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By Nicholas Shaxson, }ohn Chiistensen anu Nick Nathiason
1



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Economic inequality has ieacheu extieme piopoitions in many countiies. But
the pioblem is fai woise than we have unueistoou until now. This is because all
stuuies exploiing economic inequality have systematically unueiestimateu the
wealth anu income enjoyeu by the woilus wealthiest inuiviuuals. The enoimous
quantity of assets helu offshoie anu in opaque anu anonymous stiuctuies is not
factoieu piopeily into anybouys calculations. Not only that, but the ):#"/ of
iising inequality in many countiies appeais to be woise than pieviously thought,
foi similai ieasons.

At its simplest, oui aigument is that if an asset is hiuuen in an offshoie bank
account, oi an offshoie tiust oi company, anu the ultimate ownei oi beneficiaiy
of the income oi capital cannot be iuentifieu, then this asset anu the income it
piouuces will not be counteu in the inequality statistics. Almost all these hiuuen
assets aie owneu by the woilus wealthiest inuiviuuals. So it follows that the
inequality statistics, paiticulaily at the top enu of the scale, unueiestimate the
scale of the pioblem.


1
Nicholas Shaxson is authoi of >:#&;%:#,!;'&"/;+,>&?,@&A#";,&"/,)2#,B#",12.,C).'#,)2#,D.:'/E,
Ranuom Bouse, 2u11. }ohn Chiistensen is foimei Economic Auvisei to the 0K tax haven of }eisey
anu is uiiectoi of the Tax }ustice Netwoik. Nick Nathiason is business coiiesponuent at the
Buieau of Investigative }ouinalism.
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Although many stuuies uo tiy to compensate foi missing offshoie uata, %//!
)EF)&-G!.,-)&H.)@)*!B(&!-2.G!&)F(&-!%'&))*!-2%-!,(!G-+*7!D(#)G!)H),!D/(G)!
-(!D(#F),G%-.,'!G+BB.D.),-/7. (See F.?,4 foi biief expeit comments).









































Although much of the wealth anu income of the pooiest is also missing, as they
aie especially haiu to access anu to suivey, theii missing assets anu income aie
insignificant when compaieu to those at the top, so they make little uiffeience to
the oveiall inequality pictuie.

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In iesponse to oui initial question: uo you believe oui thesis is valiu. The
following iesponses came fiom the expeits we contacteu:

-#;E,/#3("()#'*G,,
H,52(#%G!J.K)--76!piofessoi, Paiis School of Economics
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- 4%#!J.LL.'%-., Associate Fellow, Institute foi Policy Stuuies (IPS) in
Washington, B.C.!
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- M./(&%*!?(H%D)H.D, Chief Statistician foi the 0.N. Buman Bevelopment
Repoit 0ffice

!,)2("0,)2#:#;,".,/.%J),12&);.#A#:G,G,G K#.L'#,;&*,)2#:#;,'.);,.3,M."#*,
M(;;#/,.%),&"/,)2&);,):%#G,>2#:#,(;,&",(;;%#,2#:#G,
N!3&%,K(!M./%,(H.D6!Leau Economist in the Woilu Bank ieseaich gioup !

>2#,M&(",J(&;,(;,'(0#'*,).,J#,&),)2#,).L,#"/,.3,)2#,/(;):(J%)(."G,F%),1#,/.,".),
*#),2&A#,)2#,/&)&,"##/#/,).,N.::#N),3.:,)2(;,L:.J'#M,&N:.;;,&'',N.%"):(#;G!!
N!M%&-.,!O%H%//.(, Acting Chief Economist anu Senioi vice Piesiuent
Bevelopment Economics, Woilu Bank

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&),)2#,).L,%"/#:;)&)#,)2#,L:.J'#ME,3.:,)2#,:#&;.";,)2&),*.%,;&*G,,
- 4-)@%&-!P%,G/)7, authoi of >2#,O.;),.3,!"#$%&'()*+,D2*,PN.".M(N,
P$%&'()*,(;,P;;#")(&',3.:,Q#N.A#:*G,
,
>2#,1#&')2,.3,)2#,A#:*,:(N2,(;,M&;;(A#'*,%"/#:H:#L.:)#/,(",2.%;#2.'/;,
;%:A#*;,&"/,RL:.J&J'*,;'(<2)'*,'#;;,;.=,(",)&?,&NN.%");G,K:.L#:,:#L.:)("<,
1.%'/,/:(A#,%L,)2#,S("(,&"/,/:(A#,/.1",)2#,1#&')2,;2&:#,.3,)2#,L..:#;),78,
L#:,N#")G,
N!?)H.,!Q%-K.,G, noniesiuent senioi fellow, Centei foi 0niveisal
Euucation, Biookings Institution
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Wealthy people, oi Bigh Net Woith Inuiviuuals (BNWIs) in the bankeis
pailance, usually have auviseis offeiing all mannei of offshoie seivices, ianging
fiom milu (legal) tax planning to the cloaking of assets foi the puipose of tax
evasion anu many othei ciimes. A piivate global infiastiuctuie of lawyeis,
accountants, bankeis anu company anu tiust foimation agents aie ueuicateu to
hiuing the assets of the woilus wealthiest inuiviuuals anu they have been
spectaculaily successful, as }ames Beniys accompanying iepoit foi the Tax
}ustice Netwoik shows.

Beniys ieseaich, which we believe is the most iigoious anu compiehensive
stuuy of its kinu, ieveals that well in excess of 0S$ 21 tiillion is helu uniecoiueu
anu offshoie, conseivatively estimateu. No estimate of missing wealth on this
scale has evei befoie been constiucteu. Theiefoie, both wealth anu inequality
aie being uiamatically unueiestimateu to a veiy significant uegiee, in eveiy
stuuy anu in eveiy countiy.

With the bottom half of the woilus population togethei possessing baiely 1%
peicent of global wealth while the top 1u% owns 84%
2
, economic inequality is
wiuely anu incieasingly iecogniseu as a pioblem in its own iight. Reseaich
shows that moie unequal societies tenu to expeiience slowei giowth, highei
political instability, anu a wiue iange of negative health anu social outcomes, as
F.?,7 explains.

Both the legal anu the illegal aspects of this pose big pioblems foi inequality
stuuies.


5%$/)!0<!R/-&%!A.'2!S)-!Q(&-2!:,*.H.*+%/G!81006!G)/)D-)*!D(+,-&.)G!
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4(+&D)<!T&)*.-!4+.GG)6 S'.J&',D#&')2,Q#L.:),7844. It sees a global total of neaily 8S,uuu 0ltia
Bigh Net Woith Inuiviuuals (0BNWIs) with assets exceeuing 0S$Su million, with 2,7uu of them
each owning ovei $Suum.


2
Souice: S'.J&',D#&')2,Q#L.:),7844, Cieuit Suisse Reseaich Institute, p1u http:bit.lypABcoa
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This papei is a fiist attempt to lay out the natuie of how uniecoiueu offshoie
assets anu income feeu thiough to oui unueistanuing of inequality. Baseu
piimaiily on oui inteiviews with some of the woilus top expeits, it contains
ielatively little in the way of econometiic analysis, anu it uoes not seek to be
compiehensive: it shoulu be vieweu as a staiting point. 0ui aim is to focus
attention on the pioblem anu to spui otheis to ieseaich this fielu in moie uepth.
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A numbei of iecent stuuies have focuseu on coiielations between
income inequality anu a iange of social anu economic pioblems.
Peihaps the best known is >2#,CL(:(),T#A#' by Kate Pickett anu
Richaiu Wilkinson. They founu that people in moie equal societies
aie likely to live longei, aie less likely to expeiience mental illness, to
use illegal uiugs, to achieve highei giaues at school, to be impiisoneu,
to suffei obesity, to enjoy social mobility, to suffei violence, to enjoy
chilu well-being, anu to suffei lowei iates of teenage motheihoou.
This stuuy has been wiuely iefeienceu: as the 0.S. economist Paul
Kiugman put it in Nay, Wilkinson-type views about the coiiosive
effects of inequality aie going seiiously mainstieam.
1


A 2u11 stuuy by Isabel 0itiz anu Natthew Cummins foi 0nicef founu
that foi 1S1 countiies wheie inequality coulu be measuieu, those
with iising inequality tenueu to giow moie slowly ovei the peiiou
stuuieu (199u-2uu8), anu this stiong negative coiielation between
high inequality anu high giowth iemains iemains intact foi
ueveloping countiies alone. They also founu that inequality is
stiongly associateu with political instability.

