Gaps in cross-border tax rules have allowed a very small number of the world’s super-rich elite to hide an estimated $21 trillion in offshore bank accounts. That’s according to a new study, “The Price of Offshore Revisited.”
The astounding amount of hidden money cited in the report is more than the gross domestic products of the American and Japanese economies combined. The research was commissioned by the Tax Justice Network -- an independent organization started by the British Parliament to promote reform. The report’s author, James Henry, is the former chief economist for the global management consultant firm McKinsey & Company. RFE/RL's Bruce Jacobs spoke with him by phone from New York.
RFE/RL: Your report estimates there is $21 trillion hidden in offshore accounts. How confident are you in its accuracy?
James Henry: Well, it’s like estimating the size of a black hole. There are no statistics directly published on the size of this sector, but I am pretty confident that we have been able to narrow down the range here to a fairly accurate estimate of the range and that is $21 trillion to $32 trillion as of the year-end of 2010. And that is global financial wealth of individuals that is offshore, cross-border investment.
RFE/RL: How much of this would you estimate is legal tax avoidance versus illegal tax evasion?
Henry: Well, we think that only about 10 percent of this stuff pays any taxes. You know [former British cabinet minister] Denis Healey once said the difference between evasion and avoidance is the width of a prison wall. If you are a wealthy Mexican and you have your money in a U.S. bank, it is basically up to you whether you tell the Mexican authorities about it. And our estimate is that most of the investors involved here are not running back to their tax authorities and saying, ‘Hey, I got all this income offshore.’ But we have allowed for maybe 10 percent of it being reported.
RFE/RL: Can you speak about the situation in Russia?
Henry: Russia has been a major source of capital outflow. You know, you don’t have to rely on our numbers to do that. You just have to turn up in London and see all the "non-doms" [nondomiciled individuals] who are registered there not paying any taxes to the U.K. and we don’t know what they are paying in Russia, but it would be interesting to find out.
There is enormous capital outflow from Russia. Some of it has been reinvested in Russia by way of offshore havens. So it is not completely clear how much of this is staying outside of Russia. It depends on what is going on in Russia with the economy. But we think a substantial fraction of it has been invested abroad and has remained there. The same thing is true of China, by the way. That is our leading country in terms of total outflows in the wealth stock. But we think a lot of that has been reinvested in China, but it is reinvested by way of haven companies.
The good news from Russia’s standpoint is that they do have this offshore wealth stock that they’ve accumulated. They need to decide what to do about it. They could collaborate with other countries in trying to tax it, maybe having a minimal tax like 0.5 percent of these assets that are in banks per year. That would be a tax on anonymous capital.
RFE/RL: What are the practical effects of having so much money hidden in offshore accounts?
Henry: First of all, there is a big revenue loss. I think if this wealth were, hypothetically, back home and being taxed, it might raise another $300 billion for the tax authorities of the 139 source countries we are talking about. We would also see a big impact on inequality statistics because this means that we've radically understated wealth inequality measures using the standard statistics for income inequality and other estimates for wealth inequality. These numbers are left out of that and much of this wealth, probably about 90 percent of it, accrues to the top 0.1 percent of the wealth distribution. So we are talking about 10 million people owning about one-third of the world’s financial wealth offshore, and that is a big number.
RFE/RL: How bad is this for the world economy?
Henry: Essentially, wealthy investors are being very, very conservative with this [hidden] money, we believe. And from that standpoint, there is an opportunity cost to the countries because it could be yielding a higher social rate of return if it were reinvested in the home country. But you have wealthy people who are scared and they want to have a nest egg, and they have the private banking industry helping them avoid taxes. All this adds up to this kind of irrational, global result which is that you have $21 trillion invested in [certificates of deposit] and stocks that haven’t been performing very well.
RFE/RL: What can governments with leverage like the United States and those in Europe do to remedy this situation?
Henry: Well, one of the things we've proposed and I think the [U.S.] Treasury [Department] is now issuing regulations on -- although this is tremendously controversial -- is the so-called [Foreign Account Tax Compliance Act] rules requiring foreign institutions that have U.S. investors to report to the Treasury [Department] what their deposits and their investments are earning if they want to do business in the United States. This could have a ripple effect because I could imagine the Mexican banks demanding the same thing from American authorities -- the Mexican tax authorities demanding the same kind of information from [the United States]. And so it will be interesting to see to what extent we are willing to be consistent here, because traditionally we've gotten very angry about the Swiss bankers who come to New York and try to get wealthy Americans to invest their money in Switzerland. We've been much less excited, as I said before, about helping the Mexican [authorities] tax their wealthy investors when they come to New York.
RFE/RL: Do you think there is the political will in influential countries like the United States to change the situation?
Henry: It is a situation that presents certain dilemmas for the United States, but I do think that, on the whole, as Winston Churchill once said: "The Americans will eventually do the right thing after they've exhausted all other possibilities." So in this area, I think the [United States] is the one possible jurisdiction I think will show real leadership in this arena.
RFE/RL: Can you give us an idea of who these wealthy investors are?
Henry: We estimate that there may be on the order of 50 to 100 multibillionaires, that is, people with $10 billion or more, in the world. There probably are something on the order of 2,500 to 3,000 billionaires in terms of total financial wealth. There are no more than 10 million folks with investments greater than $1 million on the planet. So all that means that when you add it up, about one-third of the financial assets of the world are owned by this 0.1 percent, and the top 1 percent probably own another one-third. So you are talking about 60 percent of the world's financial assets being owned by about 1 percent of the [world] population.
