Hidden Capital and State Borders: A reading of “The Wealth of Nations”

The importance of Gabriel Zucman’s book “The Hidden Wealth of Nations” lies in its attempt to reveal the sheer size of wealth that is being sent abroad to tax havens away from the eyes of tax authorities of the world’s states. In addition, the book transcends the technical aspects of the tax havens issue and link it to other contemporary issues, including inequality, the ability of nation states to fund its social role, and the future of democracy. The book also presents a serious attempt to gauge the size of wealth hoarded in tax havens and proposes a working plan to deal with this issue. So, how does Beshoy Magdy^[1] read the link between tax havens and mobile capital, and the ability of nation states to address this issue.

Capital and the State: Who puts the rules of the game?

There is no doubt that capital is one of the main actors that have shaped the past two centuries of our economic and social history by forcing us to keep altering our social organization institutions to meet its demands for unlimited growth. If we imagine the global, national, and local political economies as a chess game, it could be easily argued that capital has always managed to be making the first move. All other actors, including, national and local governments, labor unions, and social movements have been taking reactionary moves. Capital has been and continue to be the god of the modern world. Governments and cities are presenting their people, and their natural resources as a sacrifice to this god to gain its approbation hoping that it would generously accept to spend some time in their geographies. The problem is that this god is insatiable. Cities and governments find themselves obliged to provide this god with more human and natural sacrifices just to ensure their continued blessed existence in their territories. This god knows very well that other places are in dire need for their existence. Hence, different governments and cities enter a race to the bottom of the underworld of poverty, inequality, democratic backsliding, and natural degradation.  The question that poses itself is whether governments would ever be able to stand against the blackmailing practices performed by holders of capital, or will governments continue to be totally helpless in the face of capital given the many advantages that it enjoys, including its high mobility, particularly with the rapid technological change and the many forms that capital can now take, including intangible ones.

Where does the wealth disappear? Tax havens and the secrecy economy

In his book, “The Hidden Wealth of Nations: The Scourge of Tax Havens”, Gabriel Zucman attempts to find answers to these questions as well as solutions to this historical scourge that continues to puzzle modern nation states. The book investigates one of the main methods that have been used historically by holders of capital to circumvent tax systems by sending their wealth to offshore tax havens for the purpose of tax evasion. Zucman explains that this phenomenon is very widespread where all geographic regions of the world suffer from it without exception. According to his estimates, about 8 percent of the global financial wealth of the household sector is held in offshore tax havens^[2]. This means that in 2015, out of the 95.5 trillion USD that constitute the total wealth of the household sector, about 7.6 trillion USD were held in tax havens. About 80 percent of this figure (6.1 trillion USD) goes unrecorded^[3]. There are specific destinations that play a prominent role in facilitating tax evasion by holding assets in bank accounts that are subject to strict bank secrecy rules. One of those destinations is Switzerland for sure. According to Zucman computations, in 2015, Switzerland alone managed about 2.3 trillion USD of hidden wealth. Most of this hidden wealth that is managed by Switzerland is attributed to European individuals who owned about 1.3 trillion USD^[4]. But the shares of other regions of the world are not negligible by any means. For instance, the share of individuals who belong to the Arab Gulf states stood at 300 billion USD, while Africa’s share was 150 billion USD^[5].

