The Hidden Wealth of Nations

by Gabriel Zucman

  A Global Financial Register

  Now that we have analyzed the first element in a plan of action—sanctions against uncooperative territories—let’s look at the second, the creation of tools for verification. When tax havens agree to cooperate, how can we ensure that they do so in practice?

  The primary objective, and one of the central propositions formulated in this book, is to create a global financial register. Quite simply, it would be a register recording who owns all the financial securities in circulation, stocks, bonds, and shares of mutual funds throughout the world. A register of this type is useful because it would enable tax authorities to check that banks, onshore and above all offshore, are in fact transmitting all of the data they have available. Without a register of this type, Swiss bankers will always be able to claim that they don’t have any US or UK clients and can continue to communicate very little information to the IRS or HMRC. That is what history teaches us: from the large-scale falsification of bank documents by Swiss establishments in 1945, to the fiasco of the savings tax directive and of the “qualified intermediary” program in the United States, everything points to the need for verification tools that do not exclusively rely on the goodwill of offshore bankers. Without concrete ways to verify that bankers duly transmit the information they have about their customers, wealthy tax dodgers may be able to hide in all impunity an ever-rising portion of their wealth.

  But the goal of the register extends beyond curbing tax evasion: a better accounting of wealth—not only real assets but also financial claims—would do much good in the fight against money laundering, bribery, and the financing of terrorism, and it would help better monitor financial stability. A financial register is a concrete embodiment of the notion of financial transparency.

  A global financial register is in no way utopian, because similar registers already exist—but they are scattered and under the management of private companies. The goal is to combine them in order to create a global register that is used for the public good.

  To understand the functioning of this register, its usefulness and feasibility, it is first necessary to know what the partial registers that exist today actually do. As we have seen in chapter 1, stocks and bonds were in the form of pieces of paper during the greater part of the twentieth century. One had to move securities from bank to bank with each transaction, which was particularly laborious. With growth in the postwar period, the amount of securities became considerable, and the system was on the edge of asphyxia. To remedy this situation, in the 1960s (sometimes a bit earlier) every country created a central depository where the securities were kept. In the United States, for example, it is the Depository Trust Company, founded in 1973, that nowadays keeps all the securities issued by American companies in its safes (the Federal Bank of New York does the same for government bonds). Each bank has an account with the DTC; when one of their clients sells a security, their account is debited and that of the bank of the buyer is credited. Pieces of paper are no longer circulated. Once immobilized in the 1960s, securities quickly were dematerialized: the paper disappeared entirely, and the DTC simply records on its computers the data of who holds what.

  Every country does the same and has its own central depository. But this system has a defect. Since the 1960s American companies have had the habit of issuing bonds in marks or in pounds sterling, directly outside the US territory, on the German or English markets. These stateless securities, not really American not really European, have no natural central depository. Two companies filled this void and play the role of register for them: Euroclear in Belgium and Cedel in Luxembourg, today known by the name of Clearstream.

  The importance of the activity of this latter company and the myths that surround it beg a quick clarification. First, the name of Clearstream is a misnomer. The original—and still primary—activity of this company is that of central depository, meaning it keeps stateless bonds (once in paper form, today electronic) at a secure site and maintains a register of the owners. This is stock management. It was only recently that Clearstream began to play the role of clearinghouse, an activity that manages the flow of transactions. This consists of establishing, at the end of each day, the commitments that all buyers and sellers on the market have with one another, in order to transform the millions of gross orders into a limited number of net operations. This clearinghouse activity is of marginal interest in the struggle against tax havens, unlike that of a central depository, because Clearstream and Euroclear are today the only two entities capable of authenticating the owners of trillions of dollars of stateless securities.

  To create a world financial register, the first step would involve merging the computer data of the DTC (for American securities), Euroclear Belgium and Clearstream (for stateless securities), Euroclear France (for French securities), and of all the other national central depositories. Who should be in charge of this mission? Ideally, global public goods are best provided by international institutions. One candidate is the International Monetary Fund, one of the only international organizations that is truly global—all countries are members of it, with very rare exceptions. The IMF has the technical capabilities to create a register and to have it function in the medium term; it is also the institution that establishes international statistical rules and is responsible for collecting data on the flow of capital and countries’ portfolio positions, which, as we have seen, currently suffer serious anomalies (in particular a gaping disequilibrium between assets and liabilities). A register would precisely enable the resolution of these problems, which seriously handicap the surveillance of financial stability. In the short run, a realistic plan of action probably involves the creation of partial registers at the regional level (say, a European register managed by the European Central Bank) and the progressive merging of the regional registers to ultimately cover all of the world’s stocks and bonds.

