The Hidden Wealth of Nations: The Scourge of Tax Havens, by Gabriel Zucman

Any book that promises to offer (according to Thomas Piketty, who contributes the book’s foreword) “the first serious economic research” into tax haven activity inevitably invites us to judge it by that very high standard. In The Hidden Wealth of Nations, Gabriel Zucman makes just that claim. Although it is not wholly justified, nevertheless I can say unreservedly that this is an important work that anyone interested in tax havens, social justice, defeating inequality and delivering tax reform should read.

Let me put this in context. Zucman, a French economist based at the University of California, Berkeley, is a part of a network of researchers that includes Piketty, Emmanuel Saez and others who have done valuable work on inequality, wealth, tax and the difficulties caused by the uneven distribution of capital resources in society. It is the reputation of this group that raises expectations for this book’s academic importance. Unfortunately, that’s also the level at which the book does not deliver.

At the most basic level, The Hidden Wealth of Nations is frustrating because it simply fails to define what a tax haven is. There is no excuse for this. I have written on this subject with my colleagues Ronen Palan and Christian Chavagneux, and we are not alone. For those uncomfortable with the term “tax haven”, as far back as 2009 I proposed an alternative definition of such states: “secrecy jurisdictions”. The latter term has become widely used in official discussions on this issue, and the Tax Justice Network now has a well-justified reputation for ranking such locations against a set of rigorous criteria in its Financial Secrecy Index; disappointingly, Zucman mentions none of this work. Anyone looking to his book for a literature review on tax havens will be disappointed: it simply is not there. This is a serious omission, not least because the work in question has been the foundation of the campaign to bring the tax haven issue to public attention, almost all of which has happened in the past decade with relatively limited academic support.

The reservations that I have about this book also extend to the estimate that Zucman offers on the funds held in tax havens and the tax that has been lost as result. The first concern to note is that his book is not the first serious economic assessment of wealth hidden in tax havens. Oxfam published one in 2000, I was co-author of another in 2005, and other non-governmental organisations have offered significant analyses since then. Together, these estimates have informed much of the debate on tax havens over the past 10 years. You could argue that these omissions in Zucman’s book simply underscore the fact that academia has come very late to this critical debate. None of this worries me that much; what does worry me, however, is that the estimate he offers is so limited.

Because he considers only bank deposits and readily marketed financial securities as offshore wealth, I think Zucman seriously underestimates the scale of offshore tax abuse. He admits to ignoring real estate property, the control of private companies, title to art and intellectual property as well as other tangible assets, all of which are widely owned offshore. In addition, he says that he ignores the fact that much of the capital offshore may itself have come from tax-evaded sources; moreover, he makes an estimate of the loss to offshore caused by the tax-avoiding activities of US companies and then fails to use it in his overall total. All this means that his estimates of offshore funds and the tax lost to them cannot help but be too low. I have campaigned against tax haven abuse for more than a decade, and I believe that both the figures Zucman suggests are way below the real sums. This is hugely frustrating, because it can only help the havens defend themselves against demands for reform.

However, and curiously, The Hidden Wealth of Nations redeems itself entirely when it moves beyond economic estimates and tax haven history (which it also gets wrong). Rather surprisingly, Zucman lays excellent claim to being a campaigner on tax havens in the second half of this book. What he suggests there makes a lot of sense, and is exactly why I so warmly recommend this book.

I do believe that the necessary data exist that would allow us to create a global register of financial asset wealth holding, as Zucman suggests is necessary. This is new thinking, and his suggestion of a practical and necessary step in the assembly of the data that will be needed to underpin the global wealth tax proposed by Piketty is a very welcome contribution to the debate.

Zucman is also right to note that rapid change on such issues is possible, and, indeed, has taken place in recent years. One example he gives is the success of the global movement towards automatic information exchange on account balances held in tax havens to the tax authorities of their rightful beneficial owners. I well recall being told by UK Treasury officials in June 2009 that this process, which I was calling for, would not happen in my lifetime. Such exchange commences next year, and I have every intention of witnessing it.

Similarly, I well recall the outright opposition to the form of multinational corporation accounting known as country-by-country reporting that I created in 2003, and, again, being told that this would never happen. But in September 2014, the Organisation for Economic Cooperation and Development established it as a standard for international tax reporting by those companies.

