The Hidden Wealth of Nations, Gabriel Zucman, 2015


Tax havens are at the heart of financial, budgetary, and democratic crisis.

On a global scale, 8% of the financial wealth of households is held in tax havens. In the spring of 2015 foreign wealth held in Switzerland reached $2.3tn.  Since April 2009, when countries of the G20 held a summit in London and decreed the ‘the end of bank secrecy’, the amount of money in Switzerland has increased by 18%. For all the world’s tax havens combined, the increase is close to 25%. And we are only talking about individuals here. 55% of all the foreign profits of US firms are now kept in such havens.

To fight offshore tax avoidance, the first measure is to create a worldwide register of financial wealth, recording who owns what. Financial registry exist but they are fragmentary (Clearstream).

In France, on the eve of the 1914-18 war, a pre-tax stock dividend of 100 francs was worth 96 francs after tax. Throughout the 19th century, European families paid little or no tax. In 1920 the world changed. Public debt exploded. That year the top marginal income tax rose to 50%, in 1924 it reached 72%. The industry of tax evasion was born.

In 1920, the wealth was made up of financial securities: stock and bonds payable to the bearers. Owners looked for safe places to keep them.  The bank then took the responsibility for collecting dividends and interest generated by those securities. Many banks could do this but Swiss bank offered the possibility of committing tax fraud. Off-balance sheet activities are the holding of financial securities for someone else (they don’t belong to the bank but to clients). The most rapid growth of assets in Swizerland were in 1921-22 and 1925-27. Swiss bank secrecy laws followed the first massive influx of wealth (from France mostly), not the reverse.

For the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland – not today, not in the past. Swiss bank offshore successes owes nothing to the strength of the Swiss francs. It has to do with tax evasion.

Charles de Gaulle imposed a condition on the rapprochement between Switzerland and the allies in 1945: Berne was to help identify the owners of undeclared wealth. For Congress it was out of the question to send billions of dollars via the Marshall Plan without trying to tax French fortunes hidden in Geneva. Berne then engaged in a vast enterprise of falsification: they certified that French assets invested in US securities belonged not to French people but to Swiss citizens or to companies in Panama.

Recent policy changes are making it more difficult for moderately wealth individuals to use offshore banks to dodge taxes: for them the era of banking secrecy is coming to an end. The decrease of little account is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries.

In Switzerland, banks managed $2.3tn belonging to non-resident. $1.3tn belong to Europeans (DE,FR,IT,UK), mostly through trust and shell corporations domiciled in the British Virgin Islands. 40% is placed in mutual funds, principally in Luxembourg.  With more than $150bn in Switzerland – more than the US has, a country with a GDP 7 times higher – the African economy is the most affected by tax evasion.

If we look at the world balance sheet, more financial securities are recorded as liabilities than as assets, as if planet Earth were in part held by Mars. This amount to $6.1tn in 2014 and the bulk of the imbalance comes from Luxembourg, Ireland and Cayman Islands. This imbalance is a point of departure for estimate of the amount of wealth held in tax havens.  I estimate that $7.6tn (8% of global household financial assets) is held in accounts located in tax havens (this includes $1.5bn of bank deposits). The true figure, all wealth combined, is 10% or 11%.

It is one of the great rules of capitalism that the higher one rises on the ladder of wealth, the greater the share of financial securities in one’s portfolio. Corporate equities – the securities that confer ownership of the means of production, which leads to true economic and social power – are especially important at the very top.

On a global level, the average return on private capital, all class of assets included, was 5% per year during the last 15 years. Slightly decreased since the 1980-90, when it was closer to 6%. This is real rate, after adjusting for inflation.  Prudent funds, with 40% low risk bonds, have earned on average 6% per year. Those who invest in international stocks have returned more than 8%. As for Edge funds, reserve for the ultra-rich, their average performance has exceeded 10%.

Africa :30% of wealth held abroad; Russia:52%; Gulf countries: 57%; Europe:10%; US and Asia:4%

Foreign Account Tax Compliant Tax (FATCA): passed by Congress and Obama’s administration in 2010 – Financial institutions throughout the world must identify US clients and inform the IRS to ensure that tax on interest income, dividends and capital gains are paid. Foreign banks refusing to disclose accounts held by US taxpayers face sanctions: a 30% tax on all dividends and interest income paid to them by the US. Tax havens can be forces to cooperate if threatened with large-enough penalties.

To believe that tax havens will spontaneously give up managing the fortunes of the world’s tax dodgers, without the threat of concrete sanctions, is to be guilty of extreme naïveté.

The IRS signed a check for $104 million to the ex-banker of UBS, Bradley Birkenfeld, who revealed the practice of his former employer.  But one may well doubt the effectiveness of this strategy as to rely exclusively on whistle blowers to fight against tax-havens is not strong policy.

The EU saving tax directive, applied in the EU since July 2005 is to fight against offshore  tax evasion by sharing information between countries about clients. Yet this was a failure: Lux and Austria were granted favourable terms and do no exchange information with the rest of Europe. Lux could give the persistence of banking secrecy in Switzerland to block any revision of the directive. Lux and Austria instead of sharing information must apply a withholding tax (35%) which is less than the top marginal income tax in France. Then the tax applies only to EU owners, not to accounts held by shell corporations, trusts or foundations. And the directive applies only to interest income, not dividends. Why? This is a mystery. Was it incompetence? Complicity? The main effect has been to encourage Europeans to transfer their wealth to shell corporations (+10% in Switzerland, in the months that followed the entre into force of the Directive). Swiss bankers have deliberately torpedoed the saving tax directives. No sanctions, no verifications foreseen…it is high time to wake up to reality.