Theie is also eviuence that inequality was a causal factoi behinu the
global economic anu financial ciisis since 2uu78. Nuch of the
subpiime boiiowing patteins of low-income householus, foi
instance, was uiiven by economic inequality stimulating consumption
anu highei boiiowing among lowei income levels.
1
This chimes with
ieseaich by the 0.S. economist }ames ualbiaith:

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;.M#)(M#;,<:#&),L:.;L#:()*G,9"#,1&;,(",)2#,'&)#,4558;,1()2,
("3.:M&)(.",)#N2".'.<*,&"/,."#,(",)2#,7888;,1()2,2.%;("<E,
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<.,3.:1&:/,1()2,<:.1)2,.",&,M.:#,;%;)&("&J'#,J&;(;E,)2#",
N."):.''("<,("#$%&'()*,&"/,N."):.''("<,(";)&J('()*,&:#,)2#,;&M#,
(;;%#G,9"#,(;,&",#?L:#;;(.",.3,)2#,.)2#:G,



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M.GG.,'!@)%/-2!0<!-2)!J&.D)!(B!UBBG2(&)6!O)H.G.-)*!

}ames Beniys 2u12 iepoit foi the Tax }ustice Netwoik, entitleu >2#,K:(N#,.3,
933;2.:#,Q#A(;()#/
V
E estimates that theie is between $21 anu $S2 tiillion of
uniecoiueu offshoie financial wealth in the woilu, conseivatively estimateu.

S
This anu othei ielateu uocuments can be founu heie:
http:www.taxjustice.netcmsfiont_content.php.iucat=148
!
3(E!8!D(,-*C!

Stewait Lansley takes a similai view, focusing on what happens when a
gap opens up between wages anu piouuctivity, when benefits fiom
gieatei piouuctivity flow to the iichest section of society. This thiows
economies out of balance: puichasing powei anu consumei spenuing
fall anu the uemanu gap is filleu by iising uebt, which postpones the
pioblem.
1


Powei follows money, anu extieme concentiations of wealth at the top
of the income scale leau inevitably to uispiopoitionate powei anu
influence foi the wealthiest membeis of society. So some of the most
malign political effects of inequality stem fiom changes at the veiy top
of the income anu wealth uistiibution the veiy section that oui stuuy
focuses on.

We woulu go fuithei, suggesting that the ability of the wealthiest
membeis of society to put theii money offshoie gives them gieat powei:
the oft-heaiu ciy of uont tax oi iegulate us too much oi we will move
to ueneva oi Lonuon oi the Cayman Islanus has been wielueu to potent
effect in iecent uecaues in evisceiating financial iegulations, foicing tax
cuts on capital, anu moie.

In auuition to the many ways in which inequality has contiibuteu to the
financial anu economic ciisis, we have also outlineu a numbei of ways in
which tax havens anu the offshoie system have themselves contiibuteu
to the ciisis.


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,6%'*,7847,

Almost all this uniecoiueu wealth anu income will be enjoyeu by the top 1% of
the woilus population, uiamatically skewing the income anu wealth uistiibution
in that politically impoitant segment of the woilus population, anu having a
majoi impact on the uini coefficient foi each countiy.

Beniy, a foimei chief economist foi the consultancy NcKinsey, uiaws on uata
fiom the Woilu Bank, the Inteinational Nonetaiy Funu, the 0niteu Nations,
cential banks, the Bank foi Inteinational Settlements, anu national accounts. Be
uses these souices many of which have nevei befoie been ueployeu in this way
to constiuct a iange of uiffeient estimates of the size of uniecoiueu offshoie
wealth, in the most uetaileu stuuy of its kinu evei conuucteu.

This giounubieaking ieseaich has establisheu that foi a focus gioup of 1S9
mostly low - miuule income countiies, these piivate offshoie holuings of 0S$ 7.S-
9.S tiillion aie ioughly twice theii aggiegate gioss exteinal uebts of $4.u8
tiillion. These countiies, tiauitionally iegaiueu as uebtoi nations, aie in fact
cieuitois to the woilu, once these seciet piivate offshoie holuings aie taken into
account. The big pioblem is that the assets aie helu by a tiny wealthy fiaction of
these countiies populations, while the uebts aie shoulueieu by the pooiei
sections.

The finuings call into question claims maue by u2u leaueis in 2uu9 in the eaily
peiiou of the financial ciisis when they ueclaieu that the eia of banking seciecy
is ovei. Fai fiom it: the system is alive anu well, anu giowing fast.


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Income anu wealth statistics fiom the 0niteu States pioviue anothei cuiious
inuication of a laige amount of missing wealth, which is summaiiseu by Sam
Pizzigati, Associate Fellow, Institute foi Policy Stuuies (IPS) in Washington, B.C.
anu euitoi of the IPS newslettei on inequality, entitleu >..,B%N2. Be saiu oui
thesis is absolutely valiu anu notes:

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".,<:#&),<:.1)2,(",)2#,;#L&:&)(."G,C.,(),(;,&",#".:M.%;,L&:&/.?G
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The best known 0S income uata is piouuceu by Piofessoi Thomas Piketty of the
Paiis School of Economics anu Piofessoi Emmanuel Saez at the 0niveisity of
Califoinia, Beikeley. Table 2 below, taken fiom theii uata, shows -2)!.,D(#)G!(B!
-2)!-(F!0V!(B!-2)!R4!F(F+/%-.(,!#(&)!-2%,!*(+$/)*!B&(#!0WX1!N!81016!
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4
Authois inteiview with Pizzigati. 0nless explicitly iefeienceu otheiwise, quotes in this aiticles
weie gleaneu fiom inteiviews with the people iuentifieu.
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-2)!-(F!1C10V!#(&)!-2%,!;+%*&+F/)*C!0vei the same peiiou the incomes of
the bottom 9u% fell by neaily five peicent.!!
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These tienus piouuce some staik facts, such as estimates that just six membeis
of the Walton family (of Walmait fame) aie woith as much as the pooiest Su% of
all Ameiicans.)
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Bowevei anu this is wheie Pizzigatis paiauox becomes appaient the wealth
uata shows a completely uiffeient pictuie fiom the income uata. Accoiuing to
woik by Sylvia Allegietto, co-chaii of the Centei on Wage anu Employment
Bynamics of the 0niveisity of Califoinia, Beikeley, the top 1% of householus
owneu SS.8% of all the wealth in 198S, while 26 yeais latei, in 2uu9, the top 1
peicent owneu SS.6%: a tiny inciease
S
.