  A key challenge faced by any register of wealth involves the identification of beneficial owners. All of the world’s wealth ultimately belongs to real people, with the exception of government-owned assets and the wealth of most nonprofit institutions, like university endowments. But a large fraction of the world’s securities might not initially be attributable to any well-identified person: equities and bonds are largely held through intertwined financial intermediaries, like mutual funds, pension funds, and the like. Most depositories do not record the names of the real owners in their files, only those of intermediaries through which securities are transferred. To identify the residence of the ultimate owner, it would be necessary to know the relationships of the different entities involved in the wealth-holding chain. Fortunately, progress has begun in this area since the 2008–9 financial crisis, under the auspices of a committee of authorities from around the world working to create a global system of legal entity identification.28 Furthermore, by virtue of the international anti-laundering regulations, authorities have the right to demand that the depositories correctly identify the true holders of securities, by going back up the chain of financial intermediation if necessary. This is the fundamental principle in the fight against money laundering and the financing of terrorism: all establishments should know the names and addresses of their actual clients.

  One concern that some readers will probably have is that a world financial register would threaten individual privacy. Yet countries have property records for land and real estate; these records are public, and there seems to be little misuse. Anybody, for example, can check online who owns real estate on Park Avenue (although one sometimes stumbles upon faceless corporate titles) or if a particular person owns anything in Brooklyn. Of course, these records about real estate only capture part of people’s wealth, but when the records were created, centuries ago, land accounted for the bulk of private wealth, so that they indeed recorded most of people’s fortunes. The notion that a register of financial wealth would be a radical departure from earlier practices concerning privacy is wrong, and in light of historical experience, it would be natural
to make the world financial register public just like real estate records are.

  However, it is also true that not all countries have the same attitudes toward transparency, and such attitudes change over time. In some Scandinavian countries, taxpayers’ income and wealth is made public. But not in the United States today, although income tax payments there were required to be publicly disclosed in 1923 and 1924. So there might be a case for keeping the world financial register confidentially in the hands of the authorities. Whatever public body manages the register, access to it should be granted to domestic fiscal administrations, in order to enable them to verify that all the securities held by their taxpayers are indeed declared—and in particular that the offshore banks are exchanging all the information they have (see fig. 7).

  In the short term, the world financial register would not include all financial wealth, only stocks, bonds, and shares in investment funds. There is currently no complete private register for derivative products—the few registers created in the aftermath of the financial crisis are still partial. This is an important gap, which seriously handicaps the oversight of financial stability and which, if it is not filled in, could ultimately ruin the plan I propose—because tax dodgers could then convert all their securities into options, warrants, and so on. This is why it is essential that the global register, once it is created from the exhaustive registers that exist for securities, be extended to include derivatives as quickly as possible. More than a simple question of fiscal importance, it is a critical element for the regulation of financial markets.

  Figure 7: The case for a global financial register. The companies Clearstream, Euroclear, and so on feed the world financial register. Tax authorities can verify that taxpayers indeed declare all the financial securities included in the register.

  Source: Depository Trust Company (USA).

  A Tax on Capital

  The world financial register is intimately linked to the proposal for a global wealth tax made by Thomas Piketty in Capital in the Twenty-First Century. This proposal has generated a heated controversy, and I don’t want to repeat it here. Quite simply, let’s assume that a tax on wealth might turn out to be desirable in certain places, at certain times, if wealth concentration was to reach extreme levels above which inequality harms growth, innovation, or the well functioning of our democratic institutions. How would the wealth tax work? It is not possible to tax wealth if we cannot measure it. Most people are honest and would pay the tax if it existed, but if even a tiny minority of tax dodgers could freely evade it, the consent to taxation would be severely undermined. On the contrary, the financial register that I describe, combined with the land and real estate registers that are already in place, would make it possible to enforce wealth taxes in a democratic and transparent way. The register is thus a necessary tool for the taxation of wealth in the twenty-first century.

  It is actually the combination of wealth taxation and financial registries that would deal the fatal blow to financial opacity. Without a wealth tax, there is a risk that even a global register might fail to identify who exactly owns what. Despite anti-laundering legislation that requires financial institutions to know who the owners of the wealth that they have in their accounts truly are, a not negligible portion of the securities could continue to be recorded in a register as belonging to trusts without a well-identified owner. We can even imagine that a large-scale trade in identities might develop, in which individuals would claim to hold the wealth of defrauders or drug traffickers. A small tax on wealth levied at the source, however, would address this problem.

  Let’s look at a concrete case: imagine a global tax of 0.1% on the stock of wealth withheld at the source. This means that each year tax authorities, drawing on the information in the register, would deduct 0.1% of the value of all financial securities, bank accounts, and so on. In order to recover what has been taken from them, US taxpayers, for example, would have only one solution: declare their holdings on their IRS tax returns. Subject to this declaration, they would receive a credit for any taxes that remain due—or see themselves reimbursed if they owe no taxes at all.

