Book Review: The Hidden Wealth of Nations: The Scourge of Tax Havens

Prepared by Rashi Chandok

We are all aware of tax havens and the problems they pose to the global economy but if you

are interested in finding the solutions to this phenomenon, then give this book by Gabriel

Zucman a read. A short and informative book, it contains 3 things - a brief history of tax

havens, the impact of financial opacity in today’s world economy, and a realistic course of

action for change.

Origin

The industry of tax evasion was formed after world war when public debt exploded and the states vowed to compensate those who had suffered during the war and to pay for the retirement of veterans by increasing the tax rates.

The myth maintained by Swiss bankers that their banking secrecy laws have a humanitarian aim and admirable origin i.e. to help the Jews fleeing financial ruin protect their savings, has been debunked. “Swiss banking secrecy laws followed the first massive influx of wealth and not the reverse.” This book helps to establish the fact that even today this propaganda is being used to show that majority of customers are fleeing the instability and oppression of their home country but more than half of the wealth managed belongs to EU citizens and the EU cannot from any angle be considered a dictatorship.

Adverse impacts of tax havens

1) Law-abiding citizens are forced to pay higher taxes

2) Multinationals use tax avoidance rather than outright fraud but equity ownership is very concentrated so, only the wealthiest people get benefitted from these maneuvers (companies use transfer pricing and accounts manipulation to shift profits from a country which has disadvantageous effects on the common man)

3) They don’t benefit the country because people with accounts in Swiss banks don’t invest in Switzerland but just use these banks for tax evasion

“Most money managers still work in New York, Paris, or London - close to their clientele - but the funds are subjected to the laws of the tax haven in which they are domiciled. What is the benefit of this maneuver? It enables - completely legally - the avoidance of various taxes created to penalize defrauders.”

Solutions

1) Global Financial Register/Worldwide Register of Financial Wealth -

a) It already exists in some countries but is not truly global right now since it is private, not public (transfer ownership of data to public).

b) Automatic exchange of information between banks of all tax havens and foreign tax authorities should be implemented (will be a huge blow to financial secrecy).

c) Identification of beneficial owners should be made mandatory.

2) Levy sanctions -

a) They should be proportional to the cost that tax havens impose on other countries (asking politely allows the tax havens to prosper)

b) Countries can possibly impose trade tariffs (needs collective international pressure rather than by a few countries to be effective)

“Without access to foreign markets, tax havens are condemned to die”

3) Tax on MNCs -

a) It should be on their consolidated worldwide profit rather than country by country profits because accounts are maneuvered by accountants

b) The location of profits should not be manipulated by using measures like “amount of sales made” as a profit declaration criteria because companies can’t change that

4) A tax on Capital -

a) Each country could preserve its fiscal sovereignty (can return tax collected later on or impose progressive rate, as per wish)

b) It can reduce the worldwide use of shell companies, etc since the tax would be reimbursable after the wealth is declared on an individual basis

c) It will allow countries to tax wealth without fear of evasion (if it is globally imposed)

“The supreme irony is that a policy of on-demand exchange can thus function only by exploiting information obtained on the edge of legality (through stolen files or undeclared account information).”

Other Insights

1) Treaties/agreements are not helpful because banks/countries find loopholes

2) Competition of new tax havens is a facade because a large number of banks in these tax havens are branches of Swiss establishments

3) Numbered accounts have been forbidden by anti-money-laundering legislation but have been replaced by trusts, foundations, and shell companies “on bank statements the “account 12345” has become that of “company ABCDE”. In all cases, the true owner remains undetectable.”

4) Recent policy changes are making it difficult for moderately wealthy individuals to use offshore banks to dodge taxes but they don’t have any impact on ultra-rich people

5) Tax havens are not used to let money sleep in a savings account that earns little or no interest but is used to make the same investments in financial securities that people do from banks in London, New York, etc.

6) G20 initially decided that tax havens should sign at least 12 treaties to be compliant and to be removed from the blacklist of uncooperative states but this was a low threshold (without any reason for the low number) which created a lot of holes in the network of treaties since people could move money to a tax haven without the treaty in place

7) No means to verify that offshore bankers are respecting international regulations so, making regulations by trusting bankers is not a good policy

8) The world financial register will not create privacy issues since property records are public in some countries and there has been little misuse of that information

9) Securities deposited by customers have never been included in the bank’s balance sheets because they don’t belong to the banks and so, are hidden from the world

10) A partial fight against tax havens is actually counterproductive because it increases the incentive of the remaining havens not to cooperate

11) Tax havens can be forced to cooperate if threatened with large-enough penalties

12) Whistleblowing is less likely to occur in small organizations than in big firms so, reliance on whistleblowers to fight against tax havens is not an effective solution

“It is well known that most of the high-denomination notes belong either to defrauders, or all sorts of criminals”

In conclusion, this is a very solution-oriented book on the issue of tax havens. With ample examples and relatable explanations, the book makes it very easy for the layman to grasp the issue at heart and understand the probable solutions which can improve this situation. I would recommend anyone with an interest in this topic to pick up this book for a well-informed read.