Pizzigati comments:

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Be saiu that missing offshoie wealth is likely to be a key explanation because one
of the only othei explanations is that )2#*,)&0#,)2&),("N.M#,&"/,J'.1,(),.",_`E888,
/(""#:;,#A#:*,"(<2)G,>2&),/.#;"),M&0#,;#";#G,-.%,;(ML'*,N&"".),N.";%M#,&1&*,
)2&),3&")&;)(N,&M.%"),.3,M."#*,)2&),("N.M#,("#$%&'()*,2&;,L%),(").,)2#(:,L.N0#);G

Pizzigati consiueieu it unlikely that the wealth uata anomaly ieflecteu majoi
changes in the way people iesponueu to suivey uata: the 0.S. Feueial Reseive
suiveys aie highly uetaileu, with sessions lasting fiom 9u minutes to seveial

S
See Table 2 in EPI Biiefing Papei: The state of woiking Ameiicas wealth, 2u11: Thiough
volatility anu tuimoil, the gap wiuens, By Sylvia A. Allegietto | Naich 24, 2u11
http:www.epi.oigpublicationthe_state_of_woiking_ameiicas_wealth_2u11
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houis foi each iesponuent. Be says that one minoi pait of the explanation is that
the Feueial Reseive uata, on which Allegiettos woik ielies, puiposefully
excluues the wealthiest 4uu Ameiicans but even then, he estimateu that
incluuing them might make a uiffeience equivalent to just one peicentage point
oi so.

a.H."#,2&;,:#&''*,<."#,(").,)2&),L&:&/.?,(",&"*,/#L)2,&),&''G,

The income uata heie is baseu on tax ietuins, which aie backeu up legal
sanctions foi those who fail to comply, wheieas foi suiveys theie aie no such
incentives to iepoit accuiately: this suggests that the income uata, which shows
explouing inequality, may peihaps be the moie accuiate measuie. (Bowevei
some suiveys have auvantages ovei tax uata too: Section S below exploies
pioblems with tax anu suivey uata.)

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!


Although the suivey uata appeais to unueiestimate the scale of the pioblem, the
income uata also heavily unuei-estimates the income at the top of the scale. As
Anthony Atkinson, Thomas Piketty anu Emmanuel Saez aigue in theii wiuely
publiciseu 2u11 aiticle >.L,!"N.M#;,(",)2#,T."<,Q%",.3,@(;).:*
]
:

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6
Anthony B. Atkinson, Thomas Piketty, anu Emmanuel Saez, >.L,!"N.M#;,(",)2#,,T."<,Q%",.3,
@(;).:*, }ouinal of Economic Liteiatuie 2u11, 49:1, S71, p19
http:piketty.pse.ens.fifichieisAtkinsonPikettySaez2u11.puf
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)2
,6%'*,7847,

),,)2#(:,,&33&(:;,,(",,&,,1&*,,)2&),,:#/%N#;,,)&?,,'(&J('()(#;G,
>2#:#,(;,)&?,,&A.(/&"N#,,&"/,,)&?,,#A&;(."G,,>2#,,:(N2E,,(",,L&:)(N%'&:E,,2&A#,,&,,
;):."<,,("N#")(A#,,).,,%"/#:;)&)#,,)2#(:,,)&?&J'#,("N.M#;G,

uiven this enoimous unueiestimation in a countiy with one of the woilus most
sophisticateu anu extensive uata collection facilities, it seems likely that this
statistical unueistatement of wealth inequality may be even laigei in othei
countiies, paiticulaily ueveloping countiies wheie theie is gieatei ieliance on
possibly infeiioi suivey uata foi both income anu expenses, anu wheie tax
auministiations aie fai weakei than in the 0niteu States.


M.GG.,'!@)%/-2!Z<!_B&.D%G!U*.(+G!>)$-G!
!
Accoiuing to Leonce Nuikumana, ieseaich uiiectoi of the Afiican Bevelopment
Bank, anu }ames Boyce, piofessoi of economics at the 0niveisity of
Nassachusetts, Amheist, the sheei volume of secietly helu piivate assets uwaifs
Afiicas public uebts, making it a net cieuitoi to the iest of the woilu. In theii
book I3:(N&;,9/(.%;,b#J);+,@.1,\.:#(<",T.&";,&"/,O&L()&',\'(<2),F'#/,&,
O.")("#")E Nuikumana anu Boyce estimate a cumulative $944 bn in accumulateu
flight capital fiom SS Afiican countiies in 197u-2uu8, compaieu to just $177
bn in exteinal uebts, making Afiica a net cieuitoi to the woilu. This chimes
cleaily with }ames Beniys ieseaich accompanying this papei. The big pioblem
heie is that:

)2#,&;;#);,&NN%M%'&)#/,J*,M#&";,.3,N&L()&',3'(<2),&:#,L:(A&)#E,12('#,)2#,
#?)#:"&',/#J);,&:#,L%J'(N,'(&J('()(#;,.1#/,).,)2#,N:#/().:;,J*,)2#,L#.L'#,.3,
I3:(N&,)2:.%<2,)2#(:,<.A#:"M#");G
c
,

Beniys estimates accompanying this iepoit piouuce a similai pictuie. These
Afiican piivate assets, anu the income eaineu by these assets (which is often
accumulateu, anu spent, via offshoie ciicuits too) will geneially not be accounteu
foi in the inequality statistics. The pioblem foi many ueveloping countiies, as
Section S explains, is likely not just to be a significant factoi in the
unueiestimation of top incomes, but potentially a catastiophic one.

M.GG.,'!Q)%/-2!\<!U,)6!A7*)!J%&K6!P(,*(,!

uetting a hanule on the owneiship patteins of the wealthy is extiemely haiu.
Anecuotal eviuence, howevei, suggests that offshoie owneiship is extiemely
peivasive, especially in ceitain aieas such as the financial centie of Lonuon.

7
I3:(N&;,9/(.%;,b#J);+,@.1,\.:#(<",T.&";,&"/,O&L()&',\'(<2),F'#/,&,O.")("#")E,Lonce Nuikumana
anu }ames K. Boyce, Zeu Books, 2u11. Paiticulaily Chaptei 2. The authois conceue that while
much of this money will have been uissipateu in Paiisian shopping spiees, the cumulative stock
with imputeu inteiest eainings is a ieasonable inuicatoi of the oppoitunity cost of the failuie to
invest these funus piouuctively in Afiica. IT also piovciues the most appiopiiate measuie foi
compaiison to Afiicas exteinal uebts, since these acciue inteiest iegaiuless of how the
boiioweu money was useu. They also note (p47) that theii accumulateu capital flight figuie is
close to a Neiiill Lynch estimate foi the total wealth helu by Afiican Bigh Net Woith Inuiviuuals
(BNWIs) of appioximately $1 tiillion in 2uu7.
1u! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


Repoiting by Biitains C%"/&*,>(M#; newspapei in Novembei 2u11
8
, howevei,
pioviues a fascinating winuow into the topic. The newspapei combeu lanu
iegistiy iecoius to obtain owneiship uetails foi the S6 apaitments that hau been
puichaseu in the Lonuon iesiuential builuing 0ne, Byue Paik, which the
newspapei uesciibeu as )2#,M.;),#?L#";(A#,&L&:)M#"),J'.N0,#A#:,J%('),&"*12#:#,
.",P&:)2G

The S6 apaitments weie listeu as having a value of a total 1,278 million (0S$
2.u bn) but of these, only foui apaitments, with a combineu value of 6S.7
million, weie listeu in the name of waim-blooueu people. The iest, iepiesenting
neaily 9S peicent of the listeu value of the piopeities, weie owneu anonymously
thiough coipoiations oi tiusts, mostly in tiauitional small-islanu offshoie
juiisuictions. 2S weie owneu via the Biitish viigin Islanus, six weie owneu via
the Isle of Nan, six moie fiom the 0K, foui fiom each of uueinsey anu the
Cayman Islanus, two fiom Liechtenstein, anu one each fiom Switzeilanu,
Nonaco, Nauiitius, St vincent & uienauines, Bahamas, Thailanu, the 0niteu
States, Libeiia anu Belize.

A subsequent stoiy foi the S%&:/(&" newspapei
9
(by which time 62 apaitments
hau been solu) iepoiteu that only nine hau been iegisteieu to pay 0K Council
Tax; only foui weie paying the full council tax, while five aie paying the Su%
uiscounteu council tax oweu on a seconu home. Tax officials weie seaiching
iecoius to finu the apaitments owneis, the S%&:/(&" iepoiteu, but )2#,M*:(&/,
.33;2.:#,N.ML&"(#;,L:.)#N)("<,)2#,(/#")()(#;,.3,:#;(/#");,&:#E,&NN.:/("<,).,;.%:N#;,
&),)2#,N.%"N('E,'(0#'*,).,/#3#&),)2#MG,If they weie escaping council tax, then it is a
faii assumption that they weie effectively outsiue the 0K tax net (which means,
as Section S explains, that they aie piobably not captuieu in any tax net
anywheie in the woilu.)

