How much revenue is hidden away in tax havens?

In light of the recent Panama Papers scandal, it is worth considering how much revenue is actually hidden away in tax havens. The most widely cited estimates seem to be from a paper by Zucman (2014; Journal of Economic Perspectives, Table 1). These estimates are cited in a recent report by Oxfam (p. 12), entitled 'Ending the Era of Tax Havens: Why the UK Government Must Lead the Way'. And very similar figures are offered in a recent report by the Tax Justice Network (p. 42), entitled 'The Price of Offshore Revisited'. 

Zucman reports revenue losses from offshore wealth of: $75 billion for Europe; $36 billion for the United States; and $190 billion for the world. Using GDP data from the World Bank, and tax revenues as a percentage of GDP from the Heritage Foundation, I calculated that these estimates represent losses of: 1% of revenues for Europe (0.4% of GDP); 0.8% of revenues for the United States (0.2% of GDP); and 1% of revenues for the world (0.2% of GDP). (Tim Worstall obtains similar figures here.)

It should be noted that these estimates are most likely conservative. As Zucman writes:

My method probably delivers a lower bound, in part because it only captures financial wealth and disregards real assets. After all, high-net-worth individuals can stash works of art, jewelry, and gold in “freeports,” warehouses that serve as repositories for valuables—Geneva, Luxembourg, and Singapore all have them. High-net-worth individuals also own real estate in foreign countries.

For comparison, tax revenues in the UK decreased by 4.5% between 2007 and 2009, over the course of the financial crisis. 

EU contributions have not wiped out austerity savings twice over

The Daily Express claims that "Britain has paid more to Europe than it has saved in ENTIRE austerity drive". In particular, it asserts:

The austerity measures to reduce spiralling national debt clawed back £44 billion in the last Parliament, which critics say has come at the expense of vital public services. Being in Europe has cost the UK £87 billion over the same five years, almost double the austerity savings.

By my calculation, this is not quite correct. According to the OBR, real government spending decreased from £765 billion in 2009-10 to £747 billion in 2014-15. Cumulative savings (from spending cuts) over this period (using 2009-10 as the reference year) amount to £53.6 billion. And, according to the House of Commons Library, total net EU contributions over the same period equal £44.3 billion. EU contributions therefore equate to 83% of austerity savings––not insubstantial, but nowhere near double. 

The Daily Express obtained the figure of £87 billion by summing up gross EU contributions, rather than net ones. Our gross EU contribution encompass not only a seizable rebate but also the money we get back in the form of farm subsidies and regional development funds etc. Arguably then, net contributions are the appropriate figures, which means that 83% and not ~200% represents the proportion of austerity savings negated by our payments to the EU. 

However, it could be argued that using 2009-10 as the reference year is not the correct way to estimate austerity savings. After all, if government spending remained at 2009-10 levels, and the economy continued to grow, it would come to represent an ever smaller share of GDP. Yet government spending in 2014-15 amounted to 40.8% of GDP, which happens to be almost identical to the long-run average (the average from 1948 to 2014 being 40.7%). It therefore seems defensible to use 2009-10 as the reference year for the time period in question. 

Nonetheless, if instead of assuming that government spending would have stabilised at 2009-10 levels in the absence of austerity, one assumes that it would have stabilised at 43% of GDP after 2012-13, then cumulative savings from 2009-10 to 2014-15 actually amount to £78.7 billion. Under this assumption, EU contributions equate to only 56% of austerity savings. 

Why Cameron appears to want Turkey in the EU

A possible explanation, in the form of a letter to The Spectator (which they did not print):

Sir: Douglas Murray cannot seem to fathom why David Cameron supports Turkey’s membership of the EU (‘Cameron’s support for Turkey’s EU membership should worry us all’, 15 March). 

The Prime Minister has long been an advocate of free trade across the EU, but I don’t put him down as a committed Eurofederalist. My guess is that Mr Cameron favours Turkish entry into the EU for precisely the same reason that many Tories favoured EU enlargement during the 1990s, namely that it would serve as a bulwark against further political integration. 

Mr Murray frets over the possibility that 75 million Turks could soon enjoy visa-free access to the Schengen Area. Perhaps Mr Cameron is betting that mass immigration of Turks would prove so disagreeable that Turkish accession, were it to be achieved, would undermine not only Schengen but also the principle of free movement itself.

Noah Carl,
Nuffield College, Oxford

I'd be interested to know if anyone else has an alternative explanation.

US farm lobby calls for higher immigration to reduce wages

Jason Richwine has an interesting article in National Review about a recent report put out by Partnership for a New American Economy, a coalition of business leaders (including arch evil-doer Rupert Murdoch) that lobbies for higher immigration. In short, the report calls for an increase in immigration of low-skilled farm workers to drive down wages in the agricultural sector. 

