New Study: tax evasion by wealthy plutocrat tax cheats

Tea-Publicans are the lickspittle servants of the wealthy plutocrats, sometimes referred to as “the 1%” (or more accurately, the top .01%).  This is why Tea-Publicans are always pursuing tax cuts that redistribute what little wealth the “have nots” possess upwards to the “haves” at the top, for whom “having it all” is their ultimate dream.

But why should Americans give any tax cuts (actually tax expenditures for which government borrowing is required to cover the loss of tax revenue) to wealthy plutocrats when they are already cheating on their taxes by engaging in criminal tax evasion? Why reward them for criminal behavior?

A new study is reported in the Washington Post this morning. First, We now know who cheats on their taxes. (Hint: it’s not the poor or middle class.)

Social scientists find it hard to study many important questions because they don’t have good data: Tax evasion is one of those questions. For obvious reasons, tax cheats don’t have any desire to announce themselves in public. Nor is it easy to study tax evasion based on the people who get caught; they may not be representative. This means that the recent spate of leaks has been a gold mine for scholars interested in the causes and consequences of tax evasion. A new paper by Annette Alstadsaeter, Niels Johannesen and Gabriel Zucman uses these new data sources to come to a stark conclusion: Rich people are much more likely to cheat on their taxes than poor or middle class people.

New data allows for new conclusions to be drawn

Alstadsaeter, Johannesen and Zucman draw on three new sources to estimate tax cheating. First and most valuable is a set of data from HSBC Private Bank (Suisse), a Geneva based firm, that was leaked in 2007. This data is valuable because it provides clear evidence of who is or isn’t cheating. According to the authors, people who have a Swiss bank account and do not declare it are almost certainly tax cheats. The HSBC data set also plausibly represents a much larger problem, and it doesn’t have the same issues of “selection bias” that other sources have. The scholars also draw on other sources of data — the Mossack-Fonseca leak of shell corporations, a Swedish amnesty program for former cheaters and random audits of Danish taxpayers. None of these data sources is perfect by any reasonable definition, but if they all point in the same direction, one can argue reasonably that they probably are pointing to something real. This kind of data doesn’t capture many forms of tax fiddling — e.g. people who decline to report their tips or occasional informal cash payments as income. It does capture the kinds of larger scale tax evasion that are plausibly more damaging.

Rich people are far more likely to cheat on their taxes

In Alstadsaeter, Johannesen and Zucman’s description, the data is unambiguous. The richer you are, the more likely you are to cheat big time on your taxes. As they put it, “the probability to hide assets rises very sharply with wealth, including within the very top groups.” Zucman has previously done work estimating the size of the offshore structures through which rich people hide their income. Combining his old data with the new information, the authors estimate that the top 0.01 percent of the wealth distribution own about 50 percent of all the wealth that is hidden offshore, and that this 0.01 percent hides approximately 25 percent of its wealth from the tax collector. The authors argue that these are conservative estimates — the actual rate of tax evasion is probably substantially higher in developing countries where tax enforcement is poor.

This is likely driven by inequality and supply of tax evasion services

The pattern of the data suggests that tax evasion is heavily concentrated among very rich people. Why might this be so? The authors hypothesize that it is driven by a combination of inequality and supply of tax evasion services by specialized banks, firms of lawyers and so on. If inequality is relatively high, then a relatively small number of rich people is going to own the lion’s share of taxable assets. The combination of low numbers of people and a high level of assets makes them attractive customers for these services, since they will provide high profits with a low risk of detection. However, moving down-market will be unattractive for such services. There are many more possible customers, but these customers are less profitable individually, and more likely to be caught en masse. Thus, you might expect to see an outcome like that which seems to have happened in real life — banks like HSBC that enable high levels of tax evasion among extremely rich people, but few firms, if any, willing to provide less wealthy people the same services.

The second report on this study is The ultra-rich are hiding way more money offshore than anyone realized:

In 2007, an engineer extracted detailed records on the hidden wealth of more than 30,000 clients of HSBC Private Bank, the Swiss subsidiary of the British multinational banking giant, and secreted them to the French government. The data, which eventually became known as the “Swiss leaks,” ended up in the hands of other authorities and of journalists.

Now, that data, along with the Panama Papers — the records of a Panamanian law firm dealing heavily in offshore finance that were leaked to journalists last year — is providing academic researchers with a valuable look inside the opaque world of tax evasion and offshore holdings.

In a newly released paper, researchers in Scandinavia and the United States use the Swiss and Panamanian leaks to show that global tax evasion is likely much more prevalent than previously thought. Their estimates indicate that the top 0.01 percent of the wealth distribution own about half of all offshore assets and may be hiding roughly a quarter of their wealth offshore.

“Most of the tax evasion happens at the very, very top of the wealth distribution,” said Gabriel Zucman, one of the researchers.

