The Hidden Wealth of Nations: The Scourge of Tax Havens
Gabriel Zucman, (Chicago 2015).

The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth
Dag Detter and Stefan Fölster, (Palgrave Macmillan 2015).


2015 seems to have been the year of book titles invoking Adam Smith’s Wealth of Nations. These two quite different books both exploit publicly available statistics in an effort to shed light on important issues in the world economy. Both cope with imperfect data, both reach broad conclusions despite those imperfections, and both are likely to be influential. However, The Public Wealth of Nations copes far better with the data imperfections to support its recommendations than does The Hidden Wealth of Nations.


The Hidden Wealth of Nations: An assault on “tax havens”

Gabriel Zucman, a student of French economist Thomas Piketty (who provides a forward and a jacket blurb) and professor at the London School of Economics, has written an accessible, lively and short book attacking offshore financial centers. (Thankfully he did not follow in Piketty’s footsteps in writing style or length!) He’s put the numbers on a website, allowing him to focus the book on his major conclusions and policy recommendations.

This is not an academic exercise, comparing costs and benefits or attempting to summarize arguments on both sides of an issue. Zucman sets out from the start to show just how terrible tax havens are. While briefly acknowledging that “Each country has the right to choose its forms of taxation,” he moves in a single sentence to denouncing offshore financial centers for “steal[ing] the revenue of foreign nations” and then concludes the paragraph by stating that “nothing in the logic of free exchange justifies this theft” (page 1-2). Denouncing “tax evasion by the wealthiest individuals and large corporations,” Zucman quickly conflates evasion with tax avoidance and claims that 55 percent of “all the foreign profits of US firms are now kept in such havens.” (p4) “Since multinationals usually try to operate within the letter – if not the spirit – of the law, this profit-shifting is better described as ‘tax avoidance’ rather than outright fraud.” (p4)

Yes, indeed they are better described that way. Lumping tax avoidance in with tax evasion is sloppy work. As a lawyer as well as an economist, I find both my professions tend to misunderstand each other. Zucman provides a terrific example of how economists ignore legal distinctions. Tax evasion and tax avoidance are quite different animals – one is a crime and one is legal. There are lots of subtle questions – which my lawyer friends are happy to debate at $750/hour – about the exact line between “aggressive tax planning” and criminal activity, but only willful ignorance can explain labeling all overseas profits held outside the U.S. as the result of criminal (or similar) behavior by firms rather than the combination of some such behavior and the perverse incentives created by the U.S. tax code. As Apple CEO Tim Cook recently noted in an interview with the Financial Times, the U.S. corporate tax code was “made for the industrial age, not the digital age” and needs to be overhauled. Surely some of those corporate profits overseas are there because we have an outdated business tax system. A debate between Zucman and Cook on this point would be enlightening for all concerned, but would be particularly helpful in figuring out whether the share of those profits left overseas for illegitimate reasons (Zucman is a bit vague on what those are other than paying less in taxes) is 100 percent as Zucman claims or much less, as Cook implies. I’d bet on Cook winning that debate because Zucman shows little familiarity with actual tax rules (or legal rules of any kind) in his book, while Cook seems quite familiar with the details of U.S. tax law.

Zucman also has little sympathy for individuals who put assets in other countries. Switzerland is quickly dismissed as a jurisdiction devoted to criminal tax evasion: “For a customer, the main reason to deposit securities in a Swiss bank is and always has been for tax evasion” (p17). This is a strong claim. There’s no doubt that some Swiss banks engaged in facilitating tax evasion by foreigners in the past (and some of them are now paying heavy fines as a result of being caught). But there are many reasons Switzerland has long been a center for international finance other than facilitating fraud. For example, Harvard Business School Professor Michael Porter, in his superb book, The Competitive Advantage of Nations (Free Press 1990), noted that the “Swiss ability to deal with different languages and cultures (Switzerland contains German-, French-, and Italian-speaking regions) is an advantage in services such as banking, trading, and logistics management” (p76). Porter expands on this later in the book, noting that:

“Swiss fluency in languages, which I spoke of earlier, is one of the important reasons why Switzerland ranks with the United States and Britain as an important international service competitor. Singapore’s emergence as a growing center for services also reflects in part its English-speaking population.