Richwine doesn't quote directly from the report in his piece, so I thought I'd so here, to illustrate just how blunt and indelicate the language is. In Part V, 'Evidence that the decline in workers led to a labour shortage', the report notes:

One consequence of the reduced supply of available farm labor is that it has become much more expensive for farms to hire seasonal farmworkers, a development that has placed a strain on many U.S. farms.

It then notes:

It should be little surprise then that in recent years––as immigration has slowed––wages for seasonal positions have increased. What is surprising, however, is by how much such wages have grown.

The report proceeds to show (by means of accompanying charts) that wages have risen much more in the agricultural sector than in other low-skilled sectors, due to the relative scarcity of low-skilled farm workers. It notes:

As the economy has improved and employment has increased, employers in non-agricultural industries have been able to find enough workers to fill job vacancies without upward pressure on wages. Farmers, on the other hand, faced a hard time finding sufficient numbers of laborers and have had to bid up wages to attract and retain workers. 

The report even calculates precisely how much wages were boosted by the reduction in labour supply:

Put simply, this elasticity means that each 1.3 percent drop in the available supply of labor results in a one percent increase in the wages paid to field and crop workers.

Lord Rose concedes that ending free movement could increase British wages

During a recent meeting of the Treasury Select Committee, Lord Stuart Rose––chairman of the Britain Stronger in Europe campaign––was asked by Labour MP Wes Streeting: 

If free movement were to end following Brexit, is it not reasonable to suppose that we could see increases in wages for low skilled workers in the UK just off the back of the economic impact of free movement on wages?

His reply was: 

Well, if you're short of labour the price will frankly go up. So yes, but that's not necessarily a good thing.

A clip of the exchange is available via the Daily Express. 

Social desirability bias for survey questions on race

Social desirability bias is the tendency for individuals to avoid answering survey questions in a way that might be looked upon unfavourably by others. It often impacts questions on issues such as race, religion and immigration. Looking at data from the CBS/NYT poll that I mentioned in my last post, I discovered quite an interesting example of social desirability bias. The poll included the following question on race relations in the US:

In recent years, do you think too much has been made of the problems facing black people, too little has been made, or is it about right?

I recoded the variable so that respondents answering "too much" were distinguished from those answering either "about right" or "too little". Crucially, the poll also included the race of the interviewer for each individual respondent. Thus, I investigated social desirability bias by examining the effect of having a black interviewer on white respondents' answers to the above question on race relations. 

The table below shows coefficients from linear probability (i.e., OLS) models of believing that too much has been made of the problems facing black people. The sample is restricted to whites (who in any case comprised the vast majority of respondents). The value in the left-hand column indicates that whites with a black interviewer were 15 percentage points less likely to answer "too much" than whites with a white interviewer. And the values in the other columns indicate that this effect remains unchanged when controlling for a range of socio-demographic characteristics. 

15 percentage points is arguably a fairly large difference. Indeed, 38% of whites with a white interviewer answered "too much", whereas only 23% of whites with a black interviewer did so.

Americans who can correctly define 'socialism' view it less positively

A couple of days ago, The Federalist published a long article entitled 'Why So Many Millenials are Socialists', the main explanation being that relatively few millenials seem to understand what socialism is. To investigate whether, in general, Americans with a better understanding of socialism view it more or less positively, I examined data from a poll conducted by CBS News and The New York Times in April of 2010. 

Respondents were asked the question, "When someone says the country is moving toward socialism, what does that mean to you?" The correct (and modal) answer, given by 37% of respondents, was "government ownership of the means of production". The most-frequently given wrong answers were: "redistribution of wealth" (9%), "taking rights away from people" (9%), and "a bad thing" (4%). Unfortunately, the CBS/NYT poll did not ask respondents for their view on socialism. 

Happily, however, a Reason/Rupe poll from August 2014 did ask respondents for their view on socialism. (Since the two polls surveyed completely different individuals, it is only possible to conduct an analysis at the aggregate level.) Percentages with a positive and negative view of socialism were reported for various different socio-demographic groups: whites, blacks, Republicans, Democrats, etc. Accordingly, I calculated the percentage giving the correct definition of 'socialism' for each of those same socio-demographic groups, using the CBS/NYT poll (sampling weights were applied in order to attain representativeness).

For example, 29% of whites in the Reason/Rupe poll had a positive view of socialism, and 43% of whites in the CBS/NYT poll gave the correct definition of 'socialism'; 55% of blacks in the Reason/Rupe poll had a positive view of socialism, and 15% of blacks in the CBS/NYT poll gave the correct definition of 'socialism'. The two charts below plot percentage giving the correct definition of 'socialism' against: respectively, percentage with a positive view of socialism, and percentage with a negative view of socialism.

In both cases, there is a very strong relationship. Socio-demographic groups who are better at defining 'socialism' are less likely to view it positively, and are more likely to view it negatively. The correlations (controlling for group fixed-effects) are: r = –.85 and r = .86, respectively. Of course, since the various groups overlap with one another, and are therefore not at all independent, these figures should be interpreted with considerable caution.