Together with Benno Torgler and Katharina Gangl, I published a piece recently on how to tax the powerful and sophisticated. Our substantive argument on what one should do becomes relatively simple once you understand what happened in the world of Western taxation the last 50 years. Consider the story of what happened in three graphs that essentially cover the question who, when, and how did the few escape taxation?
The first graph is from a 2019 AER paper by Alstadseater (et al.) and is mainly an analysis of the leaked 2016 Panama papers that uncovered the accounts of lots of Western tax-evaders who used a specialised firm in Panama. The graph adds that information to information on tax amnesties and what regular tax audits in Scandinavia find.
The way to read this graph is consider that for instance for the P40-P50 group, which is the 10% of the population just under the median level of wealth in Scandinavia, that random audits by tax officers find no more than 2% extra tax that was hidden, and no-one from that wealth group shows up in tax amnesties or in the Panama papers. They are hence very law abiding citizens. Audits find an extra 4% in the P99-P99.5 group (the poorest half of the top 1% in wealth). The Panama papers (plus tax amnesties) find that that group hides another 1% more than shows up in audits. Even up to the P99.95 group (everyone below the top 0.05%), implied tax evasion is less than 5%.
The implied tax evasion really only takes off in the P99.99 group and above, so only the very richest person out of 10 thousand individuals. The estimate of the level of tax evasion at the top is 30% in this graph, but that of course still misses a lot of ‘legal’ evasion and other illegal methods not picked up in this paper, so the reality is much worse. Note for instance that the majority in the top 0.01% is still poor enough to have to organise tax evasion via intermediaries like firms in Panama and could thus get caught by leaks. Billionaires have their own people and their own laws, so they dont have to run the risk of discovery via some dodgy Panama office.
The answer to the question who evades taxes is thus that whilst the bottom 99.95% of the population pays nearly all their taxes, the very richest (the top 0.01%) does not and has escaped taxation. Note that these people will not be in most surveys or even official income statistics, so we are talking about a group that most researchers looking into tax evasion wont even have in their data.
The next graph is taken from a recent Financial Times articles and answers the question when the big increase in tax evasion happened. Continue reading