If You See a Little Piketty in This Tax-Haven Book, That's Fine

  • Gabriel Zucman blasts Swiss in `The Hidden Wealth of Nations'
  • Economist's acolyte sees widening inequality due to tax policy

Look out, Thomas Piketty. Here comes Gabriel Zucman.

With a slim new book that has the feel of Piketty’s bestselling “Capital in the 21st Century,” Zucman, a baby-faced 28-year-old University of California-Berkeley economist, is taking his own swing at global capitalism. His target: tax havens that he says hide $7.6 trillion -- about 8 percent of the world’s net financial wealth.

The Hidden Weath of Nations

Source: Gabriel Zucman

With his book, “The Hidden Wealth of Nations,” Zucman is positioning himself as this year’s Piketty, whose opus renewed a debate about inequality last year. Both titles play off economics classics -- one by Karl Marx, the other Adam Smith -- and the new book resembles the cover of Piketty’s. It also features the French economist’s name on the cover not once but twice. Piketty, who supervised Zucman’s doctorate degree, also wrote the forward.

“The Hidden Wealth of Nations” is capitalizing on the U.S. political season, hitting the shelves just as presidential candidates as diverse as Jeb Bush, Donald Trump and Bernie Sanders attack the tax breaks exploited by the ultra-wealthy.

“Almost nobody in economics is talking about tax havens,” Zucman said in an interview. “People haven’t really made the link between tax evasion and rising inequality. They see big companies and the very wealthy avoiding taxes, but they don’t understand how this is part of this dramatic increase in inequality. My hope is to bring more attention to this.”

There has never been as much wealth sitting in tax havens as there is today, Zucman says, whether it’s Apple Inc. funneling billions in profits through a tiny Irish unit or a French cabinet minister using secret accounts to cheat on his taxes. For multinationals, Zucman found the majority of foreign profits reported by U.S. companies are attributed to a handful of havens. For individuals, he estimates at least $2 trillion held in Swiss banks is still undeclared by account holders to their home countries. Reforms are of dubious impact. In 2009 the Group of 20 Nations declared the end of banking secrecy. Since then, the amount of money in Switzerland-- “the heart of the offshore tax evasion industry,” Zucman called it -- has risen 18 percent.

Gabriel Zucman

Source: Gabriel Zucman

Zucman’s calculations are conservative because he can’t count assets like art, jewelry or real estate, but he’s still able to come up with big numbers. Two of them: Tax evasion by individuals costs governments $200 billion a year, and havens used by U.S. multinational companies cost $130 billion annually.

Inequality Debate

Zucman is one of several mini-Pikettys spreading the word on inequality. Piketty’s website at the Paris School of Economics lists more than a dozen students he advised who are now teaching at institutions ranging from the University of Chicago to the London School of Economics.

“Gabriel’s book is probably the best book that has ever been written on tax havens and what we can do about it,” Piketty said in an e-mail. “I think it complements my book very nicely and powerfully.”

Zucman, born, raised and educated in Paris, said Piketty encouraged him to expand his interest in taxes to look for clues into its role in inequality.

During his research, Zucman had a eureka moment. For years, economists have puzzled over a mystery in obscure economic data: financial liabilities around the world consistently outstrip the reported financial assets held by investors –- by trillions of dollars.

Sifting through central bank data from various countries, Zucman seemed to find the answer. Those trillions were missing because they were showing up as shares of mutual funds incorporated in tax havens, primarily in Luxembourg, Grand Cayman and Ireland. His theory: wealthy investors around the world have used the investments, often made through Swiss bank accounts, to hide their wealth.

Switzerland comes in for harsh criticism in Zucman’s book. The country is responsible for nearly a third of the globe’s total hidden financial wealth, he said. He estimates as much of 30 percent of the wealth owned by the richest in Africa and Latin America is held offshore. In Russia, it’s as much as 50 percent.

Global Register

What is to be done? Zucman said there needs to be a central global register of the owners of the world’s wealth, similar to various registries for real estate holdings. Such a database doesn’t have to be public, but it must be available to regulators. The government can no longer rely on “the goodwill of bankers” for sharing information, he said. For companies, taxable profits should be allocated between countries based on real factors like where the sales or employees are. He also suggests imposing tariffs or similar sanctions on tax havens that resist reform.

The need to stop the wave of tax avoidance and evasion goes beyond the revenue lost to the particular dodges, he said. “If a significant fraction of rich people can evade taxes and if the rest of the population feels taxes are not fairly enforced,” he said, “then the willingness to pay taxes will disappear.”

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