Is Thomas Piketty Right About Tax Havens?

September 2nd, 2014

If you have had much contact with the disciple of economics in the last year, you’ve heard of the book Capital in the Twenty-First Century, written by French economist Thomas Piketty. And Capital concerns two subjects that are very near and dear to us at the Financial Transparency Coalition: inequality and taxes.

Piketty’s book is all the rage among economists and policy wonks. Perhaps for good reason. In a unique exploration of a new dataset, Piketty parses through literally centuries of tax data to discern long-term trends in inequality and wealth. His conclusions are broad and many, but one of his main findings is this: wealth inequality was high before World War I, it fell after and for much of the century, and it has been on the rise again since the 1980s.

That income inequality is already extreme (and getting worse) should come as no surprise to readers of this blog. We’ve heard that the richest one percent of Americans earn about a fifth of the nation’s income. Central to Piketty’s thesis, inequality is even starker in terms of wealth, rather than income. By contrast to the top earners who make one-fifth of the nation’s income, the wealthiest one percent of Americans hold about one-third of the nation’s wealth.

Piketty’s findings about inequality have received much more attention than his solution to the problem: a global wealth tax. In Capital, Piketty proposes a highly progressive tax on wealth –beginning with those who have assets worth more than one million euros. This tax would increase to about five to ten percent for those who own assets worth more than a billion euros. Assets (net of debts) would include everything a person owned—including stocks, art, land, and houses. Again, his tax would be global, which under this proposal, means that every nation on earth would agree to tax its citizens in this way.

The challenges associated with measuring an individual’s net assets aside, Piketty argues vehemently that this tax is technically achievable. Politically, however, even Piketty himself acknowledges that his tax is utopian. Raising taxes on the wealthy is already difficult in any country, levying an entirely new tax on the wealthy is likely impossible.

Even if a nation like the United States or United Kingdom did pass a wealth tax there is strong reason to believe that their wealthy individuals would transfer their assets abroad to tax havens.

Piketty has cited two distinct solutions to this problem: the international community should either (1) force the tax havens to participate or (2) force them to share their data on non-resident assets. What makes Piketty believe either of these solutions lie in the realm of the possible for the world of the living? Relative size, he argues. “If the U.S. (a quarter of world GDP) and the EU (another quarter of world GDP) want this to happen, then this can happen,” Piketty says. “Again, this is political, not technical.”

I truly believe that Piketty is a deeply intelligent man. Perhaps a little optimistic and impractical, but deeply intelligent nonetheless. This statement, though, makes me wonder. The United States and the European Union have, what seems like in serious earnest, attempted to pressure tax havens into compliance with existing tax laws. Tax havens, for example, were a very high priority of the 2013 G8 summit. And yet little progress has been made. So what gives?

Perhaps we have not, in serious earnest, really pressured tax havens, at all. There has been a lot of strong language and big talk, but little real action. Despite the harsh words at the G8, the group of leaders is a long way off from a real agreement with tax havens.

We’re also still making disappointing progress on existing efforts. The United States has yet to pass the Stop Tax Haven Abuse Act. The OECD’s standards on automatic tax information exchange exclude too many nations. Outside of the United Kingdom, there has been little headway on public registries of beneficial ownership. Even recently, the U.S. Congress has been reluctant at best to seriously tackle the publicly-visible, unpopular practice of tax inversion.

Maybe Piketty is right.

Written by Ann Hollingshead

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