Book Discussion I: The Hidden Wealth Of Nations by Gabriel Zucman

by complexdevelopmentsblog

LuxLeaks, Panama Papers and more recently BahamasLeaks: Tax evasion is increasingly recognised as a major problem for government revenue collection. This issue is not only about wealthy individuals who hide their assets from tax authorities, as has been shown in the recent EU versus Apple controversy involving the US company’s stateless subsidiary. Gabriel Zucman is the go-to expert on such schemes and how to fight them. This article discusses and summarises his 2015 book The Hidden Wealth Of Nations.

Introducing Gabriel Zucman

Zucman is a young but already quite established economist, teaching at the University of California at Berkeley. Having Thomas Piketty, author of 2013’s hot book Capital in the 21st Century, as PhD supervisor clearly influenced his research and continues to shape his career. Together with Anthony Atkinson, Facundo Alvaredo and Emmanuel Saez, they have founded the World Wealth and Income Database, helping researchers track shares of top income recipients and wealth holders in multiple countries. This group of renowned scholars consists of great contributors to the revitalised academic interest in growing inequalities, alongside other thinkers such as former World Bank economist Branko Milanovic.

As demonstrated in The Hidden Wealth Of Nations, Zucman has found his own research niche: global taxation. Rather than working out and refining the most macro of economic theories such as Piketty with his homage to Marx, Zucman’s clear focus is more than a play on words aluding to Smith’s The Wealth Of Nations. Although Zucman has a firm grip on historical developments, he goes beyond telling a story and weaving theoretical carpets. In his attempt to build a comprehensive database on top wealth holders, he has identified a lack of data: the missing wealth, or as in the more accusatory form, the hidden wealth of nations. [1] In the book discussed here, he details his findings about these assets, how large their number is, who is hiding them, what are the mechanisms of hiding them, and what can be done about this.

Hidden Household Wealth

Bloomberg describes his basic approach well:

For years, economists have puzzled over a mystery in obscure economic data: financial liabilities around the world consistently outstrip the reported financial assets held by investors –- by trillions of dollars.

Sifting through central bank data from various countries, Zucman seemed to find the answer. Those trillions were missing because they were showing up as shares of mutual funds incorporated in tax havens, primarily in Luxembourg, Grand Cayman and Ireland. His theory: wealthy investors around the world have used the investments, often made through Swiss bank accounts, to hide their wealth.

The idea is that in the case of a German citizen holding shares from a US company through a Swiss bank account, only the liabilities on the balance sheet of the US will be reported, while assets go entirely undeclared: Switzerland does not register assets as these are only administered there; however, nor will Germany do so as long as Switzerland does not report the assets held by the Swiss bank as ultimately German property (see Zucman, 2015: p.37; all page references from here on will refer to this book).

The ingredients of this tax evasion scheme regularly include the following three denominators:

  1. A shell company registered in a secrecy jurisdiction that is set up quickly, costs little and is run anonymously.
  2. The shell company’s bank account, opened in a country that does not report to tax authorities of foreign countries.
  3. The hidden wealth is finally invested in mutual funds in low-tax countries, allowing for the assets to accumulate further capital gains.

For a a brief visual summary of the process, you can watch this video from the International Consortium of Investigative Journalists, the watchdog organisation handling the Panama Papers. The video was published in 2013 but is just as relevant today.

How many assets are hidden in this way globally? Through rigorous analysis of national balance sheets, Zucman reaches the conservative estimate of assets worth $7.6 trillion stashed away in tax havens. “There has, in fact, never been as much wealth in tax havens as today. On a global scale, 8% of the financial wealth of households is held in tax havens” (p.3).

Extrapolating from Swiss data on how high the rate of voluntary declaration of assets is, he estimates that “$6.1 trillion were not declared globally in 2014” (p.49). This amounts to annual losses of about $200 billion in tax revenues – “the equivalent of about 1% of the total revenues raised by governments worldwide” (p.52). The calculation takes into account capital income tax, inheritance taxes and the rare wealth taxes. One should note however that such numbers are based on tax rates of today which are relatively low compared to average post-war rates.

What proposals does Zucman have up his sleeve for recovering this lost revenue? He puts much hope into a recent US legislation called Foreign Account Tax Compliance Act (FATCA) and similar systems that require automatic exchange of information. This is in contrast with current on-demand exchange of information which he criticises as follows: “To obtain banking information from a tax haven, a country (…) must first have well-­founded suspicions of fraud against one of its residents, which in practice is almost impossible to prove” (p.59). In order to ensure the cooperation of countries, Zucman recommends tariffs imposed on non-compliant tax havens as these are heavily reliant on exports. This could already be accomplished, he argues, by a relatively small group of countries.

