By James S. Henry.
NEW ESTIMATES FOR “MISSING” GLOBAL PRIVATE
WEALTH, INCOME, INEQUALITY, AND LOST TAXES
INTRODUCTION/ SUMMARY.
The definition of victory for this paper is to review and improve upon existing estimates
of the size, growth and distribution of untaxed private wealth protected and serviced by
the global offshore industry.
This is necessarily an exercise in night vision. The subterranean system that we are
trying to measure is the economic equivalent of an astrophysical black hole.
Like those black holes, this one is virtually invisible and can be somewhat perilous to
observers who venture too close.
So, like astronomers, researchers on this topic have
necessarily used indirect methods to do their estimates, conducting their measurements
from a respectful distance. This indirect approach is painstaking, and has many inherent
limitations, as we’ll see.
Unlike in the field of astrophysics, however, the invisibility here is fundamentally man made.
Private sector secrecy and the official government policies that protect it have
placed most of the data that we need directly off limits – even though it is, in principle,
readily available.
In many ways, the crucial policy question is – what are the costs and benefits of all this
secrecy?
Another key theme that emerges from this paper is that there is an urgent need for tax
justice advocates and their allies in governments and in the public, especially in “source”
countries where the wealth is coming from, to press the relevant authorities for this
information.
The very existence of the global offshore industry, and the tax-free status of the
enormous sums invested by their wealthy clients, is predicated on secrecy: that is what
this industry really “supplies” as it competes for, conceals, and manages private capital
from all over the planet, from any and all sources, no questions asked.
We are up against one of society’s most well-entrenched interest groups. After all,
there’s no interest group more rich and powerful than the rich and powerful, who are
the ultimate subjects of our research.
The first step, however, are the estimates. The way is hard, the work is tedious, the data
mining is as mind-numbing as any day below surface at the coal face, and the estimates
are subject to maddening, irreducible uncertainties.
Nevertheless, as usual, some things may be said. James S. Henry, TJN 2012 4
New Estimates. As discussed below, previous estimates of the size and growth of the
offshore industry to date have relied on rough judgments and rules of thumb or, at best,
on one or two very simple estimation methods.
Here we have triangulated on our estimates from the vantage point of several different
methods. The aim is not pseudo-precision, much less “really big numbers,” but to
identify a plausible “base case” for this otherwise-well hidden sector of the global
economy.
A More Open Process. Another objective is to keep a sharp eye out for the puzzles
surfaced by this data analysis, of which there are many. A key problem with previous
estimates is sensationalism. That is to be expected, given the subject matter, and the
fact that estimation is still dominated by relatively closed communities of consulting
firms, government agencies, or NGOs.
An important aim of this project is to establish a more open, transparent, collaborative
model for doing such research so that the data sources, estimation methods, and core
assumptions are all exposed to the sunlight of peer review, and ultimately to public
scrutiny.
Estimation Methods. As discussed below in more detail, this paper employs four key
estimation approaches: (1) a “sources-and-uses” model for country-by-country
unrecorded capital flows; (2) an “accumulated offshore wealth” model; (3) an “offshore
investor portfolio” model; and (4) direct estimates of offshore assets at the world’s top
50 global private banks.
To compile its estimates, the paper uses latest available data from the World Bank and
IMF, the UN, central banks, and national accounts to explicitly model capital flows for
each member of a subgroup of 139 key “source” countries that publish such data.
The paper goes further still, supplementing these models with other evidence, including
(1) data on so-called “transfer mispricing,” (2) data on the cross-border demand for
liquid “mattress money” like reserve currency and gold, part of which may move
through offshore markets; and (3) a review of market research by leading consulting
firms on the size of the “offshore” private banking market.
(These methods are discussed in detail in Section 5, below.)
We believe that the resulting estimates of unrecorded capital flows and accumulated
offshore wealth are the most rigorous and comprehensive ever produced.
In the spirit of open research, we hereby issue an open challenge to the IMF and the
World Bank – to all comers, in fact – to see if they can come up with better estimates.
James S. Henry, TJN 2012.
5 KEY FINDINGS
Overall Size
A significant fraction of global private financial wealth — by our estimates, at least $21 to
$32 trillion as of 2010 — has been invested virtually tax-free through the world’s still
expanding black hole of more than 80 “offshore” secrecy jurisdictions. We believe this
range to be conservative, for reasons discussed below.
Remember: this is just financial wealth. A big share of the real estate, yachts,
racehorses, gold bricks — and many other things that count as non-financial wealth —
are also owned via offshore structures where it is impossible to identify the owners.
These are outside the scope of this report.
On this scale, this “offshore economy” is large enough to have a major impact on
estimates of inequality of wealth and income; on estimates of national income and debt
ratios; and – most importantly – to have very significant negative impacts on the
domestic tax bases of key “source” countries (that is, countries that have seen net
unrecorded private capital outflows over time.)
To keep reading this great piece done by James S. Henry, go here:
http://tjn-usa.org/storage/documents/The_Price_of_Offshore_Revisited_-_22-07-2012.pdf
