Tax avoidance and the myth of trickle down wealth

The files released from the International Consortium of Investigative Journalists (ICIJ) may finally put faces to the offshore accounts scandal whose numbers are quite astounding. A recent report by the Tax Justice Network found that the equivalent to the total combined GDP of U.S. and Japan is being hidden away by those rich enough to use offshore accounts.

The files released from the International Consortium of Investigative Journalists (ICIJ) may finally put faces to the offshore accounts scandal whose numbers are quite astounding.

A recent report by the Tax Justice Network found that the equivalent to the total combined GDP of U.S. and Japan is being hidden away by those rich enough to use offshore accounts.

Let us put that into plain English: the world economy is being robbed of 30 per cent of its potential total tax receipts by the top 1 per cent.

The report adds that while the world economy collapsed, “high net worth” customers grew fortunes in part from these accounts from $5.4 trillion in 2005 to more than $12 trillion in 2010: the size of the U.S. economy.

This seems to be the missing piece in the puzzle of the split economy we have been living through in the developed countries over the last 30 years and shown most clearly in the U.S. – why has most of the benefit of growth in this period been gained and kept by society’s wealthiest?

Top income

Source.

The obvious answer is in the greater ability of the rich to claim a greater share of income through the restructuring of the economy; but if our tax systems had been working properly then there would have been a greater re-distribution of income which redressed the balance and from which we all benefited.

This is the great trickle down effect highly prized by right leaning economists when expounding us to just let the wealth owners go and make more wealth and we would all benefit.

As the below graph drawn from Hacker and Person’s Book Winner-Take-All Politics clearly demonstrates, this has not actually taken place in the US regardless of the government.

Graph 5

In discussing the tax burden of the top 1 per cent of wealth owners we are only looking at the visible wealth seen by the tax authorities, with the dark matter of offshore non-taxed income making a mockery of the whole system, as the latest release of the ICIJ showing 175,000 UK companies using offshore registered directors illustrates so clearly.

This ultimately makes any comparison of the tax paid by the top 1 per cent compared to the other 99 per cent as nonsensical. Tax avoidance is not a policy pursued by a few, but due to the size it must be seen as a systematic fault in the economic modeling of our social contract that is the foundation of a fair and just society: That we all contribute to our society depending on our means.

Does it make any sense now to base our economic models and tax systems on attracting this super rich when we now know that a large amount of that wealth will be of no benefit to our societies and will quickly leave our boarders?

In the UK we have a really pressing decision: do we carry on with a laissez-faire tax policy leading to a state of affairs similar to the U.S. where the six heirs to the Walmart empire possess a combined “known” wealth of some $90 billion which is equivalent to the total wealth of 30 per cent of the lowest population of the U.S. society?

Or, do we take a more mature, ethical attitude and ask those who want to participate in this countries rich and vibrant culture to see the payment of taxes as a badge of honor to as their investment in our society?

Recently I spoke to a friend who after years working in Norway returned to the U.K. He was mortified that the first person he met after starting his new position in the U.K. firm was an accountant employed to work out how best to structure his business to avoid tax.

Isn’t that the culture right there that we must address? After all, what have we to lose, except lost taxes?

8 Responses to “Tax avoidance and the myth of trickle down wealth”

  1. Anthony Masters

    The Tax Justice Network estimates the ‘off-shore wealth’ accumulated is somewhere between $21tn and $32tn. Total global wealth is around $231 tn, according to Credit Suisse. However, the author makes the false comparison between off-shore wealth and GDP, as the former has accumulated whilst the latter is annual.
    The author, and the headline writer, describes the current situation as “the myth of trickle down wealth”. However, no economist has seriously expounded such a theory, and the term is usually used as a caricature for reducing tax rates. Indeed, “the myth of trickle down wealth” appears to be a myth itself. For more information, do read Thomas Sowell’s short booklet “Trickle Down” Theory and “Tax Cuts for the Rich”: http://www.tsowell.com/images/Hoover%20Proof.pdf
    Lastly, there is some conflation between tax avoidance and tax evasion. Tax evasion is the failure to pay due taxes, which is illegal, as opposed to tax avoidance, which describes reducing one’s taxes within the legal system. Often, from the Tax Justice Network and others, it is claimed that numerous companies are partaking in tax avoidance, when really what they are doing is tax compliance: using the tax system as it was designed. Consider the recent furore surrounding companies placing bases in low-tax countries within the EU: that’s how it’s meant to work.