In his proposal, automatic exchange of information is complemented by a world financial register to enforce the cooperation of banks that have historically gone to great lengths in guarding the secrecy of their clients’ hidden assets. This register would keep track of global financial wealth, similar to national registers of land ownership. Central securities depositories, entities that hold assets to facilitate their exchange by the actual owners, would feed their information on the ownership of global securities into the register. Tax authorities could then gather information on their citizens’ financial assets from that central entity without having to rely on full declarations.

While technically ambitious, such a register does seem feasible if its creation were supported by the world’s major powerhouses. One practical argument Zucman does not address is however the question of world leaders’ actual interest in tax collection without exceptions. As revealed by the recent leaks from Luxembourg, Panama and the Bahamas, exactly these leaders, or persons close to them, are often complicit in the business of tax dodging. A strong citizens’ movement pushing for change in that direction seems like a necessary requirement to press for real political change in global taxation. [2] Although organisations like the Tax Justice Network are recurrently making it to the head lines, we are less optimistic than Zucman who estimates that “automatic sharing of bank information is set to become the global standard by the end of this decade” (p.64). While an eventual agreement seems likely, one may well remain doubtful as to whether there will be any loopholes left in the legislation.

Corporate tax avoidance

In the last chapter Zucman also takes up the recently ubiquitous topic of corporate tax evasion. He describes that “the corporate tax is not adapted anymore to today’s globalized world and must be reinvented” (p.102). The problem posed by corporations becoming multi-national is the pressure on national governments to offer companies incentives for being taxed within their national tax regimen. Companies can thus make use of a race to the bottom by governments competing for the lowest corporate tax rates. (This issue is at the core of Ireland’s refusal to accept the financial penalties the EU imposed on Apple.)

Unlike his more original recommendations to solve the issue of hidden household wealth, he is proposing to scale up a system already in place on a regional level; for example, to allocate corporate profits fairly among US states. Such a scheme goes under the name of unitary taxation and has been discussed since the inception of the current system of separate taxation that practically allows multi-national corporations to shift their profits to low-tax legislations as they please [3]. The idea is that profits are taxed globally, regardless of where subsidiary companies are located, in the following way (pp.110-111):

To attribute profits to the different countries necessitates the use of an apportionment formula, perhaps some combination of sales, capital, and employment … [so that] the location of profits cannot be manipulated. One way to achieve this is to attribute a substantial weight to the amount of sales made in each country, because companies have no control over that: they cannot move their customers from the United States to Bermuda!

Our Verdict

Are the numbers to be trusted? In our opinion, Zucman appears to be reasonable in his calculations, so that reviews critical of his findings have to misrepresent his approach in order to find attack surface. One clear example of such misguided critique is Sternberg’s writ in the Wall Street Journal which states:

Mr. Zucman’s guesses about billions of tax dollars left uncollected boil down to crude extrapolations: Assume all foreigners’ money on deposit in tax-haven jurisdictions has gone completely untaxed by the relevant authorities …

This is factually wrong. Either Sternberg wants to reassure his ideologically offended readers or he has not actually read the book. On pages 47-49 Zucman clearly states his procedure:

Of course, not all the wealth held offshore evades taxes: some taxpayers duly declare their Swiss or Cayman holdings. But contrary to what Swiss bankers sometimes claim, most offshore accounts are still to this day not declared to tax authorities … Now, according to the latest figures published by the Swiss tax authority, only 20% of the assets are voluntarily declared—­for the rest, the depositors refuse to reveal their identity … On the assumption of a like basis for other tax havens, this means that $6.1 trillion were not declared globally in 2014.

There you have it–positive reviews could never assure you better of the factual correctness if critics must apply such dubious methods to reject the conclusions presented. What remains to be noticed is Zucman’s clear writing style and the good structure in which he incorporates his arguments. The book is easily readable even for newcomers to the topic of taxation and requires only a basic understanding of financial globalisation. We thoroughly enjoyed the book and can recommend it as an introductory reading to one of the more apparent solutions to rising global inequalities–functional global taxation, for individuals and corporations.


~Florian Carl & Yannick Schwarz


[1] A 2012 paper of Zucman is actually entitled The missing wealth of nations: Are Europe and the U.S. net debtors or net creditors?

[2] For a list of organisations fighting the fight for global taxation and tax justice you may look at Open Data For Tax Justice, of which Gabriel Zucman is an individual member.

[3] This report written by Sol Piccotto for the Tax Justice Network gives you the details on unitary taxation and the reasons why there needs to be a new approach to corporate taxation in the first place.


Zucman, G., (2015). The Hidden Wealth Of Nations: The scourge of tax havens. University of Chicago Press.