0wning the apaitments offshoie can help the owneis avoiu vaiious uiffeient
taxes: not just council tax, but stamp uuty on the sale of the apaitment
1u
; iental
income taxes if those aie eaineu offshoie; inheiitance taxes, anu moie.

This anecuote suggests cleaily that foi at least some classes of asset in some
juiisuictions, the iatio of high-woith assets helu via seciet offshoie stiuctuies is
exceptionally high.


M.GG.,'!@)%/-2!^<!-2)!'/($%/!GD%/)!

Piofessoi Thomas Piketty, a leauing expeit on economic inequality anu one of
the authois of the Woilu Top Incomes Batabase, says:

8
}ohn Ailiuge, I"*J./*,@.M#dE,C%"/&*,>(M#;E Novembei 2u, 2u11
9
Baniel Boffey, 9"'*,"("#,L&*,N.%"N(',)&?,(",#"N'&A#,3.:,;%L#:H:(N2E, >2#,S%&:/(&", Nov 26, 2u11
1u
Stamp uuty is payable to the 0K on the sale of the apaitment. Bowevei, if the apaitment is
owneu by an offshoie company, then stamp uuty coulu be avoiueu if the offshoie company was
itself tiansfeiieu fiom one ownei to the othei, iathei than having the outiight owneiship of the
apaitment itself tiansfeiieu.
11! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


C.,3&:E,1#,2&A#,".),)&0#",)2(;,R.33;2.:#,M."#*=,(").,&NN.%"),(",)2#,D.:'/,
>.L,!"N.M#;,/&)&J&;#G,D#,):(#/,&'1&*;,).,J#,A#:*,N'#&:,)2&),e.%:,:#;%');,
&:#f,N#:)&("'*,&,'.1#:,J.%"/E,".),."'*,3.:,)2#,'#A#',.3,("#$%&'()*E,J%),
L:.J&J'*,3.:,)2#,):#"/,&;,1#''G,,

Piketty has been woiking with uabiiel Zucman, also of the Paiis School of
Economics, to tiy to compensate foi this. In a Naich 2u12 papei >2#,B(;;("<,
D#&')2,.3,a&)(.";+,I:#,P%:.L#,&"/,)2#,UGCG,a#),b#J).:;,.:,a#),O:#/().:;E,Zucman
states that:

.33(N(&',;)&)(;)(N;,;%J;)&")(&''*,%"/#:#;)(M&)#,)2#,"#),3.:#(<",&;;#),L.;()(.";,
.3,:(N2,N.%"):(#;,J#N&%;#,)2#*,3&(',).,N&L)%:#,M.;),.3,)2#,&;;#);,2#'/,J*,
2.%;#2.'/;,(",.33;2.:#,)&?,2&A#";G,

Zucman finus that 8% of global wealth is helu in tax havens, anu 6% is
uniecoiueu anu uesciibes a puzzle:

I),)2#,<'.J&','#A#'E,'(&J('()(#;,)#"/,).,#?N##/,&;;#);+,)2#,1.:'/,&;,&,12.'#,(;,&,
"#),/#J).:E,eL:#;%M&J'*,).,.)2#:,L'&"#);,(",)2#,;.'&:,;*;)#MfG,C(M('&:'*E,)2#,
<'.J&',J&'&"N#,.3,L&*M#");,;2.1;,)2&),M.:#,("A#;)M#"),("N.M#,(;,L&(/,
)2&",:#N#(A#/,#&N2,*#&:G,

This has iesulteu in majoi misunueistanuings of the net assets positions of, foi
example, westein countiies vis vis China, anu Zucman concluues that cuiient
economic analyses aie labouiing unuei &",(''%;(.",N&%;#/,J*,)&?,2&A#";G Be
explains how this comes about:

@.%;#2.'/;,/.,".),.L#",J&"0,&NN.%");,(",C1()Y#:'&"/,&"/,C("<&L.:#,).,
L'&N#,)2#(:,3%"/;,(",'.1H*(#'/,J&"0,/#L.;();G,>2:.%<2,)2#(:,J&"0,&NN.%");,(",
)&?,2&A#";E,)2#*,("A#;),(",L.:)3.'(.,;#N%:()(#;G,F%),12#",&,\:#"N2,2.%;#2.'/,
.1";,&,UC,#$%()*,)2:.%<2,&,C1(;;,J&"0E,\:&"N#,%"/#:#;)(M&)#;,();,3.:#(<",
&;;#);E,J#N&%;#,C1(;;,J&"0;,/.,".),#?N2&"<#,/&)&,1()2,\:#"N2,;)&)(;)(N(&";G,
UC,;)&)(;)(N(&";,/%'*,:#N.:/,&,3.:#(<",'(&J('()*+,)2#*,&:#,&1&:#,)2&),&,3.:#(<",
:#;(/#"),.1";,&,UC,#$%()*G,C1()Y#:'&"/E,12(N2,(;,;(ML'*,&,N."/%()E,:#N.:/;,
".)2("<G,>2%;E,M.:#,#$%()*,'(&J('()(#;,)2&",&;;#);,&:#,:#N.:/#/,1.:'/1(/#G,

Zucman singles out the tax havens of Luxembouig, Iielanu anu the Cayman
Islanus as being paiticulaily impoitant elements in the puzzle
11
anu estimates
the uisciepancy at appioximately 0S$4,Suu billion ($4.S tiillion) woiluwiue.

This is significantly lowei than Beniys figuies, laigely foi two main ieasons,
both acknowleugeu by Zucman. Fiist, Zucmans uata ielies on numbeis that aie
available ).,;)&)(;)(N(&";,(balance of payments statisticians anu so on)E,wheieas

11
See also, foi example, INF Woiking Papei, O:.;;HF.:/#:,!"A#;)M#"),(",CM&'',!")#:"&)(."&',
\("&"N(&',O#")#:;, Philip R. Lane anu uian Naiia Nilesi-Feiietti which says in footnote 4 that The
Net Asset value iepoiteu by heuge funus iegisteieu in the Cayman Islanus totaleu ovei $2.2
tiillion at enu-2uu7. Bowevei, poitfolio equity claims on the Cayman Islanus iepoiteu by the
main investoi countiies paiticipating in the CPIS weie only $768bn.
12! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,

Beniys uata is moie focuseu on what is ueclaieu ).,)&?,&%)2.:()(#;G,A foieign
bank account owneu by a ueiman iesiuent anu taxpayei is likely to be ieflecteu
in global balance of payments statistics, but even so theie is no guaiantee that
that the ueiman tax authoiities will have any knowleuge that the account exists.
Seconu, Zucmans estimate incluues financial assets only, anu excluues many
othei asset classes (such as ieal estate, yachts, aitwoiks anu so on.)

Piketty says he will woik on incoipoiating the uata on the missing wealth into
the uata sets anu thinks it will make a significant uiffeience:

D#,2&A#,".),/."#,)2#,3%'',N.ML%)&)(."E,J%),M.;),'(0#'*,12#",1#,/.,(),
)./&*;,'#A#',1('','..0,J(<<#:,)2&",(",R)2#,(MM#/(&)#,L:#Hb#L:#;;(.",*#&:,.3=,
457g+,(";)#&/,.3,R)2#,S("(,N.#33(N(#"),3.:,)2#,U"()#/,C)&)#;=,J#("<,`8E,(),1('',
L:.J&J'*,J#,;.M#12#:#,J#)1##",`8,&"/,]8+,!,/."),0".1G
47
,

Beniys estimates foi hiuuen offshoie wealth aie fai biggei than Zucmans. The
implications foi the inequality unueiestimate woulu cleaily be uiamatic.


