There are two stylized facts regarding the distribution of wealth and income First, the distribution of wealth tends to be much more unequal than the distribution of income. Second, the available data on income distribution tends to be more accurate than the data on wealth distribution.
This second feature is in large part due to the sources from which the different data is compiled. Wages, profits and rent are reported on official income tax returns. Wealth and financial assets, on the other hand, may be held in ‘offshore’ accounts in order to avoid taxation.
The recent leak of the so-called Panama Papers provides a peak into the the hidden wealth of nations. According to Boing Boing, in terms of sheer data size this constitutes the largest leak in history. The Economist provides a basic taxonomy of the leaked documents and comments:
The activities these anonymous firms are used for appear to range from the perfectly legitimate, to tax evasion, to the deeply dodgy, including the looting of public wealth. (…) Around 140 political figures, among them Russia’s president, Vladimir Putin, and his Chinese counterpart, Xi Jinping, are alleged to have links to the holders of the offshore accounts through family members or associates. Iceland’s prime minister is under pressure to resign: the files show that he transferred shares in an offshore company to his wife for a token sum. Several countries, including Sweden and Australia, have already opened investigations.
Since the publication of Piketty’s Capital In The 21st Century, the issue of offshore wealth started to receive some serious public attention. Gabriel Zucman, a collaborator of Piketty, has worked on this issue in particular and published a book, which inspired the title of this post.
Mr. Zucman estimates — conservatively, in his view — that $7.6 trillion — 8 percent of the world’s personal financial wealth — is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law. According to Mr. Zucman’s calculations, 20 percent of all corporate profits in the United States are shifted offshore, and tax avoidance deprives the government of a third of corporate tax revenues. (NYT)
In the short run, the Panama Papers are likely to lead to a number of proverbial lambs being slaughtered on the altar of public opinion. Whether there is going to be any effective national legislation and an international attempt to restrict offshore financial holdings remains to be seen. In any case, this issue is going to be with us for some time.
For more, the Planet Money podcast has a short primer on the Panama Papers as well as a great episode in which the team sets up an offshore company in a tax haven.