The question now is what the effects of this phenomenon are on the lives of laypeople. According to Zucman estimates, the practices of tax evasion through holding assets in tax havens cost all government in the world 200 billion USD each year in the form of forgone tax revenues. Such forgone revenues could have been used for spending on health, education, social protection, or other types of public spending that would benefit laypeople. Although this figure might not be that large since it represents about 1 percent of the total public revenues of all governments across the globe^[6]. Still, Zucman argues that we should not underestimate these figures, especially that its relative weight differs from one region to another. For instance, while the hidden wealth held in offshore tax havens represent about 10 percent of the total wealth of the household sector in Europe, this percentage increases to 20-30 percent in the cases of Latin America and Africa^[7]. In addition, these tax evasion practices have deprived governments of 21 and 14 billion USD of tax revenues in Latin America and Africa respectively^[8]. It would have been good if these forgone revenues were collected by the concerned governments where they could have spent it on improving the lives of Africans and Latin Americans by investing in their health and education. By its turn, such human development investments might have played a role in stemming the tide of emigration from Africa to Europe or from Latin America to the United States and many lives of those who drowned in the seas trying to flee their countries would have been saved. Additionally, this could have lessened the possibility that ultra-right movements in the West would use the emigration crisis to climb up the authority ladder as we have seen with the case of the MAGA movement in the United States context, as well as other far right parties across Europe. Hence, it is a vicious circle, and all its parts are connected to each other in one way or another.

Similar to the case of individuals in the household sector who hoard their wealth in tax havens, multinational companies are also implicated in tax evasion practices by sending their profits to tax havens where the taxes are very low or even zero. The list of these havens, include among others, Singapore, Luxemburg, Premuda, and Switzerland. Again, these practices cost the public treasuries of countries huge sums of money. For instance, Zucman estimates that the United States alone loses about 130 billion USD each year in forgone tax revenues that could have been collected if companies working in the US do not use these tax evasion practices^[9].

The irony in this whole situation is that individuals and companies have enjoyed massive tax rate reductions all over the globe with the neoliberal reforms that started in the 1980s, but it seems that this was not enough for them, and they decided to go too far by choosing not to pay any tax whatsoever. This takes us back to the point that was discussed in the beginning of this review that capital is never satiable. Hence, it seems that the most logical way to deal with such a greedy actor is not to yield to its threats of leaving this or that country, but by confronting it. One necessary condition for such confrontation, Zucman argues, is collaboration and coordination between different countries. But let us pause here for a moment to question such collaboration recommendation that is made by Zucman. The main issue here is that Zucman takes the global financial architecture and its governance system as givens and do not problematize them as if the core and the periphery are equal players on the global stage. At the end of the day, the global financial system, and in the heart of it, the global capital markets, is a power landscape where most of the rules of the game originate from the Global North and are imposed on the Global South. They usually say that capital is coward. Capital is coward not only because capital holders prefer to stay away from high risks, but also because capital, particularly in its financial form, seeks high yields in developing and emerging countries when interest is low in the core centers of the global financial system, but once crisis looms, those capital holders take their assets and flee these countries and seek safety in their home countries in the center. As a result, developing countries are left to face the consequences of the financial busts that result in part from the volatility attached to this exact mobile capital. In addition, in those moments of crisis, the flight of capital to the core supports the currency stability in advanced capitalist countries at the expense of currency instability in the Global South. The irony here is that this capital flees these countries in the exact same timing that it is needed the most to support the stability of their currencies against the currencies of the core centers^[10]. This is exactly why capital, especially western financial capital, is coward. Also, this is why I consider it a bit problematic that Zucman does not problematize such governance structure when he discusses collaboration between different countries to deal with the tax havens issue. He even suggests that the US and Europe, the core financial centers, should be taking the lead in that effort.

Who has the capacity to confront? The limits of a global solution

To get back Zucman’s recommendations on how to deal with the tax havens issue, and whether there are possible solutions to it, Zucman puts forward what he calls an action plan. He argues that countries should not count on the good will of banks and financiers in tax havens since this strategy was tried many time before and failed in every single one of them. Hence, the first pillar of his action plan is that countries should impose penalties on tax havens that do not cooperate with regard to disclosure and transparency re the wealth hoarded in their banks. For instance, Zucman contends that Switzerland neighbors and main trade partners (i.e., France, Germany, and Italy) will need to threaten Switzerland that they will impose a tariff on its trade with them in case it does not want to cooperate in removing the strict secrecy rules that facilitate the tax evasion practices. Zucman argues that Switzerland will reevaluate its approach in case it finds that its losses because of the trade tariffs will be higher than the benefits that it gains from being a tax haven. Zucman warns that countries such as Switzerland or Hong Kong might decide to absorb the effect of tariffs and continue to play its role as key tax havens. Zucman then contends that cooperation and coordination between countries and not actions from individual states will lay maximum pressure on tax havens and hence they will choose to comply and cooperate. Zucman also argues that such coordination and cooperation between different countries is the main strategy that will stop tax havens from retaliating by imposing similar trade tariffs in case the action was made by individual countries and not a group of countries since tax havens will face immense pressures and significant losses as a result of such coordination of efforts between countries. Finally, Zucman argues that the implementation of trade tariffs is not in the interest of any party, but the threat of using it should be real to make it effective in compelling tax havens to change their approach.