ZC!M)%G+&)#),-!.GG+)G!
!
M)%G+&)#),-!F&($/)#G<!G+&H)7!*%-%!

Two main uata souices aie useu foi measuiing inequality: official inequality anu
tax uata, on the one hanu, anu suivey uata, on the othei. (F.?,V,below biiefly
uiscusses the main ways useu to measuie economic inequality.) Suivey uata is
especially impoitant foi measuiing inequality in ueveloping countiies, wheie
income uata can be extiemely patchy. Bowevei, suivey uata is especially
pioblematic with iespect to captuiing income anu assets of high-income
householus.

Pizzigati in Section 2 above uesciibes the huge uisconnect between tax uata anu
suivey uata in the 0S; Atkinson, Piketty anu Saez back him up. Foi instance, they
note that the 0S Cuiient Population Suivey (CPS) estimates the top 1% shaie of
householu income at about 1S% while the tax uata (incluuing capital gains)
1S

shows an income shaie of ovei 2S%: anothei iemaikable uisconnect.

When it comes to suiveys, vaiious pioblems stanu out. 0ne is non-iesponse (that
is, when ceitain people uecline to paiticipate) anu anothei is uiffeiential
iesponse: when people pioviue false infoimation: i.e. they tell lies. Both aspects
tenu to uownplay the effect of inequality: as Atkinson, Piketty anu Saez note,
these two pioblems L&:)(N%'&:'*,,&33#N),,)2#,,).L,,("N.M#,,:&"<#;G 0ffshoie
unuei-ueclaiation is a cential pait of this pioblem.

12
Piketty auus: The pioblem is that the people uoing micio woik anu the people uoing macio
aie uiffeient people so the stuuy of inequality veiy often uoesnt tiy to be consistent with the
inteinational macio pictuie that we have, on capital flows, tax havens etc. These aie uiffeient
planets, histoiically: we aie tiying to meige these two in the liteiatuie, to make the micio
inequality uata consistent with the macio uisciepancies that we have.
1S
Atkinson, Piketty, Saez, 2u11, pp29-S2
1S! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


Niloiau Kovacevic, Chief Statistician foi the 0.N. Buman Bevelopment Repoit
0ffice, auus:

K#.L'#,)2&),&:#,(",N2&:<#,.3,M#&;%:("<,("#$%&'()*,J&;#/,.",;%:A#*,/&)&,
0".1,)2&),)2#,J.)2,#"/;,.3,)2#,/(;):(J%)(.",&:#,%"/#::#L:#;#")#/,.:,
M(;:#L:#;#")#/G,;1'3'!(0!323'?@!2!1%A0'1%?B!C3%&!61'!6%:!+D!'23#'30!
6126!:236($(:26'0!(#!61'!0A3E'@<,9",)2#,.)2#:,;(/#,)2#,L..:,L#.L'#,#()2#:,
/."h),2&A#,&//:#;;#;,).,J#,;#'#N)#/,(").,)2#,;&ML'#E,.:,12#",;#'#N)#/,)2#*,
M(;$%.)#,)2#(:,#&:"("<;,H,%;%&''*,J(&;("<,)2#M,%L1&:/;G R9%:,#ML2&;(;,
&//#/G=

Bianko Nilanovic, Leau Economist in the Woilu Bank ieseaich gioup anu a
woilu expeit on the subject of inequality, backs this up:

B.;),.3,)2#;#,R.33;2.:#=,&;;#);,2#'/,J*,L#.L'#,&:#,L:.J&J'*,(",).L,("N.M#,
&"/,)2#;#,L#.L'#,&:#,".),.3)#",(",;%:A#*;G,>2#*,:#3%;#,).,L&:)(N(L&)#G,
G,G,,,
D#,0".1,L#.L'#,(",;%:A#*,12.,&:#,%"/#:H:#L:#;#")#/G,>2#*:#,(",)2#,
J.)).M,.:,)2#,).LG,>2#,48H5`,L#:N#")R('#;=,&:#,:#&;."&J'*,("N'%/#/G,>2#,`W,
&),)2#,).L,&"/,)2#,J.)).M,&:#,%"/#::#L:#;#")#/,;.,N'#&:'*,)2#,<&L,J#)1##",
)2#,).L,&"/,)2#,J.)).M,(;,3&:,2(<2#:G,

Anu a Woilu Bank papei cites obvious ieasons why the iich uont paiticipate:

@(<2H("N.M#,2.%;#2.'/;,M(<2),J#,'#;;,'(0#'*,).,L&:)(N(L&)#,J#N&%;#,.3,&,
2(<2,.LL.:)%"()*,N.;),.3,)2#(:,)(M#,.:,N."N#:";,&J.%),("):%;(.",(",)2#(:,
&33&(:;G
4X
,

A fuithei issue is that many income suiveys aie top coueu that is, incomes
above a ceitain thiesholu aie lumpeu togethei, so the top categoiy may be all
ovei $1 million, foi example. Beie, the numbeis themselves aie likely to be
accuiate enough, but still fail to captuie the potentially huge uistiibution of
wealth within that top coue. Some stuuies uo tiy to compensate foi this, but even
so none have hau access to the unpieceuenteu uata ievealeu by }ames Beniy.

0ne might aigue that the missing wealth anu income at the bottom enu of the
income scale might even out the gap at the top, but Lansley, in the context of a
uiscussion about the 0niteu Kinguom, explains why such an aigument holus little
watei:
I),)2#,J.)).ME,()h;,)("*,;)%33E,N.ML&:#/,).,L#.L'#,&),)2#,).L+,)2(;,(;,L'%MJ#:;,
%"/#:;)&)("<,)2#(:,("N.M#,J*,78,.:,V8,L#:N#")G,!),(;,:#&''*,;M&'',J##:+,)2#*,
/."h),#A#",.%),&),&''G,>2#,;2&:#,.3,)2#,).)&',("N.M#,L..',.3,)2#,J.)).M,48,
L#:N#"),1('',J#,4,L#:N#"),.:,'#;;E,12#:#&;,)2#,).L,4,L#:N#"),2&;,4`,L#:N#")G,
>2#:#,(;,".,N.ML&:(;.",.3,)2#,;N&'#+,*.%,N&",3.:<#),&J.%),()Gi,


14
Anton Koiinek, }ohan A. Nistiaen, Naitin Ravallion, C%:A#*,".":#;L.";#,&"/,)2#,/(;):(J%)(.",.3,
("N.M#, Bevelopment Reseaich uioup, Woilu Bank, }ouinal of Economic Inequality (2uu6) 4: SS
SS. The aiticle was sent to us by Ravallion as pait of his iesponse to oui questions.
14! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


















































!
3(E!Z<!*.BB)&),-!#)%G+&)G!(B!)D(,(#.D!.,);+%/.-7!
!
Economic inequality is measuieu in uiffeient ways. The commonest measuie is piobably
the uini coefficient, which ianges fiom u (eveiyone is equal) to 1 (one peison has all the
income oi wealth, eveiyone else has nothing.) uini coefficients in the ieal woilu iange
between about u.2S in highly egalitaiian Scanuinavian countiies to ovei u.6 in some paits
of Afiica: anu sometimes the numbei is expiesseu in a iange between u anu 1uu insteau of
a iange fiom u to 1.

The uini coefficient is simple anu cleai but inauequate in some iespects. Foi instance, it
uoes not captuie subtleties such as when inequality is uispiopoitionately skeweu in one
paiticulai pait of the uistiibution, such as at the veiy top of the income scale. Nany
stuuies theiefoie piefei to talk in teims of the income captuieu by the top (oi bottom) x
peicent of the population, oi to uesciibe income shaies accoiuing to quintiles (fifths) oi
ueciles (tenths) of the population, oi in the iatios between these shaies (such as the iatio
between the top ueciles shaie anu the bottom ueciles shaie.). 0thei, moie technical
measuies of inequality aie also useu foi uiffeient puiposes.

