Tax records are absolutely integral to the study of economic inequality, providing comprehensive information on income – and in some countries the wealth – of taxpayers in a given jurisdiction. A good chunk of this information comes directly from employers and banks, so it tends to be very accurate, and because there are tax records that date back about 100 years or so, they provide invaluable insight into historical trends pertaining to inequalities. Much of this information is publically available and has proved to be powerfully influential in shaping the debate on tax reform and economic policy more broadly.
But this important field of research grapples with a challenge. The major problem with calculating statistics on inequality in the 21st century is that they only include the income and wealth that the taxman actually sees. In other words, it doesn’t capture the tax that has been evaded. New research suggests that when accounting for what isn’t seen – or the wealth stashed away in offshore accounts away from the eyes of the government – the inequality gap is actually much wider. The rich evade taxes at much higher rates than the poor, meaning that tax records likely underestimate inequality.
Researchers affiliated with the Inequality Project at the Ford Foundation have made an attempt to systematically measure tax evasion and develop better metrics of actual global economic inequality, specifically digging into tax evasion in Denmark, Norway, and Sweden. The researchers made use of the HSBC files, a trove of documents leaked from the Swiss subsidiary of HSBC, which was formed by a major player in the offshore wealth management sector. The study also used data obtained from the Panama Papers as well as random audits of taxpayers in three aforementioned countries.
So, what did they find? The rich do indeed evade tax more frequently than their poorer counterparts, meaning that global economic inequality is likely underestimated, perhaps even dramatically so.
“The higher one moves up the wealth distribution, the higher the probability of hiding assets. Scandinavian households in the top 0.01% of the wealth pyramid – the ultra-rich, who own more than $40m in net wealth each – are 250 times more likely than average to hide assets,” inequality researchers Annette Alstadsæter, Niels Johannesen and Gabriel Zucman wrote last month in the Guardian. “At the very top of the pyramid, it is much greater than previously estimated. In Norway, where the available wealth data is particularly detailed, the super-wealthy appear to be 30% wealthier than previously thought, when all the wealth hidden in tax havens is taken into account. The share of wealth owned by the top 0.1% increases from 8% to 10%. Since Scandinavians generally pay their taxes and hide little wealth in total, our results are likely to be even stronger in Great Britain and elsewhere.”
The bottom line? The research strongly suggests that more a precise measurement of tax evasion would raise inequality levels globally. Luckily, however, the researchers do point out that there is a solution to this problem: dis-incentivize major financial institutions to help the wealthy from hiding their wealth offshore and away from the taxman. In the US, while a number of financial institutions have ended up pleading guilty to criminal conspiracy to defraud the IRS for helping clients siphon money offshore, these institutions were still able to keep their banking licenses. Stronger consequences would send a strong message to the industry, making it less likely they would facilitate tax evasion.
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