“Also significant in many services is the ability to interact easily with many different cultures. This is another Swiss advantage. Not only do Swiss often have language skills, but their familiarity with multiple cultures yields advantages in client relations, as does Swiss neutrality.” (p257)

Perhaps it is not surprising, although it surely is depressing, that an economist focused on inequality would not consider whether comparative advantage might play some role in the international division of labor. And Porter’s theory, unlike Zucman’s quick imputation of illegitimate motives to the entire Swiss financial industry, is testable. As Porter notes, Sweden has many of the same advantages that Switzerland does. Why isn’t Sweden an important financial services center? “[A] narrower base of industry, a stifling government involvement in providing services (demand conditions), and a poor climate for start-ups (firm strategy, structure, and rivalry), among other reasons.” (p257)

Zucman’s reductionism extends well beyond Switzerland. Hong Kong, Singapore, Jersey, Luxembourg and the Bahamas are all the same: “In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice, as well as other services, such as the possibility of having a current account that earns little or nothing.” And, of course, “they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances.” (p23) Well, no, they don’t. These jurisdictions differ dramatically in the types of services they offer. Singapore has sought to play a role as the “Asian Switzerland” in private wealth management (which is certainly not entirely about tax evasion but partly about stability and cultural attributes similar to Switzerland’s) while Hong Kong is a major financial center for investment into China and Asia generally by virtue of its sophisticated capital markets, business law, courts and overall legal system. Jersey plays an important role in inbound investment into less developed economies for similar reasons, as shown in the Capital Economics report, Jersey’s Value to Africa: The Role for International Financial Centres in Delivering Sustainable Growth in Developing Countries (Nov. 2014) (note the report was funded by Jersey Finance). For example, the report notes that a number of extractive industry companies active in Africa are based in Jersey:

“At first glance, this may appear odd given the island’s lack of mineral resources or technical expertise in the field. But it makes sense in the context of the scale of the risks taken and investment needed by such businesses. The business model for mining or drilling is typified by large up-front capital expenditure and sizeable operational risks. In Africa, these may be compounded by political and systemic dangers. Few investors have an appetite for such ventures – so those assembling the finance for a mining or drilling deal must search across the globe for funders. Jersey is a logical location for the pooling of these multinational funds — with an internationally respected legal system that can be trusted to handle cross-border disputes fairly, and tax neutrality which eliminates any investors’ concerns about being double taxed or subject to withholding charges.” (p13)

Ignoring the role that legal systems play in creating and maintaining investment arrangements is a convenient abstraction but it is ultimately bad economics.

How much wealth is there hidden away? Zucman’s calculation is that there $7 to $8 trillion avoiding and/or evading tax around the world (p40). He is gently critical of the James Henry/Tax Justice Network estimate of $21 to $32 trillion. (Richard Gordon and I are less gentle in Moving Money: International Financial Flows, Taxes, & Money Laundering, 37 Hastings Int’l & Comp. L. Rev. 101 (2013) available at If this could be taxed, Zucman suggests it will all be spent on fine things like education and infrastructure, never considering that some might end up in fraud or crony capitalist projects.

Zucman also has little patience for legal values like due process or privacy. He rejects on-demand information exchange because it requires “well-founded suspicions of fraud” before information can be requested, noting “in practice [this] is almost impossible to prove.” (p59) This is false, as criminal convictions for tax fraud occur regularly in most developed countries. Even more disturbing is the casual dismissal of the value of requiring governments to follow the rule of law and prove criminal behavior rather than assuming it. He also has little appreciation for the costs imposed by the sorts of regulatory measures he favors. After conceding that there is “a real risk that FATCA will impose substantial administrative burdens on many law-abiding U.S. taxpayers and the financial institutions that serve them, while at the same time failing to catch the most aggressive tax dodgers,” he concludes that it is “the starting point toward changing the ground rules that previously governed offshore banking.” (p63)

To solve the problem of tax evasion and avoidance – Zucman continually conflates the two – he proposes several extraordinary measures. First, substantial trade tariffs should apply to jurisdictions like “Switzerland, Luxembourg or the Cayman Islands” whose economies, he claims, “offer some taxpayers who wish to do so the possibility of stealing from their governments.” (p79) These tariffs would be set to recover what Zucman estimates is the lost tax revenue from such jurisdictions’ activities. Not just high tax jurisdictions like France should impose these tariffs, but a “coalitions of countries” which “weigh heavily in” the jurisdiction in question’s foreign trade. (p80)

Second, a “global financial register” is needed, which “[q]uite simply … would be a register recording who owns all the financial securities in circulation, stocks, bonds, and shares of mutual funds throughout the world.” (p92).  The benefits from such a database appear to be virtually limitless to Zucman: “a better accounting of wealth – not only real assets but also financial claims – would do much good in the fight against money laundering, bribery, and the financing of terrorism, and it would help better monitor financial stability.” (p93) There is nothing “simple” about creating such a database, nor does Zucman appear to be concerned that unsavory regimes, criminals, or fraudsters might find such data useful or to have given any thought to the transactions costs creating and maintaining such a register would require.