But even if tax havens agree to cooperation with tax authorities in different countries, what would be the guarantees that such cooperation would be genuine and that they would not try to circumvent again as happened in previous times. Here comes the second pillar of Zucman’s action plan which is represented in the creation of a “global wealth registry” that will include ownership information on all circulated financial securities. All tax authorities will have access to this registry and will be able to tell whether banks in tax havens disclose all the true information or not. Zucman links this proposal to another highly debated proposal made by his mentor, Thomas Picketty, in his book “Capital in the Twenty First Century” on a global wealth tax. Zucman claims that his wealth registry proposal is a necessary condition in case countries decided to implement this wealth tax proposal.

Zucman argues that there are many benefits that would result from the encirclement of tax evasion/havens. Imposing tax on the wealth hoarded in tax havens will stem the tide of fiscal austerity that plagues the whole world by easing the public debt stance of different countries. Using these tax revenues, states will be able to repay parts of its debt, and this will create some fiscal space for more social spending. In addition, by making everyone pays their fair share of tax, this will ease the tax burden on those at the bottom or the middle of the income distribution. Ultimately, breaking the vicious circle of austerity and achieving more tax justice will help in restoring faith in democracy and one of its main pillars, consent to taxation.

Zucman does not agree with those observers and experts who might consider his proposals to be utopian, particularly his proposal to establish a global wealth registry through coordination and cooperation between different states.  In fact, the not-so-distant history does not provide us with many examples in which all or most countries of the world were able to coordinate their efforts to face some type of common challenge. The failure to cooperate regarding an existential crisis such as the global warming is a case in point. But only time can tell us whether Zucman’s proposals would ever see the light of the day.

Arab wealth and the missing social contract

What does all this mean for us as citizens of the Global South, particularly in our Arab region, which is considered one of the most unequal, if not the most unequal, region in the world^[11]. Like other countries that suffer the consequences of tax evasion, hoarding Arab wealth in tax havens negatively affect the revenues collected by Arab tax authorities and the ability of Arab governments to provide social services to Arab citizens. But unlike the case in what is called mature welfare states in the West where taxation by the state was conditioned on representation, Arab citizens have been historically stripped of their political and civil rights in return for the provision of some social benefits by authoritarian Arab regimes. But even this package of social benefits started to erode with the implementation of neoliberal reforms in the 1980s. This political economic order proved itself to be unsustainable and came under threat during the Arab Spring events where Arab citizens took to the streets to request the full set of citizenship right: political, civil, and social and economic. Unfortunately, winds blow counter to what ships desire as they say, and here again capital is the culprit. Arab Gulf states funded counter-revolutionary forces across the Arab world and a new order based on an extra dose of authoritarianism and austerity has been established. The irony is that Arab gulf elites prefer to invest their money in the West or to hoard it in tax havens instead of investing in the development of other Arab countries, and when they decide to invest within the region, they chose to fund the counterrevolution forces.

Overall, we can say that “The Hidden Wealth of Nations” is a very important book that is still very relevant although it was published a decade ago. In a world where wealth and income inequalities are widening, and the faith in democracy is eroding with the ascendency of far-right movements everywhere, fair and just taxation on all could be the stone needed to hit those two interconnected malicious social phenomena at the same time. The book is very accessible and is suitable to a broad spectrum of readers, including laypeople, experts and academics, and university students.