Inequality is Weakening Social Security. Here’s How We Fix That.
When Congress set the cap on Social Security contributions in 1983, they didn’t anticipate forty years of rising inequality. And it’s cost us — a lot.
More than enough, the latest statistical evidence suggests, to warrant a full-fledged federal search. A new banking law in effect this month could start that search in the right direction.
By Sam Pizzigati
Almost everyone knows how Al Capone went down. We’ve seen the movies.
The biggest and baddest gangster in American history extorted and murdered for years. But the feds could never convict him on anything, until the green eyeshade guys went to work. They finally nabbed Capone — on income tax evasion.
The moral of this story? Even the most ruthless of our richest can’t hide what the federal government really wants to find.
We need the green eyeshades back on the job. Today’s wealthy have taken tax evasion to a level that old Scarface never dared imagine. Their network of offshore tax havens is now hiding a significant share of the world’s wealth.
How much are the mega rich hiding offshore? Independent analysts have been working to pin that figure down. The most recent — and statistically robust — of these estimates comes from the young London School of Economics analyst Gabriel Zucman, a protégé of the widely heralded French economist Thomas Piketty.
Zucman has zeroed in on what he calls the “anomalies” of international financial record-keeping. His prime example: the “residence principle.”
In theory, this notion works simply. Say, for instance, that a French national holds a $1 million investment in U.S. financial securities. Financial records, under the residence principle, are supposed to record this $1 million as an asset for France and a liability for the United States.[pullquote]We’re living in a world where taxes on our wealthy can only be collected if these wealthy self-declare their income.[/pullquote]
At the end of the day, these assets and liabilities should balance out globally. But they don’t. Not even close. Why not? The wealthy are stashing a growing share of their wealth in tax haven banks that don’t, Zucman notes, “automatically report the investment income earned by their clients to tax authorities.”
In effect, the economist relates, we’re living in a world where taxes on our wealthy can only be collected if these wealthy “self-declare their income.” Ever fewer do.
Zucman’s virtuoso statistical sleuthing ends up concluding that the global super rich — deep pockets who typically hold over $50 million in assets — had stashed, as of 2008, $7.6 trillion in offshore tax havens, about 8 percent of total global personal financial wealth.
About 80 percent of this offshore wealth, Zucman calculates, goes undeclared to tax authorities. Declaring that income — and paying a taxes due on it — would add, Zucman estimates, over $200 billion annually to global tax collections.
Zucman emphasizes that his figures only cover financial wealth. His calculations do not cover the huge sums the ultra rich have parked in jewels or fine art or luxury real estate.
Helping the wealthy hide their wealth, financial and otherwise, has become an astonishingly lucrative business opportunity for bankers and barristers the world over. Most all major global banks, including American giants like JPMorgan Chase, have subsidiaries in the world’s top tax havens.[pullquote]About 80 percent of offshore wealth goes undeclared to tax authorities. [/pullquote]
This lucrative, tax-evading universe occasionally surfaces out of the opaque accounting depths. One story broke late last month when a federal judge sentenced powerhouse Illinois lawyer Paul Daugerdas to 15 years behind bars for a two-decade-long fraud that saved his wealthy clients $1.6 billion in taxes.
Those clients ranged from an early investor in Microsoft to the late oil billionaire Lamar Hunt, one of the most powerful owners in professional sports.
For his services, Daugerdas personally pocketed $97 million.
“This case shows the astonishing lengths some super-wealthy Americans will go to avoid their obligation as citizens,” U.S. district court judge William Pauley fumed at the sentencing. “Mr. Daugerdas was a tax shelter racketeer who tapped into the incredible greed of some of the country’s wealthy.”
A new tax law provision that went into effect July 1 could make life for Daugerdas and his colleagues more difficult. Or at least IRS officials hope so.
The 2010 passage of the Foreign Account Tax Compliance Act gave these officials the regulatory wherewithal to level stronger sanctions against foreign banks that play footsie with wealthy American tax cheats. As of this month, the heart of the law goes fully into effect: Foreign banks must now report the accounts of U.S. citizens that total over $50,000.
About 70 nations have so far agreed to abide by the new Foreign Account Tax Compliance Act reporting requirements, many without much enthusiasm.
[toomuch_promo]Other nations — tax havens like the Seychelles, an island nation in the Indian Ocean — remain defiant. They see the new law as an ideal opportunity to boost their global market share in tax-evasion services.
Financial operators in the Seychelles specialize in creating “shell companies” that help their wealthy clients conceal their fortunes. They take a fee for every company created.
“The British Virgin Islands registers 30,000 companies a year,” Paul Chow, a former member of the Seychellois parliament, boasted recently to a visiting journalist. “We are at about 11,000. We are catching up.”
The United States has in the past, of course, invaded islands with less “just cause” than the tax-evasion enablers in the Seychelles are now providing. But the United States wouldn’t have to invade anybody to end the tax evading ways of America’s rich. A serious squeeze on their financial industry enablers — a series of sophisticated, high-profile sting operations, for starters — would do.
That squeeze ought to go hand-in-glove with financial wealth reporting reforms that could set the stage for a still bolder step, a global tax on excessive wealth.
“With the right policies,” as Gabriel Zucman puts it, “this trend in rising wealth concentration could end pretty soon, sooner than we believe.”
Sam Pizzigati edits Too Much, the online Institute for Policy Studies weekly on excess and inequality. His latest book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class (Seven Stories Press).