  2. Max Hunter

    i agree, its the culture of tax avoidance that needs to be addressed

  3. SadButMadLad

    How can the money be removed from the GLOBAL economy. Money that has been kept off shore must be kept in a bank of some sort. And banks do not sit on money piles. They use it to fund loans taken out by customers and the invest it in businesses or buy bonds. So whilst the money might have not gone to a particular government in taxes, it has not been removed from the world economy.

  4. Anthony Masters

    Good point. A similar claim was made about the stimulus packages a few years ago: that the governments were “injecting” money into the ‘world economy’. The first question is: from where?

  5. Curious Chris

    But, is it being taxed?

  6. Ranjit Sidhu

    Sorry I have to reply to this stream

    SadbutMad: Your point is only in anyway relevant to the article if you consider that there is no duty to paying the taxes due in the country they that wealth is earned , if that is correct, thanks for the comment- I have a different perspective as mentioned in the article.

    Anthony:

    Firstly,No I have not picked a false comparative as, to roughly put it, the amount offshore is the equivalent of 30% of the yearly GDP, ie if that where to become tax deductible that would be the uplift. Your point on the definition of “trickle down” is a point on the definition of “trickle down” and am finding it hard to find any relevance to the economic policy of re-distributuion of income which is the heart of the article. As for tax evasion versus tax avoidance, as I hope you have picked up from the article my position is an ethical and economic one regarding the effect on the social contract such activities have, therefore the distinction is irrelevant to me.

    But, if I can be so brazen , I find it hard to believe you would comment on the semantics rather then such wider issues that are the crux of the article: The basic points: being:

    1.As I mentioned above ,whether monies that are earned and tax deductible to the tune of $35 trillion should be treated as such and whether this is effecting the social contract as defined above

    2. Whether the undeniable growth in wealth distribution should be a worry for our society’s structure? As per the Walmart example

    3. If this lost income should be important factor in considering future tax policies?

    Anyway, thank you for your comments

    Ranjit Sidhu

  7. Anthony Masters

    I apologise if my comment appeared to stay on semantics, but semantics are quite important when you discuss tax policy, as tax avoidance (legal) and tax evasion (illegal) are often conflated into ‘tax dodging’ or some other term.
    The World GDP in 2011 was $69.97tn, so 30% of that GDP is about $20.6tn (which is roughly the combined GDP of USA and Japan, as you correctly noted). If your statement is correct, then two-thirds of TJN’s estimate for all off-shore wealth occurred in one year alone. This off-shore wealth has accumulated over many years.
    I will respond to your highlighted points:
    1. The social contract is not an explicit contract, so divining exact terms is not possible. However, if we work from the broad assumption that a person is obligated to ‘pay in’ to a society that they are part of, via the coercion of taxation. The fact that trillions of wealth are off-shore does not imply that the social contract is being violated: there is a bevy of other taxes that these individuals pay when they are in the country: VAT, fuel duty, alcohol duty, road tax, and so on.
    2. The condition of those relatively poorer is more important than the precise distribution of wealth in society. Moreover, the similarity between the wealth distribution of the United States and Sweden, who both have very different taxation policies, suggests there may be an inability for governments to significantly affect the wealth distribution.
    3. Given the supposed culture of avoidance, tax simplification would mollify these issues, whilst making the distinction between the legal and the illegal even clearer. This ‘lost’ income may require further bilateral agreements on tax, but may not directly affect our domestic tax policy.

  8. Ranjit Sidhu

    Thank you for reply:

    1. Indeed it is an ethical question, of course it not a contract but a persuasive term In my op that “That we all contribute to our society depending on our means.” hence a moral duty, you differ, i accept that

    2. I consider it important role of government to try and as we have achieved it before 1945-80, see no reason why it cannot be done again.

    3.It may indeed, as per previous answer, I consider it an ethical question.

    Thanks again

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