Economic inequality also has seveial uimensions. Some stuuies focus on inuiviuuals,
wheieas otheis focus on families oi householus. Thiee main economic uimensions aie
measuieu.

:,D(#)C Theie aie vaiious ways to uefine income, but one common measuie useu in
inequality stuuies ielies on tax uata, which captuies the annual income that is subject to
tax. It is also impoitant to uistinguish between 1&<# inequality, which is what woikeis aie
paiu, anu ("N.M#,inequality, which incluues financial anu othei capital gains, which acciue
most substantially to the iichest stiata of societies.

T(,G+#F-.(,!%,*!GF),*.,'. These measuies aie faiily similai: Consumption equals
spenuing plus the value of foou anu othei consumption items piouuceu anu consumeu by
a householu oi inuiviuual. Nost stuuies of ueveloping countiies use consumption iathei
than income uata.

Q)%/-2!%,*!%GG)-GC This focuses on owneiship of assets. It is haiuei to measuie than
income inequality, because all states have income taxes anu theiefoie theie is a laige
amount of income uata available, wheieas ielatively few states levy wealth taxes, so othei
methous geneially have to be useu, such as suivey uata, which is often an infeiioi
measuie. The pioblems of measuiing wealth at the top of the income scale aie piobably
even gieatei than foi income.

Each measuie has its limitations, paiticulaily foi the ieasons that aie the subject of this
iepoit. Bata on inequality is collecteu piimaiily fiom suiveys anu fiom official income tax
uata. 0ccasionally othei souices, such as piobate uata aie useu.

The tiauitional uata is contesteu, anu each stuuy anu eveiy countiy measuies the uata in a
slightly uiffeient way.

0ui focus is not so much on these uisputes as on the way that vaiious stuuies
unueiestimate the scale of inequality, as a iesult of seciet offshoie holuings anu othei
ielateu phenomena. We uiscuss some of the pioblems with measuiing inequality below.

1S! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


M)%G+&)#),-!F&($/)#G<!-%E!*%-%6!)H%G.(,!H)&G+G!%H(.*%,D)!!
!
Fiom a tax peispective, offshoie stiuctuies aim to piotect BNWIs fiom a iange of
taxes: income taxes, stamp uuties, capital gains, wealth anu inheiitance taxes.
They covei up many othei ciimes anu abuses too. Assets owneu offshoie iange
fiom financial assets to ieal estate, aitwoiks, iacehoises, jets, yachts the
authois even know of inuiviuual wiistwatches which aie helu thiough offshoie
companies oi tiusts, often in peipetuity.

Tax evasion is by uefinition illegal, while tax avoiuance is by uefinition not illegal.
A laige giey aiea exists between the two, ianging fiom the softest tax planning
to aggiessive tax avoiuance using spectial anu fictitious stiuctuies anu schemes.

Foi those measuies of inequality that aie baseu on income anu tax uata, both
evasion anu avoiuance aie geimane to oui coie thesis about inequality.

Tax evasion will obviously skew the pictuie: if income is not ueclaieu it will not
show up in the tax statistics, anu will theiefoie be misseu in the inequality
statistics. All expeits who weie askeu saiu they weie not awaie of any stuuy that
hau successfully taken account of this.

Tax avoiuance, by contiast, is moie subtle, but coulu peihaps be as impoitant as
evasion. As Piketty saiu in an inteiview:

K&:)(N%'&:'*,3.:,N&L()&',("N.M#E,*.%,2&A#,&,;%J;)&")(&',3:&N)(.",.3,N&L()&',
("N.M#E,#A#",(3,(),(;,".),(",)&?,2&A#";E,)2&),M&"&<#;,".),).,J#,)&?&J'#,3.:,
L%:#'*,'#<&',:#&;.";+,(),M&"&<#;,).,<#),(").,)2#,:(<2),"(N2#E,)2#,:(<2),&:)(N'#,
.3,)2#,)&?,N./#E,).,&A.(/,)&?G,

Nilanovic auus:

>2#,M&^.:()*,.3,)2#;#,L#.L'#,&:#,A#:*,:(N2,&"/,&NN#;;,)2#,3&N('()(#;,L:.A(/#/,
J*,<'.J&'(;&)(.",&A.(/("<,)&?&)(.",(",)2#(:,.1",N.%"):(#;G,>2#*,&:#,L'&N("<,
1#&')2,J#*."/,)&?,&%)2.:()(#;G,>2#,M&^.:()*,.3,)2#;#,)2("<;,&:#,".),
"#N#;;&:('*,(''#<&',J%),();,/.%J)3%',)2#*,<#),("N'%/#/G,

All this iaises the question not just of what constitutes tax avoiuance, but also
what constitutes income: both aie elastic concepts anu assessing them becomes
a mattei of inteipietation. Effoits have been maue to finu alteinative measuies
of income which avoiu using tax uata, but these contain theii own potentially
catastiophic pitfalls too.
1S



1S
The best known methou foi avoiuing a tax-ueiiveu uefinition of income is the Baig-Simons
appioach, which uefines it as the sum of all consumption uuiing a yeai, plus the change in net
woith (which makes sense, as theie aie only two things one can uo with income: save it, oi
consume it). Anything that ueviateu fiom that income is iegaiueu as the piouuct of an unjustifieu
tax loophole. The pioblem fiom oui peispective is that, as Sections S explain, both consumption
anu wealth measuies aie highly inauequate anu inaccuiate.
16! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,

Nany souices of capital income such as inteiest income oi ietuins on pens
ion funus oi uiviuenus
have been eithei taxeu sepaiately at flat iates oi fully exempteu anu have
not been counteu in the tax statistics. Atkinson, Piketty anu Saez (2u11) auueu:

9%:,,A(#1,,(;,,)2&),,'#<&''*,,)&?H#?#ML),,N&L()&',("N.M#,L.;#;,M.:#,;#:(.%;,
L:.J'#M;,,)2&",)&?,#A&;(.",&"/,)&?,&A.(/&"N#,L#:,;#G,

Although tax uata is most usually useu to collect incomes, it is occasionally useu
to collect wealth uata. The 0niteu Kinguom, foi instance, has attempteu to collect
wealth uata baseu on piobate foims (that is, the foims filleu in when people uie,
foi inheiitance tax puiposes.
16
) This uata is highly inauequate not just because of
wiuespieau avoiuance anu evasion, but because of the cai ciash pioblem: it will
if, foi example, people accumulateu a lot of wealth in the 199us anu 2uuus, they
will not be iecoiueu unless they uie unexpecteuly, such as in a cai acciuent.

Some ieal-woilu cases, immeuiately below, uemonstiate why (legal) tax
avoiuance is so impoitant in skewing the inequality stuuies.

52)!9.##7!T%&&!D%G)!

In }une 2u12 a tax avoiuance scanual maue heaulines in the 0K when the well
known comeuian }immy Caii was founu to have escapeu millions of pounus in
tax by using a complex tax avoiuance scheme via the Ciown Bepenuency of
}eisey, a notoiious Biitish tax haven. The K2 scheme that Caii useu was not
iuleu illegal at the time, but it was cleaily abusive: the comeuian subsequently
apologiseu to the nation foi using it, aftei wiuespieau public outiage, anu Piime
Ninistei Baviu Cameion calleu such schemes moially wiong.

0nuei the K2 scheme, Ni. Caii was able to channel pioceeus fiom BvB sales anu
television appeaiances thiough a }eisey-baseu tiust, which then lent him the
money back
17
. Since loans aie (theoietically) supposeu to be iepaiu, they aie not
taxable. In auuition to iunning an estimateu S.S m thiough the }eisey stiuctuie,
Caii paiu himself a salaiy of 1uu,uuu. The company piomoting the K2 scheme
saiu that it coulu achieve tax iates between u anu 2S peicent, anu the Times
newspapei estimateu that this single scheme alone shelteieu 168m pei yeai.