The astounding amount of hidden money cited in the report is more than the gross domestic products of the American and Japanese economies combined. The research was commissioned by the Tax Justice Network -- an independent organization started by the British Parliament to promote reform. The report’s author, James Henry, is the former chief economist for the global management consultant firm McKinsey & Company. RFE/RL's Bruce Jacobs spoke with him by phone from New York.
RFE/RL: Your report estimates there is $21 trillion hidden in offshore accounts. How confident are you in its accuracy?
James Henry: Well, it’s like estimating the size of a black hole. There are no statistics directly published on the size of this sector, but I am pretty confident that we have been able to narrow down the range here to a fairly accurate estimate of the range and that is $21 trillion to $32 trillion as of the year-end of 2010. And that is global financial wealth of individuals that is offshore, cross-border investment.
RFE/RL: How much of this would you estimate is legal tax avoidance versus illegal tax evasion?
Henry: Well, we think that only about 10 percent of this stuff pays any taxes. You know [former British cabinet minister] Denis Healey once said the difference between evasion and avoidance is the width of a prison wall. If you are a wealthy Mexican and you have your money in a U.S. bank, it is basically up to you whether you tell the Mexican authorities about it. And our estimate is that most of the investors involved here are not running back to their tax authorities and saying, ‘Hey, I got all this income offshore.’ But we have allowed for maybe 10 percent of it being reported.
RFE/RL: Can you speak about the situation in Russia?
Henry: Russia has been a major source of capital outflow. You know, you don’t have to rely on our numbers to do that. You just have to turn up in London and see all the "non-doms" [nondomiciled individuals] who are registered there not paying any taxes to the U.K. and we don’t know what they are paying in Russia, but it would be interesting to find out.
There is enormous capital outflow from Russia. Some of it has been reinvested in Russia by way of offshore havens. So it is not completely clear how much of this is staying outside of Russia. It depends on what is going on in Russia with the economy. But we think a substantial fraction of it has been invested abroad and has remained there. The same thing is true of China, by the way. That is our leading country in terms of total outflows in the wealth stock. But we think a lot of that has been reinvested in China, but it is reinvested by way of haven companies.
The good news from Russia’s standpoint is that they do have this offshore wealth stock that they’ve accumulated. They need to decide what to do about it. They could collaborate with other countries in trying to tax it, maybe having a minimal tax like 0.5 percent of these assets that are in banks per year. That would be a tax on anonymous capital.
RFE/RL: What are the practical effects of having so much money hidden in offshore accounts?
Henry: First of all, there is a big revenue loss. I think if this wealth were, hypothetically, back home and being taxed, it might raise another $300 billion for the tax authorities of the 139 source countries we are talking about. We would also see a big impact on inequality statistics because this means that we've radically understated wealth inequality measures using the standard statistics for income inequality and other estimates for wealth inequality. These numbers are left out of that and much of this wealth, probably about 90 percent of it, accrues to the top 0.1 percent of the wealth distribution. So we are talking about 10 million people owning about one-third of the world’s financial wealth offshore, and that is a big number.
RFE/RL: How bad is this for the world economy?
Henry: Essentially, wealthy investors are being very, very conservative with this [hidden] money, we believe. And from that standpoint, there is an opportunity cost to the countries because it could be yielding a higher social rate of return if it were reinvested in the home country. But you have wealthy people who are scared and they want to have a nest egg, and they have the private banking industry helping them avoid taxes. All this adds up to this kind of irrational, global result which is that you have $21 trillion invested in [certificates of deposit] and stocks that haven’t been performing very well.
RFE/RL: What can governments with leverage like the United States and those in Europe do to remedy this situation?
Henry: Well, one of the things we've proposed and I think the [U.S.] Treasury [Department] is now issuing regulations on -- although this is tremendously controversial -- is the so-called [Foreign Account Tax Compliance Act] rules requiring foreign institutions that have U.S. investors to report to the Treasury [Department] what their deposits and their investments are earning if they want to do business in the United States. This could have a ripple effect because I could imagine the Mexican banks demanding the same thing from American authorities -- the Mexican tax authorities demanding the same kind of information from [the United States]. And so it will be interesting to see to what extent we are willing to be consistent here, because traditionally we've gotten very angry about the Swiss bankers who come to New York and try to get wealthy Americans to invest their money in Switzerland. We've been much less excited, as I said before, about helping the Mexican [authorities] tax their wealthy investors when they come to New York.
RFE/RL: Do you think there is the political will in influential countries like the United States to change the situation?
Henry: It is a situation that presents certain dilemmas for the United States, but I do think that, on the whole, as Winston Churchill once said: "The Americans will eventually do the right thing after they've exhausted all other possibilities." So in this area, I think the [United States] is the one possible jurisdiction I think will show real leadership in this arena.
RFE/RL: Can you give us an idea of who these wealthy investors are?
Henry: We estimate that there may be on the order of 50 to 100 multibillionaires, that is, people with $10 billion or more, in the world. There probably are something on the order of 2,500 to 3,000 billionaires in terms of total financial wealth. There are no more than 10 million folks with investments greater than $1 million on the planet. So all that means that when you add it up, about one-third of the financial assets of the world are owned by this 0.1 percent, and the top 1 percent probably own another one-third. So you are talking about 60 percent of the world's financial assets being owned by about 1 percent of the [world] population.