Review: Hidden Wealth of Nations

Gabriel Zucman (@gabriel_zucman) has put out an anti-tax haven manifesto, The Hidden Wealth of Nations.

His major contribution is to assemble in a one-stop, accessible history of tax havens, and an estimate of how much they cost the public. Based on copious statistical research, Zucman estimates $7.6 trillion (or eight percent of global wealth) is held in tax havens. A third of this is held in Switzerland, which plays a fulcrum role for other tax havens around the world. All of this adds up to $190 billion in lost tax revenue. For comparison purposes, this is over 40 percent the size of the US government deficit.

Against narratives that the status quo is a free market outgrowth, Zucman demonstrates zucman2015bookcoverthe key role of public institutions. Swiss banks, for example, were made profitable on the basis of deposits by the Swiss government, which moreover served as a lender of last resort. The governments of Panama and other tax havens mounted complementary tax haven industrial policies. Moreover, Switzerland’s foreign policy of neutrality amounted to another form of subsidy, as it could attract deposits other nations couldn’t. Finally, the US and other Allied Powers allowed Swiss banks to misrepresent assets’ true owners, giving up the massive leverage they had at the end of World War II to force a clean-up of questionable accounts.

By highlighting the key role played by the state, Zucman opens up a clear reform path. Much as governments made choices to only lightly regulate and cooperate on tax haven activity in the past, they can make a decision for more robust governance in the future.

His recommendation: to unify and expand private depositaries of wealth into a public global utility. This recommendation is not surprising: Zucman’s focus is above all on data collection. But he pairs it with a recommendation to levy trade sanctions on tax havens equivalent to their contribution to tax avoidance.

While this proposal will have its detractors in the international trade law bar (which tends to favor liberalization over other goals), Zucman’s economic logic is unassailable. Simply put, current government policy subsidizes tax havens – re-balancing sanctions would better approximate the free market outcome. He makes some attempt to square this with WTO rules, but his conclusion about EU constraints is blunt – kick tax havens out the EU, on the logic that they’ve commercialized (and thus forfeited) their sovereignty.

Although not a major focus of the book, Zucman alludes to the role of victimhood discursive strategies employed by the wealthy in their fight against accountability. For many years, Swiss banks sold financial secrecy as a protection for persecuted minorities in other countries, such as (in an earlier era) victims of the Holocaust. Whatever the ethics of this strategy, Zucman shows there’s weak empirics: Holocaust victims’ accounts were very few compared to those of standard tax avoiders. It’s an interesting sidebar – one with clear parallels in the investment arbitration space. There, narratives of human rights protections for victims of government abuse help justify a system that seems more geared towards business interests than protecting regulatory space.

Zucman’s major contribution is to bring some of Jeremy Bentham into the debate on multinational taxation. Bentham famously thought that the law should be simple and easy for everyone to understand. As a participant on the margins of the tax debate, I find most interventions anything but. With an economy of words (the book is only a bit over 100 pages, and the font is big!), he cuts through the legalese and economese to offer some valuable pearls of wisdom.

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