria

Thai

land

C

olom

bia

Irela

nd

Spa

in

Sou

th A

frica

Ita

ly

Rus

sia

Fran

ce

Ger

man

y U

K

Bel

gium

Tu

rkey

P

ortu

gal

Taiw

an

Gre

ece

Arg

entin

a R

ussi

a (N

EO

) S

audi

Ara

bia

Vene

zuel

a U

AE

Offshore wealth / GDP (All countries with GDP > $200 billion in 2007)

World average: 9.8%

Hidden wealth is extremely concentrated

0%

10%

20%

30%

40%

50%

60%

P0-50 P50-P90 P90-P99 P99-P99.9 P99.9-99.99 P.99.99-P100

% o

f tot

al re

cord

ed o

r hid

den

wea

lth

Position in the wealth distribution

Distribution of wealth: recorded vs. hidden

Hidden wealth disclosed in amnesty

Hidden wealth held at HSBC

All recorded wealth

Tax evasion is widespread among the verywealthy

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P10

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% o

f tax

es o

wed

Position in the wealth distribution

Taxes evaded, % of taxes owed (stratified random audits + leaks)

Average: 2.8%

Tax evasion makes the tax systemregressive at the top

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5-P

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9-P

100

% o

f tax

able

inco

me

Position in the wealth distribution

Taxes paid vs. taxes owed

Taxes paid

Taxes owed

Because of offshore wealth, wesignificantly under-estimate inequality

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6%

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10%

12%

Spain UK Scandinavia France USA Russia

% o

f tot

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ouse

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wea

lth

The top 0.01% wealth share and its composition

Offshore wealth

All wealth excluding offshore

The Solutions

Despite recent policy initiatives, muchremains to be done to fight tax evasion

Automatic exchange of bank info is becoming globalstandard: big progress.

Three obstacles:

Incentives of offshore bankers

Financial opacity

Incentives of tax havens

⇓What is missing: well defined sanctions and a world

financial registry

We need a world financial register to fightfinancial opacity

The case for a world financial register

The companies Clearstream, Euroclear, etc. feed the world financial register. Tax authorities can verify that tax-payers indeed declare all the financial

securities included in the register

Despository Trust Corporation

(USA)

Clearstream (Luxembourg)

Euroclear France (France)

Other central securities depositories

& other sources

World financial register

U.S. tax authority

U.K. tax authority

French tax authority

Other tax administrations

Reforming the corporate tax

Formula apportionment

Works reasonably well for US States

Based on final sales to remove incentives to move realactivity

It’s the best way to levy taxes efficiently and fairly

Can be done unilaterally

But best done multilaterally as part of free tradeagreement (e.g., TTIP)

Supplementary Slides

The proba to have an unreported HSBCaccount rises sharply within the top 1%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

P90-P95 [0.6 – 0.9]

P95-P99 [0.9 – 2.0]

P99-P99.5 [2.0 – 3.0]

P99.5-P99.9 [3.0 – 9.1]

P99.9-P99.95 [9.1 – 14.6]

P99.95-P99.99 [14.6 – 44.5]

Top 0.01% [> 44.5]

Net wealth group [millions of US$]

Probability to own an unreported HSBC account, by wealth group (HSBC leak)

HSBC evaders hide close to half of theirwealth at HSBC

0%

10%

20%

30%

40%

50%

P90-P95 [0.6 – 0.9]

P95-P99 [0.9 – 2.0]

P99-P99.5 [2.0 – 3.0]

P99.5-P99.9 [3.0 – 9.1]

P99.9-P99.95 [9.1 – 14.6]

P99.95-P99.99 [14.6 – 44.5]

Top 0.01% [> 44.5]

Net wealth group [millions of US$]

Average wealth hidden at HSBC, by wealth group (%oftotalwealth(includingheldatHSBC))

The Panama Papers confirm the sharpgradient in use of tax havens by wealth

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

P90-P95 [0.6 – 0.8]

P95-P99 [0.8 – 1.8]

P99-P99.5 [1.8 – 2.7]

P99.5-P99.9 [2.7 – 8.1]

P99.9-P99.95 [8.1 – 13.3]

P99.95-P99.99 [13.3 – 41.4]

Top 0.01% [> 41.4]

Net wealth group [millions of US$]

Probability to appear in the "Panama Papers", by wealth group (Shareholders of shell companies created by Mossack Fonseca)

Amnesty data show widespread evasion atthe top

0%

2%

4%

6%

8%

10%

12%

14%

P90-P95 [0.6 – 0.8]

P95-P99 [0.8 – 1.8]

P99-P99.5 [1.8 – 2.7]

P99.5-P99.9 [2.7 – 8.1]

P99.9-P99.95 [8.1 – 13.3]

P99.95-P99.99 [13.3 – 41.4]

Top 0.01% [> 41.4]

Net wealth group [millions of US$]

Probability to voluntarily disclose hidden wealth, by wealth group (Swedish and Norwegian tax amnesties)

Even in countries with low total evasion,including hidden wealth ↑ inequality a lot

0%

1%

2%

3%

4%

5%

1930 1940 1950 1960 1970 1980 1990 2000 2010

Top 0.01% wealth share in Norway

Excluding hidden wealth

Including hidden wealth

Tax evasion on hidden wealth

0%

10%

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30%

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50%

P90

-95

P95

-99

P99

-99.

