February 2, 2023

Tax Haven Trinity

An increasingly large part of world wealth is stashed away in tax havens. This has become such a high share of the world economy and individual countries’ economies that governments encounter increasingly irresistible headwinds to revert this trend. Tax fraud leaves a hole in national budgets and honest taxpayers have to accept artificially inflated tax rates to finance public services.

Experts do not agree on amounts and proportions. So we propose as a conservative common denominator the tax haven trinity:

We can assume that more than 6% of world wealth is hidden in tax havens, equally shared by tax avoidance, tax evasion and money laundering.

Exact estimates are difficult to come by and most will end up higher than the assumption of 6%. This estimate can get refined as more precise data becomes available.

Different studies only consider some elements but not all three that make up offshore wealth. The assumption that each of the three reasons for offshore finance has an equal share is an appropriate starting point.

  1. Tax avoidance is somewhat tolerated and is used by individuals and multi-national corporations to optimize their tax bill within the existing tax laws or through tax competition.
  2. Tax evasion is used by individuals, corporations, and trusts to deliberately and illegally misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability. It includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.
  3. Money laundering is done in tax havens to recycle money from organized crime and corruption.

Tax havens are a pillar to facilitate each of these three activities.

Tax evasion and money laundering are illegal. While forms of tax avoidance which use tax laws in ways not intended by governments may be considered legal, it is almost never considered moral or ethical by the public.

Some multinational corporations use tax havens for tax avoidance and tax mitigation in international transactions to improve their competitive position or shareholder value.

The question is if the political goodwill towards tax havens should remain to support the competitive standing of corporations while at the same time providing a playground for the majority of activities in tax havens that are of illegal or criminal nature.

How much money is kept in tax havens?

  • The OECD has estimated in 2007 that $5 trillion to $7 trillion, five times as much as two decades earlier, are held on tax havens and made up perhaps 6-8% of worldwide wealth. The absolute value and share will have increased since.
  • The Tax Justice Network has estimated in 2012 that the stock of financial wealth held offshore, hardly taxed or untaxed and in substantial conditions of secrecy, amounts to some $21 to 32 trillion.
  • The IMF estimated the annual cost of bribery early 2016 at around $1.5 to $2 trillion (roughly 2 percent of global GDP).