Response to the $21 trillion Tax Avoidance Study

July 23, 2012

Today the Tax Justice Network released a report that estimates that unreported offshore wealth held in tax havens has reached at least $21 trillion. The TJN opposes both tax evasion (which is, by definition, already illegal) as well as tax avoidance (the use of various legal strategies to lower an individual's tax bill), claiming that both constitute major causees of poverty around the world. Tax Foundation President Scott A. Hodge had the following response to the study's claims:

Whether or not the $21 trillion figure is accurate or not, we should not be surprised that taxpayers who have the means, and who live in countries with very progressive tax systems, will try to shelter some of that income from those high rates. Income and capital are the most mobile factors in the economy and, thus, the most sensitive to high tax rates. When the UK raised their top rate to 50%, they lost a lot of income – and high earners – to low tax countries such as Switzerland. France will surely see an exodus of income and wealthy citizens in the very near future.

While the top U.S. tax rates are not as high as some countries, we still have the most progressive income tax system of any industrialized nation according to the OECD. It would not be surprising that many high income Americans look for friendlier homes for that income. Ironically, the U.S. also has the fourth-highest level of inequality according to the OECD. So either we have inequality in spite our progressive system, or progressive taxation is not a very effective means of combating inequality.

The solution is to this “problem” is to not wring our hands about inequality, but to lower tax rates and, thus, stop chasing away this fugitive resource. It is much better to tax all income at low rates than half as much income at high rates. People who write these reports never seem to understand this.

More on inequality and taxing the rich here.

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