The 0K tax authoiities iepoiteuly accepteu Ni. Caiis scheme. So foi income tax
puiposes that S.Sm was iemoveu fiom the 0K income tax bill. That woulu
uiiectly impact on the inequality statistics calculateu on the basis of 0K tax uata,
making inequality look less bau than it ieally is. Bowevei, theie is still ioom foi
uebate on whethei this S.Sm shoulu count as income: Bei Najestys Revenue &
Customs (BNRC) accepteu the K2 tax scheme so fiom theii peispective it was
not income, while most ieasonable people, anu the Biitish Piime Ninistei,

16
See, foi instance, Peisonal Wealth Statistics 2uu1 to uS anu 2uuS to u7, Bei Najestys Revenue
& Customs, }une 2u11. http:www.hmic.gov.ukstatspeisonal_wealthintio-peisonal-
wealth.puf
17
See, foi example, >2#,N.M#/(&",&"/,2(;,;2#')#:#/,M(''(.";, Alexi Nostious anu Fay Schlesingei,
The Times, }une 19 2u12
17! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,

woulu consiuei that it was. Tax avoiuance schemes iange in theii uegiee of
aggiession anu this obviously cieates a measuiement pioblem: wheie uoes one
uiaw the line.

Anothei example helps explain how both assets anu income can be cloakeu,
appaiently legally, fiom the tax authoiities.


5&+G-G6!%,*!-2)!*.GD&)-.(,%&7!-&+G-!

At its most basic level, a tiust is a thiee-way legal aiiangement wheieby a
G)--/(& (such as a wealthy gianufathei) puts assets into a tiust, to be manageu
by inuepenuent -&+G-))G (peihaps pioviueu by a law fiim) foi the benefit of one
oi moie $),)B.D.%&.)G!(such as the gianuchiluien). When the settloi hanus ovei
the assets (which might be a bank account, oi a iacehoise, oi a poitfolio of
equities) into a tiust, the '#<&',)()'#,passes to the tiustee, but the tiustee iemains
bounu by law to ueploy the assets on behalf of the beneficiaiies unuei the teims
of a ):%;),/##/. That is the simple stoiy: in fact, tiusts have many fiequently
slippeiy anu uevious vaiiants, anu can pioviue seciecy at least as stiong as the
Swiss banking kinu: tiusts anu paiticulaily offshoie tiusts aie wiuely useu foi
tax evasion anu a vaiiety of othei ciimes. (See this exploieu in moie uetail, heie.)

Essentially, a tiust is a legal aiiangement foi manipulating anu unbunuling the
concept of .1"#:;2(L into uiffeient stianus: legal owneiship, beneficial
owneiship, conuitional owneiship, usage iights, anu moie.

To illustiate the point moie cleaily, consiuei the uiscietionaiy tiust, wiuely useu
in Euiope (although 0.S. tax law has hau some success in tackling them.)

The innovation in a uiscietionaiy tiust is that the beneficiaiies aie not fixeu.
Insteau, the question of who is to benefit fiom the assets is left to the uiscietion
of the tiustees. So you might have seveial potential beneficiaiies some coulu
even be chiluien who have not even been boin yet anu at least foi now, nobouy
can say that they aie entitleu to the assets oi theii benefits until the tiustee uses
his oi hei uiscietion (anothei veiy slippeiy concept, paiticulaily when wielueu
by an offshoie tiustee) anu shells out to a paiticulai peison oi people at some
point in the futuie.

Thus uiscietionaiy tiusts cieate a situation wheieby until the payout happens
which may be uecaues in the futuie it is impossible to iuentify any given
inuiviuual who is uefinitely entitleu to any of those assets: you cannot say who
the beneficiaiy is. Theie actually isnt one: it is all up in the aii, as the tiustees
uiscietion has not been exeiciseu yet. So until then, the assets liteially have no
ownei: they aie in an owneiless legal limbo. Even the potential beneficiaiies
coulu tiuthfully say in a suivey that they aie not entitleu to those assets.

0ltimately, howevei, people will get benefits fiom those assets often via
loopholes which mean they uont pay taxes on them even when a uistiibution is
maue. The point is that these assets aie not ieflecteu in national statistics.
18! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


No attempt has evei been maue to assess accuiately how much wealth is
involveu, oi what the natuie of this wealth is, but these stiuctuies anu similai
owneiless ones (such as assets helu in Liechtenstein founuations) aie
wiuespieau in Euiope anu elsewheie. Bowevei, given the populaiity of such
appaiently owneiless stiuctuies, it is likely that hunuieus of billions anu
possibly tiillions of uollais aie helu in this way.


52)!)/G)@2)&)!F&($/)#C!

Tax havens spenu a lot of time anu legislation ueeming income oi assets to be
locateu elsewheie: in othei woius, they aie ueemeu not to fall into the local tax
net. The iesult of this wiuespieau elsewheie pioblem is that these assets anu
income uo not fall into any tax net anywheie. Elsewheie becomes nowheie.

}ohn Chiistensen, a co-authoi of this papei, useu to be Economic Auvisei to the
0K tax haven of }eisey wheie foi seven yeais he was iesponsible foi negotiating
the teims of entiy of Bigh Net Woith Inuiviuuals (BNWIs) wanting to become
iesiuents. }eiseys stiategy was (anu still is) not to negotiate a tax iate but to
negotiate an annual income that woulu be ueemeu taxable in }eisey.

Buiing his peiiou in office Chiistensen aimeu to negotiate a minimum tax
payment of 1Su,uuu each yeai. So if you hau, say, 1um eaining 7.S% (oi
7Su,uuu) then youi tax iate woulu be level with }eiseys noimal income tax iate
of 2u%. But if you hau 1uum yieluing an S% annually (oi S million pei yeai),
then that negotiateu annual tax payment of 1Su,uuu woulu iepiesent an
effective tax iate of just S%. In the absence of a capital gains tax in }eisey, it is all
too easy foi the BNWIs wealth management team to uiess up eainings as capital
gains, to keep taxable income to piecisely the negotiateu amount. 0bviously this
iegime becomes moie attiactive, the wealthiei you aie.

The 0niteu Kinguom uoes something similai with its uomicile iule: foi those
classeu as non-uomicileu taxpayeis, in ietuin foi an annual fee of Su,uuu, the
0K only taxes income eaineu in the 0K: income eaineu fiom assets helu outsiue
the 0K, often in places like }eisey, is consiueieu to fall outsiue the 0K tax net.
This has attiacteu some of the woilus wealthiest inuiviuuals fiom Russian
0ligaichs to Inuian steel magnates to Sauui ioyalty to 0.S. financieis - to locate in
Lonuon, wheie theii income anu assets aie ueemeu by the 0K to be elsewheie
(which means they aie taxeu nowheie.) So the income inequality statistics
ignoie the vast assets helu by some of the woilus wealthiest inuiviuuals. !

!
!
!
!
!
!
!
19! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,

M)%G+&)#),-!F&($/)#G<!-2)!D%G)!(B!_&'),-.,%!