Zucman has previously estimated that the equivalent of about 10 percent of global gross domestic product is hidden in tax havens. These countries, which often have laws that ensure the secrecy of offshore accounts, include Singapore, Hong Kong, Luxembourg, the Cayman Islands, the Bahamas, and, of course, Switzerland — which alone manages an estimated 40 percent of the world’s offshore wealth.

The researchers matched up individuals present in the leaks and in random tax audits with wealth records from Scandinavia. Those countries offer particularly detailed records on the wealth of their populations, allowing the researchers to figure out what the distribution of offshore accounts might look like amount different economic classes.

Their estimates show that the wealthiest people are getting away with paying far less than their far share. While about 3 percent of personal taxes are evaded in Scandinavia overall, households with more than $40 million in net wealth — or the top 0.01 percent of the wealth distribution — evade about 30 percent of their personal tax burden, they found. They caution that this figure might be much higher in other countries where the rule of law is weaker.

The chart below, from the paper, shows that, compared with all recorded wealth, the wealth hidden in HSBC’s Swiss accounts — or revealed by the kind of amnesty programs that allow people to declare earnings they have previously hidden offshore — tends to belong to those at the upper end of the wealth distribution.

Screen Shot 2017-06-01 at 7.16.54 AM

Tax evasion has been difficult for researchers to study because, as with all criminal behavior, people go to great lengths to keep their actions secret. The most common method for studying tax evasion is to look at random audits, but the researchers say these do not do adequately capture the extent of tax evasion at the top.

For one thing, the sample size of the ultrawealthy that are affected by random audits is quite small, making it hard to gather accurate data. For another, the superwealthy may have ways of evading taxes that are difficult for regulators to catch, like forming strings of shell companies around the world to disguise the real owner of valuable assets, like a property or a painting.

Previous researchers had theorized that tax evasion was likely much more common at the top of the wealth spectrum. Not only can the superwealthy afford expensive offshore services that help them hide their earnings, they are also less likely to have to disclose to the government in the first place.

Top earners are more likely to be self-employed, and thus have the burden of reporting their own income. In contrast, lower-income people typically earn wages, which in the United States are reported directly to the government by an employer in the form of W-2s. Among wage earners, rates of tax evasion are almost zero, Zucman says.

In addition to providing new insight into the nature of tax evasion, the researchers say their findings probably mean that economists have significantly underestimated inequality. If the top 0.01 percent have 30 percent more wealth than their tax returns indicate, that puts far more distance in the yawning wealth gap between the haves and have-nots.

“It increases measured inequality quite substantially,” said Zucman.

For Zucman, the findings imply that governments are missing out on a lot of revenue that is being hidden by the super wealthy. He says governments could recover more of these funds by cracking down on the kind of tax evasion services provided by the companies at the center of the Swiss and Panamanian leaks. To do so, countries would need to increase the penalties for facilitating tax evasion until what is now a very lucrative industry becomes too risky.

Despite the high profile leaks of the past few years, there hasn’t been much progress on this front, Zucman says. “If it remains profitable for the providers of offshore services to facilitate tax evasion, tax evasion will continue.”

These are the “tax reforms” that we need, but it is not part of what Tea-Publicans in Congress are proposing in their tax legislation. Because they are the lickspittle servants of the wealthy plutocrats, and never forget it.

3 responses to “New Study: tax evasion by wealthy plutocrat tax cheats

  1. John Huppenthal

    What intellectual drivel. Your .01% would amount to 30,000 people in the United States. These people are overwhelmingly liberal democrats.

    And, they don’t pay taxes at all and it is quite legal. They don’t have to cheat. All they have to do is be big bundlers for the Democratic party and load liberal democrats on their boards with stock options. Bezos, Buffett, Gates, Zuckerberg, Sergei and Larry the google founders, have all paid less than 4% of their lifetime earnings in taxes. Buffett has probably paid less than a tenth of a percent.

    Meanwhile Republicans creating jobs for poor people are paying 63% on the margin and assholes like you are trying to exhort people to raise that to 90%.

    This is the perpetual shell game. Scream about the “rich”- leave them untaxed and pile it on the small businessman.

  2. bruce.desertrat

    So long as Citizens United holds, meaningful tax reform (in the direction Steve mentions) is going to be essentially impossible.

    The 0.01% can drop billions of dollars into political campaigns and still only be spending a fraction of their wealth. Look at the current Administration. EVERY major push by both the Trump Administration and Congress is in the aid of a gargantuan transfer of wealth from the 99.99% to the 0.01%.

  3. What a fascinating study! It tells us pretty much what has always been suspected, but it is surprising the sheer size of the tax fraud going. Of course no one should be surprised, amassing the wealth is a key part of who these people are and they will do what they can to amass it quickly as possible. Plus, they feel the money is theirs and the government has no right to it. Given the desire to accumulate the money, the assets to facilitate hiding it, and the sheer volume of money to make it worthwhile, tax fraud is inevitable.

    I would like to see tax reform that eliminates that abaility to hide the money so easily. Stiffer penalties should be in place for those who who violate the law. However, in the zeal to find this hidden wealth, these people should still have their rights observed.

    Great article, AzBM!!