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. It shows over time how much of corporate profits got funneled away from the US tax authorities into just 7 tax havens (including the Netherlands I am ashamed to say). This is only a tiny part of corporate tax evasion (which is now estimated to easily be 50% of multinational corporate profits), so its not the numbers that matter but the timing of the changes.
This graph tells you that evasion among the big and powerful became a big thing around 2002 and stabilised around 2013, you might say the era of the explosion of the internet and thus the ability to hide in a very sophisticated manner.
The next graph tells you how this was essentially achieved by showing you over time the total number of pages you need to be aware of when paying taxes in the US. Note that 1986 was supposedly the year of the great tax simplification.
The key thing to know is that the number of pages of the actual tax legislation is pretty constant in the last 50 years at around 2,600 pages. Additional rulings of the IRS are another 6,400 pages or so. The big increase is the jurisprudence, ie ruling by courts on how elements of the tax code can be read and (ab)used. The increased complexity is thus not by government, but by rich individuals and companies trying to get away with tax evasion, leading to all kinds of schemes on which courts then have to decide (if the IRS even uncovers them). You see the tax rat-race begin in the 1970s and really explode in the 1990-2012 period and some stabilisation thereafter.
What this reflects is that companies and rich individuals understand the tax regulations much better than the tax officials. The advisers and lawyers of corporations and the top 0.01% often include the people who wrote the legislation. Also, the ability to simply avoid taxes by postponing them again and again via litigation has burgeoned.
So the rich have become more sophisticated than the tax authorities. They have the smarter experts and the deeper connections with politics, able to use the courts to hide and enable their activities. The US tax authorities have tried to keep up, but are spectacularly failing, which you can also see in the top graph that shows that tax audits do not find among the 0.01% what the leaked Panama documents did uncover.
The simple fact is that particularly the American super-rich have effectively beaten the tax-system and are no longer true citizens of the US in the sense that (if the pattern of the Scandinavians applies doubly to them) the laws 99.95% of Americans abide by do not apply to them. They are in between true rulers, who at least have the duty to look after their population, and the citizens: they are a new kind of nobility. Funnily enough, the nobility of centuries past was often untaxed in Europe, instead doing a lot of taxing themselves of their peasant subjects. That time has now returned and Americans thus now live economically in a neo-feudal era, which is not compatible with democracy or nationalism.
The situation in Australia is no different: Australia now has an economic wealth and tax burden structure more reminiscent of the European middle ages than of the 1970s. The reality that a new group of barons has arisen, and what one can do about it, is something to talk about in a follow-up post.