Aigentina pioviues a ielatively iaie case stuuy of how top incomes might have
been miscalculateu as a iesult of the missing uata. Accoiuing to a 2u11 stuuy by
Facunuo Alvaieuo of the 0niveisity of 0xfoiu
18
:

@.%;#2.'/,;%:A#*;,&:#,.3,'())'#,2#'L,12#",3.N%;("<,.",)2#,A#:*,:(N2,G,G,G,>2#,
:(N2,&:#,M(;;("<,3:.M,;%:A#*;,#()2#:,3.:,;&ML'("<,:#&;.";,.:,J#N&%;#,)2#*,
:#3%;#,).,N..L#:&)#,1()2,)2#,)(M#HN.";%M("<,)&;0,.3,N.ML'#)("<,.:,
&";1#:("<,).,&,'."<,3.:MG,D2#",3.%"/E,)2#*,&:#,;.M#)(M#;,(")#")(."&''*,
#?N'%/#/,;.,&;,).,M("(M(Y#,J(&;,L:.J'#M;,<#"#:&)#/,J*,.%)'(#:;G,
G,G,G,,
D2('#,;%:A#*,(")#:A(#1#:;,(",L..:,N.%"):(#;,N&",%;%&''*,N.''#N),/&)&,(",A#:*,
L..:,&:#&;E,L#"#):&)("<,)2#,<&)#/,N.MM%"()(#;,(",12(N2,M&"*,:(N2,L#.L'#,
'(A#,(;,.3)#",(ML.;;(J'#G,

Alvaieuo founu that while 698 Aigentine tax files showeu income above $1m,
anu 26 showeu income above above $Sm, the suiveys showeu that the top 16u
inuiviuuals only hau income between $Suu,uuu anu $1m. In ueveloping
countiies, he saiu, suiveys will typically uetect eaineu income (e.g. wages anu
salaiies) but fail to captuie infoimation on uneaineu incomes (e.g. ients,
uiviuenu payments anu capital gains).

0ne of the iaie attempts to estimate the effect of hiuuen offshoie wealth was
uone by }oige uaggeio anu Biio Rossignolo of the Centio ue Economia y
Finanzas paia el Besaiiollo ue la Aigentina (CEFIB-AR). Pievious estimates of
the uini foi Aigentina, without coiiecting foi unueclaieu, income was u.46 in
2uu9 while the uini they calculate aftei coiiecting foi inequality was u.48: this
big uiffeiential, they saiu, was baseu on veiy conseivative estimates of ients
pioviueu by wealthy Aigentines exteinal investments, which in tuin was baseu
on conseivative official estimates of theii exteinal holuings.
19


!
!
!
!
!

18
Facunuo Alvaieuo, >2#,Q(N2,(",I:<#")("&,.A#:,)2#,>1#")(#)2,O#")%:*+,3:.M,)2#,N.";#:A&)(A#,
:#L%J'(N,).,)2#,K#:."(;),#?L#:(#"N#,&"/,J#*."/,45V7H788X, Paiis School of Economics, Apiil 2u11,
http:hal.aichives-ouveites.fiuocsuuS88S18PBFwp2uu7u2.puf ,
19
The u.46 figuie is fiom Noia Lustig, Leonaiuo uaspaiini, >2#,Q(;#,&"/,\&'',.3,!"N.M#,!"#$%&'()*,
(",T&)(",IM#:(N&, Tulane 0niveisity, Febiuaiy 2u11. The u.48 figuie is fiom !ML&N).,/#',
K:#;%L%#;).,C.J:#,'&,P$%(/&/, }oige uaggeio y Baiio Rossignolo, Bocumento ue Tiabajo No. 4u,
Cefiu-AR, Sept 2u11. The compaiison anu the stiess of this stuuys conseivative natuie was
maue by uaggeio, in uiscussion anu in email coiiesponuence: he saiu that Beniys uata involveu
much gieatei sums of offshoie wealth (apioximately SSu% gieatei than oficial Aigentine uata)
which implieu a fai gieatei uistoition of the uini coefficient, though he was not able to piouuce a
iecalculation baseu in Beniys uata in the shoit timescale piesenteu to him.
2u! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,

!
!
\C!T(,D/+G.(,!
!
This papei ieveals foi the fiist time that economic inequality is woise
significantly woise than any known stuuy of inequality has evei inuicateu. This
is tiue piobably foi eveiy countiy in the woilu, anu foi the woilu as a whole.
!
In the Su yeais to 2u1u, the income of the top 1% in the 0S uoubleu while the top
u.u1% quauiupleu. In this peiiou, incomes of the bottom 9u% in the 0S fell by
neaily S%. Yet wealth uata uoes not ieflect the huge incieases of income
enjoyeu by Ameiicas iichest eaineis. Theie is a total uisconnect.

It is incieasingly iecogniseu that income inequality compounus anu even of itself
geneiates seiious social pioblems, hampeis giowth anu can spaik political
instability.

Reputable estimates suggest SS Afiican countiies have seen accumulateu capital
flight of $944bn between 197u anu 2uu8 - a vast sum consistent with }ames
Beniys ieseaich accompanying this papei, which finus that theie was $21-S2tin
in assets sitting secietly offshoie, uncounteu.

We askeu eight woilu expeits specialising in economic inequality whethei
uniecoiueu offshoie wealth is piopeily factoieu into theii calculations, anu if
not, whethei cuiient analyses unueiestimateu the pioblem. They all agieeu with
oui theses: it is not, anu they uo.

Piofessoi Thomas Piketty, a leauing expeit on economic inequality, has tolu us
uniecoiueu offshoie money is geneially not incluueu in the Woilu Top Incomes
Batabase stuuy he co-authois. So its iesults, he says, aie N#:)&("'*,&,'.1#:,J.%"/E,
".),."'*,3.:,)2#,'#A#',.3,("#$%&'()*E,J%),L:.J&J'*,3.:,)2#,):#"/,&;,1#''G

The pioblems with gaining accuiate iesults to base conclusions on wealth anu
inequality aie manifolu. National tax authoiities have well uocumenteu issues
accessing anu assessing the income of theii citizens, paiticulaily BNWIs. Bata
suiveys suffei fiom people eithei ueclining to paiticipate oi issuing false
infoimation, anu these pioblems aie paiticulaily acute foi the top 1%. Similai
things happen at the veiy lowest income gioups too -- but the sums involveu aie
small beei compaieu with the uppei income biackets.

The iesult is that economic inequality, in the vaiious ways it is measuieu, uoes
not ieflect the ieality of vast sums of wealth as much as $S2 tiillion accoiuing
to the accompanying iepoit by }ames Beniy which aie not incluueu in the
calculations.

This means inequality is fai moie pionounceu than we have until now
appieciateu.
21! !"#$%&'()*+,-.%,/."),0".1,)2#,2&'3,.3,(),,45
)2
,6%'*,7847,


Inequality is a political choice: a choice about how much inequality in outcomes a
society is willing to toleiate, accoiuing to its beliefs about how impoitant that
may be to pioviue incentives, anu how much uamage it may uo to social
cohesion, economic giowth anu so on. People take uiffeient views on each of
these aspects, anu on the oveiall balance, anu that is why theie cannot be a
'iight' answei imposeu on a countiy fiom outsiue, but iathei the society's
toleiance of inequality must be ieflecteu in the uecisions of electeu
iepiesentatives.

But anu this is a big but Alex Cobham, heau of ieseaich at the 0K chaiity Save
the Chiluien, poses a question.

D2&),(3,)2#,#?)#"),.3,("#$%&'()*,2&;,J##",2(//#"E,&"/,M&*,#A#",
2&A#,J##",;*;)#M&)(N&''*,("N:#&;("<E,%";##",J*,M.;),L#.L'#d,D2&),1.%'/,
)2&),M#&",&J.%),)2#,L.'()(N&',N2.(N#;,)2&),2&A#,J##",)&0#",.:,&NN#L)#/E,
&"/,&J.%),)2#,L.;;(J('()*,.3,:#A#:;&',&;,)2#,):%#,;)&)#,.3,&33&(:;,
J#N.M#;,("N:#&;("<'*,N'#&:d,,

We hope that oui aiticle, anu }ames Beniys accompanying ieseaich foi the Tax
}ustice Netwoik, seives to help make the tiue state of affaiis cleaiei, anu to
change the fiame of iefeience in which societies cieate theii policies anu theii
systems foi ensuiing the piospeiity of theii citizens.


",*,(-)<!we will make these anu ielateu iepoits peimanently available on oui
new web page, heie
http:www.taxjustice.netcmsfiont_content.php.iucat=148 .!