How to tax capital in a globalized world? Lessons from population-wide administrative data

Drawing on newly published macroeconomic statistics, we estimate the amount of household wealth owned by each country in offshore tax havens. The equivalent of 10% of world GDP is held in tax havens globally, but this average masks a great deal of heterogeneity - from a few percent of GDP in Scandinavia, to about 15% in Continental Europe, and 60% in Gulf countries and some Latin American economies. We use these estimates to construct revised series of top wealth shares in ten countries, which account for close to half of world GDP. Because offshore wealth is very concentrated at the top, accounting for it increases the top 0.01% wealth share substantially. In a companion paper we attempt to estimate the size and distribution of tax evasion in rich countries. We combine random audits, which has been the key source used to study tax evasion so far, with new micro-data leaked from large offshore financial institutions - HSBC Switzerland (Swiss leaks) and Mossack Fonseca (Panama Papers)- matched to population-wide wealth records in Norway, Sweden, and Denmark. We find that tax evasion rises sharply with wealth, a phenomenon random audits fail to capture. On average about 3% of personal taxes are evaded in Scandinavia, but this figure rises to close to 30% in the top 0.01% of the wealth distribution, a group that includes households with more than $45 million in net wealth. We also find that after reducing tax evasion - by using tax amnesties - tax evaders do not legally avoid taxes more. Another part of the project focuses on multinational corporations' use of tax havens. The results show that close to 40% of multinational profits are shifted to tax havens globally. We also show that the fiscal authorities seem to concentrate their efforts on relocating profits booked by multinationals in other high-tax countries, crowding out the enforcement on transactions that shift profits to tax havens.

The output from the project has renewed the understanding of the magnitude of tax evasion and tax avoidance, with global impacts for the academic literature, for tax administrations and policy makers' applied policies, and in the public debate. It has generated five academic papers that have been or are in the final stages of top journal publication (AER, JPubEc, AEJ, RES), nine op-eds (New York Times, The Guardian, Le Monde, Dagens Næringsliv), 623 media coverages in 51 countries (including tv and radio interviews in New York Times, The Economist, The Guardian, Financial Times, Washington Post, Bloomberg, podcasts (NRK, BBC, Vox), participation in web-tv series aimed at a younger audience, and coverage in the 2019 Billionaire- episode of the Netflix documentary series Explored), and 135 presentations worldwide to academics, policy makers, and the public (e.g., OECD; UN; European Parliament; European Central Bank; Danish Parliament; various Ministries)

There is growing concern about the practicality of taxing capital in a globalized world. Half of the world's foreign direct investments are routed through offshore tax havens. In April 2016, The Panama Papers showed that rich individuals routinely use shell companies in tax havens to avoid or evade taxes. Still, little is known about who evades capital taxes, why, and to which extent. Current estimates on offshore tax evasion are based on aggregate data. We are the first to utilize unique new administrative micro data from Norway and Sweden to provide much sought after insights in the anatomy of capital tax evasion to governments, media, NGOs, and researchers. We have access to population wide samples of individuals who have been found evading taxes, data on firms' and individuals' cross-border bank transfers, detailed taxpayer information, exhaustive coverage of the richest individuals at the micro-level, as well as a link between firms and individuals. First, we provide the first comprehensive assessment of how tax evasion varies across the wealth distribution. By combining our results with aggregate data, we can construct revised estimates of income and wealth inequality all over the world, when taking into account income and wealth that is unreported to tax authorities. Second, we develop and implement innovative machine learning methods to detect international tax evasion. If successful, this project could revolutionize the way capital taxes are enforced all over the world. Third, we provide credible causal estimates of how capital taxation affects international tax evasion. The results are likely to illuminate the public debate on the desirability of wealth taxes, which has gained prominence worldwide following the publication of Thomas Piketty's (2014) book, Capital in the 21st Century. Most importantly, we provide the very first estimate of the tax elasticity of capital flight, which is the key determinant of the optimal tax rate on Capital