Financial Secrecy and Its Impact on Cross-Border Deposits

• Thesis title in Czech: Financial Secrecy and Its Impact on Cross-Border Deposits
• Thesis title in English: Financial Secrecy and Its Impact on Cross-Border Deposits
• Key words: Finanční tajemství, daňové ráje, offshore financial center, daňový únik, výměna informací, regulace, secrecy jurisdiction
• English key words: Financial secrecy, tax havens, offshore financial center, tax evasion, information exchange, regulation, secrecy jurisdiction
• Academic year of topic announcement: 2016/2017
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: prof. doc. Petr Janský, M.Sc., Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 09.11.2016
• Date of assignment: 09.11.2016
• Date and time of defence: 21.06.2017 08:30
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 19.05.2017
• Date of proceeded defence: 21.06.2017
• Opponents: doc. Bc. Jiří Novák, M.Sc., Ph.D.

Guidelines

A replication and update of the following paper, published in American Economic Journal: Economic Policy - Johannesen Zucman 2014 The End of Bank Secrecy - An Evaluation of the G20 Tax Haven Crackdown

During the financial crisis, G20 countries compelled tax havens to
sign bilateral treaties providing for exchange of bank information.
Policymakers have celebrated this global initiative as the end of
bank secrecy. Exploiting a unique panel dataset, our study is the
first attempt to assess how the treaties affected bank deposits in tax
havens. Rather than repatriating funds, our results suggest that tax
evaders shifted deposits to havens not covered by a treaty with their
home country. The crackdown thus caused a relocation of deposits
at the benefit of the least compliant havens. We discuss the policy
implications of these findings.

References

1. Cobham, Alex, Petr Janský, and Markus Meinzer. 2015. “The Financial Secrecy Index: Shedding New Light on the Geography of Secrecy.” Economic Geography 91 (3): 281–303. doi:10.1111/ecge.12094.
2. G20. 2009. “The Global Plan for Recovery and Reform, Final Communique of the G20 Summit Held in London on 2 April 2009”. London. https://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf.
3. Johannesen, Niels, and Gabriel Zucman. 2014. “The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown.” American Economic Journal: Economic Policy 6 (1): 65–91. doi:10.1257/pol.6.1.65.
4. Henry, James S. 2012. “The price of offshore revisited.” Tax Justice Network, http://www. taxjustice. net/cms/upload/pdf/Price_of_Offshore_Revisited_120722. pdf.
5. OECD. 2015. “Measuring and Monitoring BEPS, Action 11 - 2015 Final Report.” OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/9789264241343-en
6. Zucman, Gabriel. 2013. “The missing wealth of nations: Are Europe and the US net debtors or net creditors?” The Quarterly Journal of Economics (2013) 128 (3): 1321-1364 first published online April 9, 2013 doi:10.1093/qje/qjt012
7. Zucman, Gabriel. 2014. “Taxing across Borders: Tracking Personal Wealth and Corporate Profits.” The Journal of Economic Perspectives 28 (4): 121–48.
8. Zucman, Gabriel. 2015. The Hidden Wealth of Nations: The Scourge of Tax Havens. University of Chicago Press. https://www.google.com/books?hl=cs&lr=&id=tpIpCwAAQBAJ&oi=fnd&pg=PR5&dq=zucman +hidden+wealth+&ots=dw-fg1KhHf&sig=7w_oyIIuJF4ljW_WPoyzHk5GF74.

Preliminary scope of work in English

Shifting profits and wealth to offshore tax havens has become a prominent topic in economic and political debate. As recent studies show, the influx of foreign assets is no more a domain of small island nations only. Instead, some of the developed and well-governed countries also come into focus, when speaking about tax havens (Cobham, Janský, and Meinzer 2015). Furthermore, the significance of tax havens in terms of the volume of wealth and profits sheltered in there has risen dramatically over the past decades. Zucman (2014) sees two main reasons for that: globalization and technological progress. Whereas the former has made it much easier for corporations to move their profits offshore, the latter simplified the shift of assets for wealthy individuals.
There are numerous attempts among economists to estimate the financial costs resulting from shifting assets to tax havens. Their conclusions differ, however, due to differences in methodology and availability of data. According to the estimate by Henry (2012), the value of global financial wealth held offshore is $21 trillion, which, under numerous conservative assumptions, would result in the loss in corporate tax revenue of $189 billion per year. Another estimate by OECD (2015) claims that the base erosion and profit shifting (BEPS) causes the yearly loss of 4-10 % of the global corporate income tax revenues, which would correspond to the tax loss of $100-240 billion each year. Zucman (2013), one of the leading experts in the field, estimates that 8% of the global financial wealth of households is held offshore. In another work, Zucman (2015) also estimates that 20 % of all US corporate profits are booked in tax havens, which he believes is the main cause of a 33% decline in the US effective corporate tax rate since the late 1990s. Even more alarming is the fact that both proportion of individuals’ offshore wealth and corporate profits booked offshore have significantly increased during the last decades (Zucman 2015).
The abuse of offshore tax havens by companies and individuals has become one of the big topics pronounced by political authorities around the globe. The first coordinated action against the offshore financial centres was launched in late 1990s, when a group of economically powerful nations established the first global anti-offshore scheme in cooperation with the OECD. Its goal was to encourage the existing tax havens to exchange financial information under the threat of blacklisting and economic sanctions. The next big step came after the 2007-08 financial crises, when fighting tax havens has become one of the top political priorities (Johannesen and Zucman 2014). The mechanism that was launched at the G20 summit in April 2009 urged each tax haven to sign at least 12 bilateral treaties concerning the exchange of financial information. Under the threat of economic sanctions, more than 300 treaties were agreed right before the end of 2009.
The policymakers welcomed the 2009 crackdown with the hope that it will finally bring the era of bank secrecy to an end (G20 2009). Whether this action was successful is in question, though. When Johannesen and Zucman (2014) came with the first empirical assessment of the scheme, they found that rather than repatriating funds, the crackdown led to a relocation of assets from cooperating tax havens to those, which were not covered by the treaties. It seemed therefore, that the least cooperating havens are in the end the ones that benefited the most from the anti-offshore policy.
In my thesis, I intend to replicate and expand the research made by Johannesen and Zucman (2014) with more actual data. The first goal will be to determine, whether their unsatisfying results are rather stable, or whether they demonstrate just a temporary shock caused by the anti-offshore program. The key question that I will try to answer is whether or not there can be distinguished a significant relocation of foreigners’ assets from countries involved in the 2009 tax haven crackdown scheme. If yes, I will then attempt to explain it and propose possible policy implications. In the second part of the thesis, I will add the data on financial secrecy and examine, whether the level of secrecy is somehow related to the effectiveness of tax haven crackdown in respective countries.