Globalization, Taxes& Inequality

Gabriel Zucman(UC Berkeley and EU Tax Observatory)

September 27th, 2021

Introduction

Globalization has created new ways to avoid taxes:

. Multinational firms shift profits to low-tax places

. Countries compete by cutting their tax rates

. Wealthy households can move assets to tax havens

How does this tax avoidance redistribute income betweennations and between social groups?

What policies and institutions can help address it?

This talk

This talk is based on work with 15+ co-authors overseveral years, and draws more particularly on:

. “The Missing Profits of Nations” (w. Tørsløv, Wier)

. “Tax Evasion & Inequality” (w. Alstadsæter,Johannesen)

. First reports and ongoing work of EU Tax Observatory

Two goals of this research agenda:

. A macro-distributional analysis of globalization

. Re-thinking the different possible institutional pathsfor sustainable global economic integration

The Missing Profits of Nations

How much profits move across countries because ofdifferences in corporate tax rates?

. Firms move capital to low-tax countries

. Firms shift paper profits to tax havens

If there was a perfect international tax coordination:

. Which countries would gain/lose profits?

. How? Relocation of capital, or reduced profit shifting?

How we estimate the amount of profitsshifted to tax havens

We compute capital shares α in foreign vs. localfirms across the world. Striking global pattern:

. Foreign firms have lower α than local firms...

. ... Except in tax havens: hugely higher α

Benchmark estimate: set profitability of foreign firms inhavens equal to profitability of local firms in havens

. Transparent

. Robust

Main results

Close to 40% of multinational profits (≈ $900bn in2018) shifted to havens

. Main winners: Ireland, Luxembourg, Singapore, etc.(impose low rates but on big base)

. Main losers: high-tax EU countries

. Profit shifting swamps tax-driven tangible capitalmobility (different welfare implications)

. Rise of capital share is higher than in official data →provide corrected estimates of α, GDP, trade

In tax havens, foreign firms are muchmore profitable than local firms

1675%

0%

200%

400%

600%

800%

Puerto

Rico

Irelan

d

Luxem

bourg

Switz

erlan

d

Singa

pore

Hong K

ong

Netherl

ands

Belgium

United

State

s

Austra

lia

United

King

dom

Spain

Japan

France

German

y Ita

ly

Pre-tax corporate profits (% of compensation of employees)

Foreign firms

Local firms

In tax havens, foreign firms are muchmore profitable than local firms

Belgium

Ireland

Switzerland

Luxembourg

Netherlands

Andorra

Anguilla

Antigua and Barbuda

Aruba

Bahrain

Belize

Bermuda

Bonaire

Curacao

Cyprus

Jersey

Grenada

GuernseyGibraltar

Hong Kong

Isle of man

Lebanon

Macau

Malta

Monaco

Sint Maarten

Seychelles

Singapore

St. Kitts and Nevis

St. Lucia

St. Vincent and the Grenadines

Turks and Caicos

Panama

Puerto Rico

-400%

100%

600%

1100%

1600%

2100%

-5% 0% 5% 10% 15% 20% 25% 30% 35%

Prof

it-to

-wag

e ra

tio in

fore

ign

firm

s min

us in

loca

l firm

s

Effective corporate income tax rate

Who loses the most profit? The EU.

0%

5%

10%

15%

20%

25%

30%

35%

40%

EU US Developing countries Rest of OECD

% o

f to

tal p

rofit

s sh

ifted

to ta

x ha

vens

Where do the shifted profits come from?

Who loses most? The EU.Who shifts most? US multinationals.

0%

10%

20%

30%

40%

50%

EU US Developing countries Rest of OECD

% o

f to

tal p

rofit

s sh

ifted

to ta

x ha

vens

Allocating the profits shifted to tax havens

Where the shifted profits come from

To whom the shifted profits accrue

The redistributive effects of profit shifting

Redistribution across income groups:

. Rise of global after-tax profits → rising income forshareholders

. Equity ownership tends to be highly concentrated

. Even in countries with broad-based pension funds

The concentration of corporate equityownership: the case of the United States

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

2017

2020

Figure 2: Share of pre-tax income earned vs. share of equity wealth owned by the top 1% pre-tax income earners

Equity wealth

Pre-tax income

The redistributive effects of profit shifting

International redistribution of tax revenues:

. Absent international coordination, revenue-maximizingcorporate rate is low for small countries: 0 < τ ∗ < 5%

. Havens with τ ≈ τ ∗ generate large tax revenue at theexpense of other countries, and to the benefit ofglobal shareholders

. Can explain race-to-the-bottom in corporate tax ratesand rise of the supply of tax avoidance schemes

Many havens collect a lot of taxrevenue...

0%

1%

2%

3%

4%

5%

6%

7%

8%

Malt

a

Luxem

bourg

Hong K

ong

Cypru

s

Japan

Austra

lia

Irelan

d

Switz

erlan

d

Canad

a

Belgium

Korea

Singa

pore

Mex

ico

United

King

dom

Netherl

ands

France

Puerto

Rico

Spain

German

y

United

State

s Ita

ly

Polan

d

Corporate income tax revenue (% of national income)

Average among non-havens: 3.5%

... By applying low rates to the large taxbase they attract

0%

20%

40%

60%

80%

100%

Malt

a

Puerto

Rico

Irelan

d

Luxem

bourg

Cypru

s

Hong K

ong

Singa

pore

Netherl

ands

Switz

erlan

d

Corporate tax revenue collected & tax rate on shifted profits

Revenue collected on shifted profits, % of total revenue

Tax rate on shifted profits

The limits of the development modelpredicated on low corporate taxes

. Offering low effective rate works as long as othercountries accept tax competition

. But this can easily change: cf. current internationalnegotiations on 15% minimum tax

. Even without a global agreement, main headquartercountries could collect the tax deficit of their ownmultinationals...

. ... Making it pointless for firms to book profits in taxhavens

Tax Evasion in a Globalized World:Evidence from Leaks

Tax Evasion and Inequality

Anecdotal evidence that wealthy conceal assets abroad

. How important is this form of tax evasion?

. How concentrated is it?

. How does it change what we know about inequality?

. How effective are recent policy efforts (automaticexchange of bank information)?

Some evidence from Scandinavia

Leaks from HSBC Switzerland and MossackFonseca (“Panama Papers”)

. Leaks random & from big offshore wealth managers

. Match to tax records in Norway, Sweden, Denmark(ongoing work in US)

. Combine with macro stats on wealth hidden in havens

Two findings:

. Offshore evasion highly concentrated

. At the top, larger than evasion detected in randomaudits

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 that the useof tax havens rises sharply with 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)

Hidden wealth is highly 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

Factoring in offshore wealth is importantto measure inequality at the top

0%

2%

4%

6%

8%

10%

12%

Spain UK Scandinavia France USA Russia

% o

f tot

al h

ouse

hold

wea

lth

The top 0.01% wealth share and its composition

Offshore wealth

All wealth excluding offshore