Tax Evasion and Inequality Gabriel Zucman

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2074 THE AMERICAN ECONOMIC REVIEW JUNE 2019, raise an obvious issue since tax rates tax evasion technologies and tax enforce. ment strategies differ across countries and have changed dramatically over time. tax data may paint a distorted picture of the cross country and time series patterns. in inequality Second tax evasion matters for analyzing the effects of governments. intervention in the economy it redistributes the tax burden and affects the costs. of raising taxes bread and butter concerns of public economics Slemrod 2017. Last knowing how tax evasion is distributed would help tax authorities which face. tight budget constraints to better target their enforcement effort. Tax evasion is fundamentally hard to study because there is no single source. of information capturing all of it The key source used so far in rich countries is. stratified random audits These audits are a powerful way to uncover unreported. self employment income abuses of tax credits and more broadly all relatively. simple forms of tax evasion Tax authorities rely on random audits to estimate. the tax gap that is the total amount of unreported income and unpaid taxes. e g IRS 2016 and academics have fruitfully used them to gain insights on the. determinants of tax evasion e g Kleven et al 2011 But random audits do not. allow one to study tax evasion by the very wealthy satisfactorily both because of. insufficient sample sizes and because they fail to capture sophisticated forms of. evasion involving legal and financial intermediaries the detection of which would. require much more resources than available to tax authorities for their random audit. programs This limitation means that random audits need to be supplemented with. other data sources to study tax evasion at the top of the distribution Such data. however have so far proven elusive, In this paper we analyze new micro data that make it possible to study tax evasion. by very rich individuals These data come from recent massive leaks from offshore. financial institutions HSBC Switzerland Swiss Leaks and Mossack Fonseca the. Panama Papers and tax amnesties conducted in the aftermath of the financial cri. sis of 2008 2009 Thanks to a cooperation with Scandinavian administrations we. were able to analyze the leaked and amnesty micro data matched to population wide. administrative income and wealth records in Norway Sweden and Denmark. The leaked and amnesty data we exploit in this paper reveal a number of con. sistent and striking findings The probability of hiding assets offshore rises sharply. and significantly with wealth including within the very top groups of the wealth. distribution Conditional on hiding assets the fraction of one s true wealth hidden. abroad is high around 40 percent and does not vary with wealth As a result the. wealth in tax havens turns out to be extremely concentrated the top 0 01 percent of. the wealth distribution owns about 50 percent of it When we apply this distribu. tion to available estimates of the amount of wealth hidden in tax havens based on. systematic exploitation of the available macroeconomic statistics Zucman 2013. we find that the top 0 01 percent evades about 25 percent of its tax liability by con. cealing assets and investment income abroad This estimate only takes into account. the wealth held offshore that evades taxes it excludes properly declared offshore. assets Throughout the article we maintain a clear distinction between legal tax. avoidance and illegal evasion, Our estimate of tax evasion at the top 25 percent of taxes owed is an order of. magnitude larger than the tax evasion detected by random audits in other wealth. groups less than 5 percent throughout the distribution Of course random audits. VOL 109 NO 6 ALSTADS TER ET AL TAX EVASION AND INEQUALITY 2075. are likely to miss some forms of tax evasion in the bottom and the middle of the. distribution Whenever there is no information trail it is hard if not impossible for. examiners to uncover noncompliance It is important to note however that most. individuals in rich countries truly have few possibilities to evade a lot of taxes. for the simple reason that most of their income derives from wages pensions and. investment income earned in domestic financial institutions income sources that. are automatically reported to the tax authority By contrast tax evasion is possible. for the very rich because there is an industry that helps them conceal wealth abroad. and most of their income derives from wealth 1 Tax evasion is also possible for the. self employed and indeed random audits uncover widespread tax evasion among. them But because self employment income is only a small fraction of total income. in Scandinavia and because the self employed are scattered throughout the wealth. distribution noncompliance by these individuals does not appear to be enough to. generate sizable evasion rates in any specific segment of the wealth distribution 2 In. that context and although there was until recently no good data to study this issue. it is perhaps not too surprising that evasion rates at the top appear to be higher than. those further down the wealth ladder, Do our findings apply to other countries We certainly do not claim that our. estimates of evasion by wealth group in Scandinavia hold everywhere as a universal. law We note however that there is nothing unique to Scandinavia that could explain. the high evasion rates we find at the top Residents of all developed countries are. typically like in Scandinavia taxable on their worldwide income And although. Scandinavian countries are high tax in an international perspective this owes more. to their high value added and payroll taxes than to high rates on personal capital. incomes which are in fact taxed at flat relatively low rates in Norway and Sweden. Kleven 2014 In our view Scandinavian economies are an interesting laboratory. because they rank among the countries with the strongest respect for the rule of. law Kauffmann and Kraay 2017 and highest tax morale Luttmer and Singhal. 2014 suggesting that evasion among the wealthy may be even higher elsewhere. We stress however that in countries such as Greece and Mexico and even more so. in developing countries where the self employed generate a much higher fraction. of output than in Scandinavia the size and distribution of tax evasion is likely to be. markedly different Many tax authorities have access to random audit amnesty and. leaked data similar to those we use in this research In future work we plan to apply. our methodology to estimate distributional tax gaps i e how evasion across the. distribution in as many countries as possible, Our paper adds to the large body of work on tax evasion 3 Our main contribution.