  This solution has four advantages. First, it is realistic: taxing 0.1% at the source is not utopian. An identical tax already exists in several countries, such as Switzerland, where all companies must, before paying any interest or dividend whatsoever, withhold a reimbursable tax of 35%. The difference with the tax that I propose is that mine is global—all financial securities would be subject, and not, as in Switzerland, only Swiss securities—and imposed as a percentage of wealth (0.1% of the value of the stock of assets) rather than income (35% of the interest and dividends generated by stocks and bonds), because many securities do not generate any income. With the establishment of a global register, these two differences pose no practical problem. There would be no escaping taxation.

  The second advantage is that each country would preserve its fiscal sovereignty, because the tax would be reimbursable to the owners of securities once they have declared them in their country. States that do not wish to tax wealth would return all of the tax levied for them. The countries who wish to impose a progressive rate would be free to continue to do so.

  The third and primary advantage: a global tax at the source would greatly reduce the use of shell corporations, trusts, foundations, names-only, and all imaginable techniques for dissimulation. For a simple reason: it would be reimbursable only after the wealth is declared on individual tax returns. Those who wish to hide their wealth would have no other choice than to pay the tax. Taxation on capital at the source is the ultimate weapon against financial opacity (although, in order to dissuade anyone from hiding wealth, one would need a wealth tax at a sufficiently elevated rate, more than 0.1% a year).

  Finally, a coordinated global tax at the source, combined with the financial register described above, would give states that want it the possibility of creating their own tax on wealth, with a wide base and at a progressive rate, without having to fear evasion. In many countries, it is precisely such fears that in the last few years have led to the elimination of the existing taxes on wealth. But this doesn’t have to be the case: nations can recover the sovereignty that has been stolen from them, and they can act against the rise of inequality if they wish.

  FIVE

  The Tax Avoidance of Multinational Corporations

  Offshore tax havens enable not only individuals to dodge taxes—they also enable multinational corporations to do so. Often this tax avoidance is done within the letter of the law: multinational groups exploit the loopholes of current legislation. The fundamental problem is that the corporate tax is not adapted anymore to today’s globalized world and must be reinvented. The spiral is profound, but here, too, solutions exist.29

  From Mountain View to Bermuda

  The reason for the current failure is that the corporate tax is based on a fiction, the idea that one can establish the profits earned by each multinational subsidiary by subsidiary. But this fiction is no longer tenable today, because multinational groups, advised by great auditing and consulting firms, are in practice free to move their profits wherever they want, which is usually wherever it is taxed the least; and large countries have themselves mostly given up taxing the profits booked outside of their territory.

  How do companies make their profits appear in tax havens? There are two main techniques. The first, that of intragroup loans, consists of loading with debt branches located in countries that tax profits heavily, such as France and the United States. The goal is to reduce the profits where they are taxed and have them appear in Luxembourg or in Bermuda, where they are taxed very little or not at all. This popular manipulation nevertheless comes up against a sizable problem: it is rather easy to detect.

  The second optimization technique, the manipulation of transfer prices, plays a more important role. Transfer prices are the prices at which branches of a given group buy their own products from one another. Within a single company, the branches in Bermuda sell servi
ces at a high price to entities located in the United States. Profits thus appear again in the tax havens and losses in the United States, in the large economies of continental Europe, and in Japan. In principle, intragroup transactions should be conducted using as a reference the market price of the goods and services traded, as if the subsidiaries were unrelated, what is known as “arm’s-length pricing.” But arm’s-length pricing faces severe limitations. First, with billions of intragroup transactions every year, tax authorities cannot conceivably check that they are all correctly priced. And indeed there is compelling evidence of transfer mispricing by US firms.30

  More fundamentally, in many cases the relevant reference prices simply do not exist. In 2003, less than a year before its initial public offering in August 2004, Google US transferred its search and advertisement technologies to “Google Holdings,” a subsidiary incorporated in Ireland, but which for Irish tax purposes is a resident of Bermuda.31 What was the fair-market value of Google’s technologies at the time of transfer, before the Mountain View firm was even listed as a public company? Google US had an incentive to charge as little as possible for this transfer. We do not know whether it was able to do so: the transfer price is not public information. But journalistic leaks in the fall of 2014, “LuxLeaks,” revealed that in many similar cases, the transfer prices that IT companies are able to charge when they send their intangibles to Bermuda is negligible, sometimes zero. Once that capital has arrived in Bermuda, all the profits that it generates are taxable there, where the corporate income tax rate is a modest 0%.