The reason for making these points is twofold: first, both attest to the pace of change in this area, defying all expectations in the process. Second, country-by-country reporting can form the foundation for the unitary method of taxation of multinational corporations that Zucman proposes. This is unsurprising, as I had designed country-by-country reporting with that intention in mind.

This point on country-by-country reporting is important. All taxation is dependent on being able to find where the asset to be taxed is located. Country-by-country reporting permits any tax authority to determine what proportion of the sales, employees and assets of a multinational corporation are located in its jurisdiction. Having done so, it can then, by apportioning global profits using a weighted formula based on these essential indicators of real economic presence in their country, estimate how much profit of that company is likely to have really arisen in, and so be taxable in, their jurisdiction. If this were done now, corporate tax scandals, such as that of Facebook paying just £4,327 of corporation tax in the UK in 2014 when it is likely to have been highly profitable in this country, would come to an end.

Similarly, if a global register of wealth could be established, the data needed to tax global wealth would have been created. I share Zucman’s belief that this is possible.

It is because Zucman takes the courageous step of moving beyond academia to being an activist committed to promoting a new and radical solution that he has unambiguously (even if cautiously) identified, that I welcome this book. Far too few academics are willing to take on the role of the public intellectual who steps up and demands action to address a problem that they have identified. Zucman deserves full marks for doing so, even if I wish he had got more of his definitions and history right and had been a little more courageous when it came to making his estimates. All the data he needed are there to use. I am hoping for a second, expanded edition of this book that would move The Hidden Wealth of Nations to the forefront of offshore-wealth scholarship.

Richard Murphy is professor of practice in international political economy, City University London, a UK chartered accountant and director of Tax Research LLP. He is author of The Joy of Tax (2015) and co-author, with Ronen Palan and Christian Chavagneux, of Tax Havens: The True Story of Globalisation (2010). In 2013, International Tax Review named him the seventh most influential person in international tax.

The Hidden Wealth of Nations: The Scourge of Tax Havens
By Gabriel Zucman
Translated by Teresa Lavender Fagan
University of Chicago Press, 200pp, £14.00
ISBN 9780226245423 and 5560 (e-book)
Published 26 October 2015

The author

Gabriel Zucman lives in Berkeley, California, with his “wonderful wife Claire, a talented economist and the most generous person on Earth”.

Now assistant professor of economics at the University of California, Berkeley, he was born and raised in Paris, which he says made him “interested in politics at a young age. It shaped my view of economics: to me a big part of studying economics is finding out how to improve policies, how to make society work better.”

As a child, he “read a lot; my parents and teachers encouraged me, but at a certain point even my parents thought it was too much: when we visited Pompeii on a holiday, they would lament that all I was interested in was reading War and Peace”.

He took his undergraduate degree at the Ecole Normale Supérieure de Cachan, where he was, he recalls, “gregarious”. He and his friends “created a review, Regards croisés sur l’économie, aimed at bridging the gap between academic research and the general public in France. It was a great collective adventure.”

As a graduate of a grande école and a scholar of inequality, does he believe that these elite institutions perpetuate privilege?

“In some senses, France’s higher education still belongs to the 19th century: there is a lot of money devoted to training a small elite (largely drawn from privileged families), and way too few resources for the rest,” he observes.

“There are great success stories like the Paris, Toulouse and Aix-Marseille Schools of Economics, Sciences Po, and other places. But it is fundamental that France increases the fraction of GDP devoted to higher education overall.”

Zucman has also worked at the London School of Economics as an assistant professor. Has he found any any notable points of similarity between the LSE, Berkeley and the French universities he spent time at? “All the institutions I’ve attended are incredible places. They share many things in common: they are research institutions, with world-famous economists and a passion for intellectual debate, in vibrant places (Paris, London, the Bay Area).”

The foreword to The Hidden Wealth of Nations was written by Thomas Piketty, Zucman’s doctoral advisor at the Paris School of Economics. What does Zucman think of the worldwide attention paid to Piketty’s weighty 2014 best-seller, Capital in the 21^st Century?

“It has become a huge success because inequality is one of the defining challenges of our time. His book brings together an enormous amount of research that is directly relevant for thinking about this challenge. And although it is long, it was written for a broad audience.”

Of his aims for his own book, Zucman says simply: “I wanted to write a book that people would read and enjoy reading from the first word to the very last.

How old will he have to be before people cease to exclaim at how much he has achieved at such an early age? Zucman, who last week turned 29, replies wryly, “Oh, I think they’ve already stopped!”

Karen Shook