to this literature is that we are able to document tax evasion by very rich taxpayers. In recent years for instance a number of financial institutions have pleaded guilty of criminal conspiracies to. defraud the IRS by helping American customers to hide assets in Switzerland or other tax havens see Section V. For example using the same random audit data as we use in Section IV Kleven et al 2011 find that 44 9 per. cent of Danish self employed evade taxes But self employment income only accounts for 6 percent of factor cost. GDP in Denmark where like in other advanced economies the bulk of economic activity takes place in the corpo. rate and public sectors see online Appendix Figure H 10 Moreover one finds tax evading self employed individ. uals throughout the distribution in the bottom or middle e g plumbers as in the top e g lawyers. One strand of the literature uses random audit data see for instance Bishop Formby and Lambert 2000. Johns and Slemrod 2010 and Kleven et al 2011 Another strand uses a variety of methods to detect traces of. tax evasion in micro or macro data see Slemrod and Weber 2012 and Slemrod 2007 2017 for surveys Both of. 2076 THE AMERICAN ECONOMIC REVIEW JUNE 2019, e g with more than 50 million in net wealth whose behavior could not be. properly studied until now Tax evasion at the top is important to study because. wealthy taxpayers although few in number own a large share of total wealth and. are liable for a large fraction of total taxes In the United States for instance the top. 0 1 percent owns about 22 percent of recorded household wealth as much as the. bottom 90 percent Saez and Zucman 2016, We also contribute to the literature on top end inequality Over the last 15 years. a number of studies have used tax data to construct top income and wealth shares. for many countries 4 The literature discusses the problem raised by tax evasion e g. Atkinson Piketty and Saez 2011 but until recently there were little data that would. allow to systematically quantify it Zucman 2013 estimates that 8 percent of the. world s financial wealth is held in tax havens globally a similar estimate is obtained. by Pellegrini Sanelli and Tosti 2016 Absent micro data on who owns the wealth. hidden offshore however these studies could not assess the implications of tax. havens for the measurement of inequality Our contribution here is to study micro. data that provide the first direct evidence on how hidden wealth is distributed 5. The rest of this paper proceeds as follows Section I presents the HSBC. Panama Papers and amnesty data and Section II analyzes them In Section III we. combine these micro data with macro estimates of the stock of wealth in tax havens. to estimate the size and distribution of offshore evasion Section IV constructs. distributional tax gaps taking into account offshore evasion and all other forms of. evasion detected in random audits Section V attempts to explain the high rates of. tax evasion among the rich we uncover by studying the role played by the supply of. tax evasion services This paper is supplemented by an online Appendix 6. I Micro Data on Households with Assets in Tax Havens. A HSBC Switzerland Leak, The first micro dataset used in this research is the leak from HSBC Private Bank. Switzerland the Swiss subsidiary of the banking giant HSBC In 2007 a systems. engineer employed by HSBC Herv Falciani extracted the complete internal. records of the 30 412 clients of this bank a large fraction of whom were evading. taxes Falciani turned the data over to the French government in 2008 who shared. it with a number of foreign administrations when Christine Lagarde was Finance. these sources find high rates of evasion for the self employed whose true income is found to be on average about. 1 5 to 2 times their reported income e g Pissarides and Weber 1989 Feldman and Slemrod 2007 Artavanis. Morse and Tsoutsoura 2016, See e g Piketty and Saez 2003 for US top income shares Saez and Zucman 2016 for US top wealth. shares Atkinson Piketty and Saez 2011 for a survey Piketty 2014 for a broad interpretative synthesis and. Piketty Saez and Zucman 2018 for an attempt at distributing all of US national income including legally tax ex. empt income but excluding income hidden abroad which is missed by the national accounts. Roine and Waldenstr m 2008 2009 study the distributional implications of hidden wealth for the recent. period They use an indirect method residual flows in the balance of payments and financial accounts to estimate. the amount of wealth hidden by Swedish residents and assume that this wealth primarily belongs to the top The. share of wealth owned by the top 1 percent rises from about 20 percent in the 2000s to a range of 25 30 percent. depending on the methodology, Please see the online Appendix All our code and data are posted online excluding de identified individu.
al level micro administrative data which cannot be publicly shared but including a large number of tabulations of. the raw data by bins of wealth which make our results fully replicable. VOL 109 NO 6 ALSTADS TER ET AL TAX EVASION AND INEQUALITY 2077. Minister in France thus the Falciani list became known as the Lagarde list The. leaked files are not publicly available but thanks to a cooperation with Scandinavian. authorities we were able to analyze the full portion of the Falciani Lagarde list. matched by the Scandinavian authorities to individual tax returns and administra. tive income and wealth data From the complete set of leaked files the authorities. attempted to match all accounts potentially connected to Scandinavia i e whose. owner controlling attorney or other related party had an address in Scandinavia or. Scandinavian nationality They succeeded in about 90 percent of the cases and we. have access to all matched records 7, The HSBC leak has a number of key strengths for our purposes First it was not. the result of specific enforcement effort by tax authorities and can be seen as a ran. dom event The documents leaked by Falciani include the complete internal records. including the names and in the majority of cases account values of the more than. 30 000 clients who controlled about 112 000 accounts of this Swiss bank in 2007. Importantly HSBC recorded the name of the beneficial owners of the wealth it man. aged even when this wealth was held as is frequently the case through shell com. panies Identifying beneficial owners is a requirement for banks under anti money. laundering regulations and it appears that HSBC complied with it This is what. made it possible for the authorities to link the accounts to their owners tax returns. Second at the time of the leak HSBC Switzerland was a major player in the. Tax Evasion and Inequality because they rank among the countries with the strongest respect for the rule of law Kauffmann and Kraay 2017 and highest tax morale Luttmer and Singhal 2014 suggesting that evasion among the wealthy may be even higher elsewhere We stress however that in countries such as Greece and Mexico and even more so in developing countries where the self

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