That’s what Gerald Auten and David Splinter argue in a paper from last year.
… new estimates of top income shares using two consistent measures of income. Our measure of consistent market income includes full corporate profits and adjusts for changes from TRA86, including changes to the tax base and increased filing by dependent filers. In addition, we include employer paid payroll taxes and health insurance and adjust for falling marriage rates. The effect of these adjustments on estimated top income shares are dramatic. Using a consistent measure of market income shows that the increase in income shares of the top one percent since 1979 is about half of the PS unadjusted estimate. The increase since 1960 is about one-quarter of the unadjusted estimate. Moreover, our measure of broad income that includes government transfers reduces the top one percent share increase to one-tenth of the unadjusted estimate.
But in an NBER working paper, Annette Alstadsaeter, Niels Johannesen, and Gabriel Zucman argue that tax evasion and offshore wealth holdings work in the opposite direction:
Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially in Europe, even in countries that do not use tax havens extensively. It has considerable effects in Russia, where the vast majority of wealth at the top is held offshore. These results highlight the importance of looking beyond tax and survey data to study wealth accumulation among the very rich in a globalized world.
In the FT, Vanessa Houlder reports about the tax evasion business. The new regulatory environment has led to portfolio adjustments and new types of behavior, and it exposes vast differences in enforcement across countries:
- Diamonds in vaults rather than financial assets.
- Trusts in South Dakota rather than anonymous bank accounts.
- Moving to a different country rather than just shifting assets.
- FATCA versus the Common Reporting Standard.
The article also links to an article by Kara Scannell and Vanessa Houlder earlier in the year entitled “US tax havens: The new Switzerland.” That article includes the following quotes:
I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.
In a world where it’s very hard to hide ownership or hide assets sometimes the easiest place [is one] no one would normally think of, which is the US.
The Economist reports (somewhat belated) about a blacklist put together by the European Union. The EU list aggregates lists of member states which applied different criteria and in parts were outdated. The Economist writes:
As pressure has mounted, however, Brussels has backtracked. At a meeting with the 30 ostracised states last month, it agreed to make clearer reference to efforts that some of them have made to adhere to new tax-transparency standards—though it is not clear if it will ditch the “non-co-operative” label.
Matthew Klein discusses corporate and personal income tax evasion and avoidance in the FT (part 1, part 2), with reference to a JEP article by Gabriel Zucman. Klein makes several points:
- Profit taxes were introduced as complements to income taxes, in order to make it more difficult to evade taxes by routing profits through fabricated corporate structures rather than distributing them. To avoid double taxation, capital gains and dividends typically are taxed at lower rates than labor income.
- Whether corporate taxation should be coordinated internationally is not a new question. The League of Nations already debated it. The issue regained importance as international trade and cross-border profit flows rose.
- Today, a third of US corporate profits are generated outside of the US. Of those, more than half are generated in Ireland, Luxembourg, the Netherlands, Singapore, Switzerland and the Carribean. Both shares have increased over recent decades (see the figure below which is taken from Zucman’s article). This might have contributed towards lowering the effective corporate tax rate of US corporations in the US.
- If the objective is to (i) avoid double taxation and (ii) render cross-border profit shifting irrelevant, an easy way forward could be to credit a corporation’s taxes paid worldwide against the personal income taxes owed by the corporations shareholders. This would imply that higher corporate taxes abroad could lead to lower domestic income tax revenue, a difficult political sell. It would also imply that unrealised capital gains may go untaxed.
- Based on discrepancies between national balance of payments statistics, Zucman estimates that 8% of global household financial wealth is not reported to tax authorities (see the table below which is taken from Zucman’s article).
- He proposes to impose high tariffs on exports originating from “tax havens” to force these countries to exchange information about bank accounts and, in the medium term, to create an “international financial registry.”