Next, Zucman suggests a global wealth tax like that proposed by his mentor Piketty. (He just assumes such a tax is desirable, noting that the idea has “generated a heated controversy” which he did not want to repeat). This would enable “the fatal blow to financial opacity.” (p99)

Staggeringly, he concludes the book by claiming “there are no technical obstacles to the measures I propose.” (p116) If he believes this, I can only conclude that Zucman has never spoken to any practicing lawyer from any jurisdiction – tax haven or not – about the practicalities or risks of his proposals.


The Public Wealth of Nations: A Call for Better Management

Dag Detter and Stefan Fölster, Swedes with both public and private sector experience, set out to accomplish a similar task – to answer the question: How much is there in underutilized public sector assets around the world? They estimate that “[m]ore than two-thirds of all public wealth ownership remains opaque” and more or less invisible to the nominal owners, the public. (p3) This includes state-owned enterprises (SOEs), public land, financial assets and noncommercial assets, less government debt. This wealth is not in opaque structures by accident – Detter and Fölster argue that much of it has been deliberately made hard to monitor by those who benefit from “shady accounting.” (p10) They argue that central governments alone control at least $75 trillion in assets, roughly equal to global GDP (52).

Even a 1 percent increase in yield would thus produce an additional $750 billion in public revenues. Based on their experiences in Sweden managing public assets, Detter and Fölster suggest that a 3.5 percent increase in yield is feasible. (p4)

What is impressive about their estimate is that Detter and Fölster are not wild-eyed, neo-Thatcherites, proposing massive privatization. Rather they are middle-of-the-road Swedes with experience raising the rate of return from public assets, making their estimates conservative. They make a compelling case that the attributes of a good manager are different from the attributes of a politician, and that bringing a managerial skill set to bear will yield results.

“Active governance is not simply a question of avoiding waste, corruption, vested interests, and crony capitalism. Active governance also means developing the business and optimizing the capital structure with a competitive operational strategy to maximize value. Doing so with public wealth should aim to yield financial returns similar to comparable assets in the private sector – to benefit all taxpayers. The gap in yield between a publicly owned company and its private competitor is really a loss of income to taxpayers. The loss benefits a vested interest – paid for by taxpayers.” (127)

Not only are there direct revenue benefits to the state from improving the management of its assets, but there are also indirect economic benefits from increasing the competitiveness of the firms managing those assets.

Getting the benefits requires three things: transparency, a clear objective, and political independence. (p128) To do that, public assets should be held by a national wealth fund (NWF), with professional management. Detter and Fölster define an NWF as “an asset manager, concerned with active management of operational assets as a portfolio” (p147). The authors provide a number of examples of successful NWF approaches, from Sweden to Singapore.


Where should global efforts go?

There are interesting parallels between these two books. Detter and Fölster suggest better management of public wealth could produce more than $2.6 trillion in additional annual revenues; Zucman says there is $7-8 trillion in hidden assets that are avoiding/evading tax. If those hidden private assets were earning 10 percent (fairly high in today’s investment environment, but let’s assume the super rich tax evaders have amazing investment advisors as well as their super tax advisors), that means there would be $800 million to tax. Even if governments taxed the $800 million at 50 percent, they would still be $2.4 trillion short of the amount Detter and Fölster predict could come from better management of existing public assets. If a Piketty wealth tax was applied to the estimated offshore hidden assets (reducing future collections by reducing the amount of income they could generate), it would need to be at a rate of more than 30 percent. Thus all of the efforts required to set up a global register, automatic tax information exchange, tariff system to punish offending jurisdictions, and so on would be able to produce revenues equal the benefits Detter and Fölster suggest are available annually from better management for just a single year, before the reduced stock of wealth would drop revenues. Even if the much higher Henry/TJN estimates were correct, a 50 percent marginal rate applied to 10 percent earnings from highest estimate ($32 trillion) would produce just $1.6 trillion annually, still requiring eating the seed corn through a wealth tax to equal the extra revenue from better management.

As a bonus, the Detter and Fölster solution also offers to improve incentives in economies around the world while Zucman would load the global economy with massive transactions costs from the red tape and tariffs his system would require, impeding wealth creation.

This comparison highlights a fundamental problem with Zucman and others who wave their hands and propose fantastical tax systems with global asset registries and the like: they never calculate the costs of what they propose. They don’t calculate the direct costs – the army of accountants, clerks, and auditors who would be needed for the global registry – or the indirect costs – the reduced trade that would slow global economic growth, the lowered economic activity in places that need to jurisdictions like the Cayman Islands, Hong Kong and Jersey to provide sophisticated legal systems that will help induce investment, spread risk, and solve governance problems for business entities. Until we get serious analysis of those costs, it is hard to take their proposals seriously. Moreover, we must also take the opportunity costs of devoting the resources to an international wealth and tax bureaucracy instead of to improving management of public assets into account. Given their reasonable estimates, Detter and Fölster’s plan seems like a far more sensible road to follow.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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