How many lives could be saved by closing offshore tax havens?

A new study by the former chief economist at McKinsey has revealed that at least $21 trillion—more than the size of the entire American economy—has been hidden by the super-rich in offshore tax havens. Upon reading this report, we asked a simple question: if the people hiding this money were forced to keep it in their home countries, and pay their usual taxes, how many lives could be saved? If the tax revenues from these funds were distributed like all other tax dollars among the various ministries of education and defense and so forth, including the ministries for public health and medical services, what public health programs could be paid for for? How many lives could be saved if the super-rich paid their taxes just like you and I do?

Some background

Before we reveal our calculations, we should give you a bit of background about the new offshore tax haven data. The economist James Henry, once at McKinsey and (a bit ironically) now part of the international group Tax Justice Network, used data from the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and related central banks to calculate how much money is siphoned offshore to “tax havens”, which are countries or territories where they can be hidden from domestic tax collectors. Henry summed the BIS’s estimates of “offshore deposits” among countries—which is cash held outside the depositor’s home country—and scaled that sum based on the proportion of their portfolio that large investors usually hold in cash. This resulted in an estimate of between $21 and $32 trillion in financial assets that have been hidden from the world’s tax authorities. The estimate is consistent with other estimates that have been conducted in the past (see here for an extensive review of the methodologies employed in making these estimates, and for some prior estimates with more detail).

It’s important to note that this estimate does not include non-cash assets like homes and yachts and artwork, and that $9.8 trillion of the total sum is owned by just 92,000 people (0.001% of the world’s population). The majority of these people are operating accounts through three big banks: UBS, Credit Suisse and Goldman Sachs.

These numbers also don’t include the impact of tax competition (the process by which jurisdictions use tax breaks and subsidies to attract investment to their local area), which is an entirely different process from tax havens. The estimates being discussed here include both the illegal kinds of tax haven use (outright tax evasion) and legal kinds of tax haven use (tax avoidance, such as when banks send their investment savings offshore). Commentators will point out, however, that there is a substantial grey area in between the legal and the illegal.

There are some key implications of these findings, beyond the obvious fact that there’s a lot of money that could be put to good use. First, when you include the money that low- and middle-income countries are losing to tax havens, it turns out that these “debtor” nations are actually creditors—that is, if you added the foreign assets and private wealth being held offshore to the current debts of these countries, you end up having positive numbers rather than debt, on the order of $10.1 to $13.1 trillion. Suddenly the “debt crisis” seems to be more of a tax haven crisis. Nigeria has lost $300 billion to offshore tax havens since 1970, for example, while the Ivory Coast has lost $141 billion. Secondly, the big private banks participating in this process are actually not small Cayman Island banks—they’re big banks in London and New York—interestingly the same banks involved in the global fiscal crisis. And third, there’s some potentially really good news here—that the world actually has a lot of the capital needed to pay for things we thought we couldn’t. Now the question is how to deliver.

How many lives could be saved?

The $21 trillion number is far larger than what the World Bank estimated in 2002 was needed to address the UN Millenium Development Goal of cutting world poverty in half by the year 2015. The MDG goal estimates are fairly outdated calculations based on a number of assumptions about reforming the aid process to focus on development priorities, so we asked a simpler question: suppose the super-rich who hold their money offshore were just to bring this cash back to their home countries and pay the usual taxes on the interest they get. What would happen to public health?

Here’s what we assumed: suppose the super-rich are very bad investors and just received a low 3% interest rate on their money (yes, we’re being super-conservative to low-ball this estimate and be nice to them), and that this interest is taxed at the typical rate of tax for their income level (which is about 28.3% on average). This tax revenue would amount to nearly $190 billion a year (not including capital gains taxes)—more than rich economies spend on aid to the rest of the world annually.

Now suppose that the percent of that revenue spent on public health does not change from current levels—e.g., politicians will still spend more money on guns than on medicine. So we’re saying that the same proportion goes to public health as does currently (which averages about 13% of the tax revenue). Now suppose that money was invested in just the basic World Health Organization-recommended interventions—specifically that the money was distributed as per WHO calculations amongst the most cost-effective public health interventions for the given country, including the various infrastructure and logistic and personnel expenses (see the tables in the WHO CHOICE study for the calculation details).

Under these rather conservative set of calculation assumptions, if the super-rich paid their taxes rather than hiding them in offshore tax havens, at least 2.6 million deaths a year could be averted at a minimum, or about one out of every twenty avoidable deaths. To put that number in perspective, that’s about 1.5 times the number of people who died from HIV/AIDS last year.

How to make this happen?

All of this of course seems a bit pie-in-the-sky. But some campaigns from British groups in particular seem to be making headway on the effort to close tax havens. After notable public protests against popular figures who kept their wealth in tax havens, Prime Minister Gordon Brown pledged to tackle tax havens and their role in the global financial crisis at the G20 summit. Recently, the Economist commented on progress to deliver that pledge, which is slow but notable. In addition to individuals, a number of corporations are holding their assets abroad. The US General Accountability Office reported in 2009 that 83 of the 100 largest publicly traded corporations were maintaining subsidiaries in tax havens. The sheer magnitude of these assets kept abroad suggests that even small efforts to legislate against tax loopholes may have a big impact on general government deficits, let alone public health.

3 responses to “How many lives could be saved by closing offshore tax havens?

  1. Fascinating, devastating, and well-done. Thanks for posting on this!

    btw – Any sense how many teacher salaries could be paid for by this vis-a-vis number of teachers who were fired as a result of state & local budget crunch / austerity?

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