Offshore trillions and uncounted inequality

Not everything or everyone that is uncounted reflects marginalisation and a lack of power. On the flip side, the story reverses and what is uncounted by design reflects the presence, not the absence of power.

But inequality is never far away. When people go uncounted through a lack of power, it both reflects and compounds the associated local inequality. When income and wealth are uncounted because of their owners’ power, it hides the scale of global inequality.

This weekend the Tax Justice Network launched The Price of Offshore Revisited, their new research on the scale of assets and income which are hidden offshore, to worldwide media coverage. [Full disclosure: I have a long association with the network, and made minor comments on the research.] Such estimates are difficult, precisely because the real numbers are not just ‘uncounted’, but by definition being deliberately hidden. Jim Henry, the former chief economist at McKinsey’s who wrote the piece, used a range of approaches to triangulate and so establish the most reasonable ‘base case’. To this end, the analysis:

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.

The findings are striking, because the base case comes out at between $21 trillion and $32 trillion. I won’t go through the detail of the calculation here, although I would urge you to do so if you have any doubts about the broad accuracy of the estimates – and I’d be interested to hear of any issues. My view is that while any undertaking of this kind necessarily involves a number of important assumptions, Jim has laid out clearly the ones he has taken, along with the data used, and nothing stands out as unreasonable. The triangulation process gives a good deal of confidence that the estimates are in the right area.

 

In truth, it’s not important if a better estimate would be – for example – slightly higher, or slightly narrower. The analysis takes us a good deal further down the road of understanding the nature, distribution and scale of illicit finance. As the piechart illustrates, the 139 low and middle income countries studied have ‘lost’ wealth of up to $9.4 trillion: more than twice their gross external debt which comes to about $4 trillion.

With the underpinning detail, national policymakers can have a clearer idea of the relevant pressure points, while internationally the excuses for inaction are surely all gone. The same international financial opacity that stymied national regulation before the crisis, has continued before and since to drain tax revenues that could have raised and protected social spending – for countries at every income level.

Where the research has perhaps the most profound implications is that the emphasis, rather than being on the flows themselves (as Global Financial Integrity have done powerfully, for example), is on the implied wealth distribution. In this, the work comes closer to the approach taken by Leonce Ndikumana and James Boyce of PERI at the University of Massachussetts, which estimates the African wealth that has been illegitimately drained from the continent.

The companion piece to Jim Henry’s report is authored by Nick Shaxson (author of the book Treasure Islands), John Christensen (founder of the Tax Justice Network and director of its International Secretariat) and Nick Mathiason (of The Bureau of Investigative Journalism). It is called, neatly, Inequality: You Don’t Know the Half of It.

In this piece, the authors bring together responses from leading researchers on inequality (and me), to the new data and its implications for what is known about the extent and nature of inequality. Experts ranging from the World Bank’s Martin Ravallion to Kevin Watkins of the Brookings Institution and Thomas Piketty at the Paris School of Economics concur that income and wealth inequalities are extremely badly captured at the top end of the distribution.

My small contribution to the report is to question the implications of the re-imagining of inequality that the research appears to require. Each society’s level of inequality is effectively a political choice, emerging and evolving over time through more and less representative systems to reflect popular tolerance. What then happens when it transpires that the actual levels of inequality may have been obscured, and deliberately so; and may have been rising, systematically, well in advance of the reported levels?

Perhaps people respond to the inequalities they recognise in life, rather than the statistics they are presented with – in which case the only adjustment is that the statistics may come closer to that reality. But perhaps not; how stable are political preferences in response to a shock to (perceptions of) inequality?

In the UK, the estimates have re-energised the (already quite frothy!) political debate over tax avoidance. In an interesting echo of the now widespread ‘tax patriotism‘ campaigns in countries at lower income levels (‘pay your tax and set your country free‘, as the Kenyan Revenue Authority have it), a UK Treasury minister has argued that middle class people paying tradesmen cash in hand are morally wrong to do so, because this makes them complicit in (potential) tax abuse.

As I’ve argued elsewhere, the evidence from experimental economics suggests that there are two main determinants of people’s tax compliance: the extent of redistribution that actually happens once taxes have been paid, and the perception of others’ compliance. This means that policymakers have a lot of leverage. The more they can ensure the system reduces inequality, for example through effective social protection and reduced losses to corruption, the higher compliance is likely to be. The higher is observed compliance among the most visible (elites and big business), the higher actual compliance more widely is likely to be.

All of which brings us back to the importance of being counted – or, in this case, of ensuring that not only are public expenditures transparent and accountable, but that so too are tax contributions. And if we could combine this with an effective international mechanism to make sure countries knew when their residents owned assets and income streams elsewhere… but that’s a whole other post.