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Constraints in Tackling Wealth Inequality

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31 October 2018

Picketty won widespread acclaims for his in-depth analysis of the evolution of inequalities especially in developed economies but was also criticised for falling short in offering viable solutions that could tackle the widening wealth gap.


One of the main problems in tackling the wealth gap is that the riches of today’s wealthiest can be easily hidden away in tax havens such as Switzerland, Singapore, Hong Kong, the Bahamas, the Cayman Islands, Luxembourg, and Jersey. This is unlike in the past when the rich held immovable assets such as land and property.


As of spring of 2015, for example, foreign wealth held in Switzerland amounted to an astounding sum of $2.3 trillion. Despite governmental efforts by the countries of the G20 to end banking secrecy since April 2009, the amount of money in Switzerland rose by 18%. For all the world's tax havens combined, the increase was even higher at about 25%.[1]


On a global scale, the $2.3 trillion stashed away in Switzerland constitutes only a third of the total amount of offshore wealth held in all tax havens which is estimated to be about $7.6 trillion or 8% of the total global household financial wealth of $95.5 trillion. The figure of $7.6 trillion is likely to be understated as it does not include hidden wealth in the form of cash in vaults, life insurance policies, works of arts, jewellery, precious metals and stones, and real estates.


Moreover, offshore banking is becoming more sophisticated. To stay anonymous, more and more wealthy individuals have switched to using shell companies, trusts, holdings, and foundations, incorporated in British Virgin Islands, as nominal owners of their Swiss assets which are then invested in Luxembourg funds. In Luxembourg, official statistics show that "assets are moving to legal structures such as family wealth-holding companies."


All in all, the fraud perpetuated through unreported foreign accounts each year costs about $200 billion in fiscal revenue lost to governments throughout the world.


The culprits are not limited to individuals. US companies, for example, routinely shift their profits to Bermuda, Luxembourg, and similar countries on a massive and growing scale to avoid paying taxes at home. Today, 55% of all their foreign profits are now kept in such havens using legally sanctioned "tax avoidance" accounting procedures. This translates into loss of tax revenues of about $130 billion a year for the US alone. Since equity ownership is very concentrated, it essentially benefits only the wealthiest.


Besides advocating financial transparency and international transmission of bank information, Picketty also suggested the setting up of global registry of financial assets as well as carrying out global coordination on taxation of wealth to cut evasion and avoidance.


None of what Picketty had suggested are off-the-shelf solutions. They require intricate international coordination on how standardized statistics can be collected. Sensitive information must then be shared between agencies across jurisdictions. Even if governments can set their differences and sensitivities aside to act in concert, it will likely take years for such a global wealth taxation framework to come to fruition.


The inadequacy in Picketty’s research thus points more to the difficulties in gathering meaningful data and in regulating wealth dynamics in today’s highly globalized economy.  The rich live in an international space while taxation is still done nationally. The highly integrated global financial markets also facilitate easy cross-border transfer of capitals and holding of assets so that wealth can be hidden in foreign tax havens which thrive on lack of financial transparency. As a result, efforts of governments to tax and redistribute wealth are constantly thwarted by avenues of tax avoidance.


Furthermore, since the wealthy are mobile and generating income from their investments from anywhere in the world where yield is high, they are no more dependent on their community for their living. They may therefore not see the need for paying back. Many simply uproot and become citizens in countries with favourable tax regime to avoid paying taxes in their home country. Eduardo Saverin of the Facebook fame is a good example. He renounced his American citizenship in 2011 and has been living in Singapore since 2009. His citizenship change helped him save $700m in capital gain tax when Facebook went IPO.


Finally, it is also difficult to talk about both income and wealth inequalities without reducing it into a blame game whether it is blaming the poor for being lazy, the rich for rent seeking, or the foreigners for taking away jobs. In the end, the perennial political bickering may incapacitate the nation and prevent it from adopting critical reforms needed to help the economy adjust to rapidly changing environments and to move the nation forward.


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[1] See Gabriel Zucman (2015). “The hidden wealth of nations: the scourge of tax havens.” Translated by Teresa Lavender Fagan. The University of Chicago. Pg 49.

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