5

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5

P99

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P99

.99

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.99-

P10

0

% o

f tot

al ta

xes

owed

that

are

not

pai

d

Position in the wealth distribution

Offshore tax evasion, by wealth group

Lower-bound scenario

High scenario

Tax evasion detected in random audits

0.0%

1.0%

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00

% o

f tax

es o

wed

that

are

not

pai

d

Position in the wealth distribution

Taxes evaded, % of taxes owed (stratified random audits)

Macro average: 2.3%

Random audits detect a lot of errors ontax returns

0%

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Position in the wealth distribution

Fraction of households evading taxes, by wealth group (stratified random audits)

But random audits fail to capturesophisticated evasion at the top

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% o

f tot

al in

com

e (r

epor

ted

+ ev

aded

)

Position in the wealth distribution

Fraction of income undeclared, conditional on evading (stratified random audits)

Combining random audits and leaks

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P10

0

% o

f tax

es o

wed

that

are

not

pai

d

Position in the wealth distribution

Taxes evaded, % of taxes owed

Offshore evasion (leaks)

Tax evasion other than offshore (random audits)

Tax evasion in random audits:US. vs. Denmark

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Position in the income (US) or wealth (Denmark) distribution

Figure S.23: Fraction of income undeclared (stratified random audits)

Denmark (left) average: 1.8%

US (right) average: 11%

Why is detected evasion higher in US?DCE multiplier + self-employment

0%

5%

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25%

30%

Nor

way

Ic

elan

d S

wed

en

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n Lu

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Finl

and

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ce

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nd

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uani

a B

elgi

um

Est

onia

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nite

d K

ingd

om

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tria

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herla

nds

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man

y S

pain

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unga

ry

Uni

ted

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tes

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veni

a C

zech

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witz

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nd

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ia

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tuga

l Ita

ly

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vak

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ublic

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rkey

P

olan

d G

reec

e

The share of self-employment income in GDP in OECD countries (Gross mixed income as a % of factor-cost GDP)

Stronger enforcement → fewer, wealthierclients

0

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Num

ber o

f clie

nts

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rage

acc

ount

val

ue (m

illio

n U

S$)

Number of clients and average account value at HSBC Private Bank Switzerland

Number of clients (right scale)

Average account value (left scale)

Income inequality in the United States

10%

12%

14%

16%

18%

20%

22%

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

% o

f nat

iona

l inc

ome

Pre-tax national income share: top 1% vs. bottom 50%

Bottom 50%

Top 1%

Source: Appendix Table II-B1

Global income inequality

Key: in 2010, 20.8% of global income accrued to the top 1% earners, using Purchasing Power Parity estimates.Note: per adult pre-tax income. The unit is the adult individual above 20 years old.Regions aggregated: Africa, Asia, Europe, Middle-East, North America, Russia, Latin America. All data from WID.world

5

10

15

20

25

% w

orld

inco

me

1980 1985 1990 1995 2000 2005 2010 2015

Bottom 50% vs top 1% shares of global incomePurchasing Power Parity

Global top1%

Global bottom 50%

The future of global income inequality0

510

1520

2530

% g

loba

l inco

me

1980 1990 2000 2010 2020 2030 2040 2050Notes: Distribution of real per adult income at Purchasing Power Parity. Average national income growth projections based on OECD forecasts.Population growth projections based on UN forecasts. The distribution of growth within countries (actual or projected) is from WID.world.

Purchasing Power ParityTop 1% vs. Bottom 50% shares of global income: 1980-2050

Global top 1% income share

... all countries follow EU 1980-2016 inequality trend = scenario 3

Scenario 2

Global inequality assuming...

Scenario 1

Global bottom 50% income share

... all countries follow US 1980-2016 inequality trend = scenario 2

... all countries follow their own 1980-2016 inequality trend = scenario 1

Scenario 3

Changes in Tax Progressivity

Figure 5.2.2

Note: The top marginal tax rate of the income tax (applying to the highest incomes) in the U.S. dropped from 91% in 1963 to 40% in 2017.Sources: piketty.pse.ens.fr/capital21c and WID.world updates.

0%

10%

20%

30%

40%

50%

60%

70%

80%

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100%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Top

mar

gina

l tax

rate

app

lyin

g to

hig

hest

iinco

mes

Top income tax rates in rich countries, 1900-2017

U.S.U.K.GermanyFranceJapan

Tax progressivity in the United States

0%

5%

10%

15%

20%

25%

30%

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40%

45%

1913

1918

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1998

2003

2008

2013

% o

f pre

-tax

inco

me

Average tax rates by pre-tax income group

Source: Appendix Table II-G1.

All

Bottom 50%

Top 1%

Inequality rose more where top marginaltax rates were cut moreFigure 521

Source: Piketty, Saez and Stantcheva (2014)Note: in the USA, the top marginal income tax rate was reduced by 33 points between the early 1970s and the early 2010s.During the same period of time, the top 1% income share increased by 9.5 points.

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DenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmarkDenmark

FinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinlandFinland

FranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFranceFrance

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IrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIrelandIreland

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NorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorwayNorway

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SpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpainSpain

SwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSwedenSweden

SwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerlandSwitzerland

UKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUKUK

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02

46

810

Cha

nge

in T

op 1

% In

com

e Sh

are

(poi

nts)

-40 -30 -20 -10 0 10Change in Top Marginal Tax Rate (points)

Changes Top 1% Share and Top Marginal Tax Rate since the 1970s in Rich countries

No growth for the U.S. bottom 50% since1980

-1%

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Income percentile

Average annual growth by percentile, 1980-2014

Top 0.001%

Average adult

Pre-tax

Post-tax

P99

P99.9

P99.99