The Un-taxed $21 Trillion

(This article is drawn from information at, compiled and edited by Barry Weisleder.)


     The world’s richest people are hiding $21 Trillion in offshore tax havens worldwide. Actually, it may be as much as $32 trillion.
     While governments slash spending and lay off workers, citing a need for “austerity” due to the recession/depression, the ultra-rich—fewer than 10 million of the seven billion people on Earth—have stashed away an amount equal to the entire US and Japanese economies – beyond the reach of the tax man. This is according to a new report by the Tax Justice Network, an independent organisation of economists, accountants, lawyers and other professionals launched in the British Houses of Parliament in March 2003. The lost tax revenue from offshore tax shelters, the report notes, “is large enough to make a significant difference to all of our conventional measures of inequality. Since most of the missing financial wealth belongs to a tiny elite, the impact is staggering.”
     James S. Henry was former Chief Economist for McKinsey & Co. He is the author of the book The Blood Bankers as well as articles for publications including The Nation and The New York Times.Henry obtained information from the Bank for International Settlements, the International Monetary Fund, the World Bank, the United Nations, central banks, and private sector analysts and found the outlines of the giant pool of cash floating in that nebulous space known as “offshore”. (Keep in mind this refers to money only—the report ommits real estate, yachts, race horses, art, and other forms of wealth the super-rich are hiding, untaxed, in offshore tax havens.) Henry refers to it as a “black hole” in the world economy and notes that, “despite taking pains to err on the conservative side, the results are astonishing.”
Meet The Top .001%
     “By our estimates, at least a third of all private financial wealth, and nearly half of all offshore wealth, is now owned by world’s richest 91,000 people– just 0.001% of the world’s population,” the report says. Those top 91,000 have about $9.8 trillion of the total estimated in this report—and fewer than ten million people account for the whole mountain of cash.
     Who are those people? The report mentions “30-year-old Chinese real estate speculators and Silicon Valley software tycoons,” and those whose wealth comes from oil, and from the drug trade.
     Drug lords, understandably, need to hide their ill-gotten gains, but plenty of the other ultra-rich are simply avoiding paying taxes by constructing complicated trusts and other investments just to shave a few more points off the bill they owe in their home country.
Where’s the Cash?
     “Offshore,” according to Henry, isn’t a physical location anymore—though plenty of places like Singapore and Switzerland, he notes, still specialize in providing “secure, low-tax physical residences” to the world’s rich.
     But today, “offshore” wealth is virtual—Henry describes “nominal, hyper-portable, multi-jurisdictional, often quite temporary locations of networks of legal and quasi-legal entities and arrangements.” A company may be located in one jurisdiction, but it is owned by a trust located elsewhere, and administered by trustees in a third location. “Ultimately, then, the term ‘offshore’ refers to a set of capabilities,” rather than to a place or multiple places.
     It’s also important, the report notes, to distinguish between the “intermediary havens”–the places most people think of when they think of tax havens, like Mitt Romney’s Cayman Islands, Bermuda, or Switzerland—and the “destination havens,” which include the US, the UK, and even Germany. Those destinations are desirable because they provide “relatively efficient, regulated securities markets, banks backstopped by large populations of taxpayers, and insurance companies; well-developed legal codes, competent attorneys, independent judiciaries, and the rule of law.”
     Thus, the people who avoid paying taxes by moving their money around are taking advantage of taxpayer-funded services to do so.
Big Bailed-Out Banks Run This Business
     Just who is facilitating this process? Goldman Sachs, UBS, and Credit Suisse are the top three, with Bank of America, Wells Fargo, and JP Morgan Chase all in the top ten. “We can now add this to their list of distinctions: they are key players in many havens around the globe, and key enablers of the global tax injustice system,” the report notes.
     By the end of 2010, the top 50 private banks alone were managing some $12.1 trillion in “cross-border invested” assets for their clients. That’s more than twice what it was in 2005, representing an average annual growth rate of over 16 percent.
     “From banks to accountancy firms and corporate lawyers, some of the biggest businesses in the world are part of the fabric of global tax avoidance,” writes financial researcher (and former Goldman Sachs trader) Lydia Prieg in The Guardian. “These companies are not moral entities that we can shame into paying their fair share; they exist to maximize their profits and those of their clients.”
     “Until the late 2000s,” Henry notes, “the conventional wisdom among flight capitalists was ‘What could be safer than ‘too big to fail’ US, Swiss and UK banks?’” Without the bailouts that followed the 2008 financial crisis, he adds, many of the banks that are stashing cash for the ultra-rich wouldn’t exist anymore. The assumption of government backing is the very reason why those uber-rich are banking with the big guys from the start.
Inequality Is Worse Than We Thought
     Inequality has already been skyrocketing around the world, by all the conventional measures. If the top 1 percent in the United States own not just 35.6 percent of the wealth, for instance, but a much larger portion that’s hidden, what does that mean for the rest of the population? An incredibly shrinking share of the wealth.
     In any case, as the report argues, “inequality is a political choice”. (Or, it is the consequence of the capitalist system of producation. – BW) The amount of inequality is what the rich can get away with, and what society will tolerate. Many North Americans are grossly misinformed about the present level of inequality. The report shows that even the ‘experts’ massively underestimated the problem.
Indebted” Countries Aren’t in Debt After All
     Henry’s report breaks out a subgroup of 139 countries, mostly lower or middle-income ones, for further study, noting that by most calculations, those 139 countries had a combined debt of over $4 trillion at the end of 2010. But if you take into account all that money being held offshore, those countries actually had negative $10 trillion in debt—or as Henry writes, “[O]nce we take these hidden offshore assets and the earnings they produce into account, many erstwhile ‘debtor’ countries are in fact revealed to be wealthy. But the problem is, their wealth is now offshore, in the hands of their own elites and their private bankers.”
     Henry further notes that the developing world as a whole turns out to be a creditor of the developed world, rather than a borrower. “That means this is really a tax justice problem, not simply a ‘debt’ problem.”
     But those debts, as we’ve noted, fall on the shoulders of the ordinary working people of those countries, those who can’t take advantage of sophisticated tax shelters.
How Much are We Losing?
     If the unreported $21 trillion earned a rate of return of 3 percent, and that income was taxed at 30 percent, that alone would generate income tax revenues of around $190 billion. If the total amount of money in tax havens is closer to Henry’s higher estimate, $32 trillion, it’d bring in closer to $280 billion—which is about twice the amount OECD countries spend on development assistance. And that’s just income taxes. Capital gains taxes, inheritance taxes, and other taxes would bring in even more.
A Matter of Strategy
     The problem with seeking a tax solution to systemic inequality is clear. The super-rich control governments, armies and states – which are dedicated to preserving their power and wealth. They have shown great capacity and a ruthless will to crush any serious challenge to their accumulated privileges. Even the most radical tax reforms can be reversed… by electoral fraud, a Capital strike, a military coup, etc. So, if fighters for social justice are in for a penny, we may as well be in for a pound. It’s the system that must be replaced. Thus, if lasting social justice and genuine economic democracy is your goal, better prepare to expropriate the bourgeoisie and build the institutions of workers’ power, from the bottom-up.