Convenient untruths

Policy Shorts

Offshore finance has long been accused of undermining tax bases and being a cause of increased government deficits. Yet, despite more than a decade of tax transparency measures and relentless political pressure, the promised significant increase in fiscal revenues has failed to materialise

Thus, a new charge has been manufactured and levied against offshore finance That of being the cause of widening global inequality

So seductive the cause, so self evident the case, that the facts go unchecked, data unverified and unreconciled. We count the Financial Times, the LSE and the IMF amongst those who repeat, ad nauseum, without critique, the 'evidence' of the tax campaigners. 'Facts' are whatever campaigners deem them to be.

The fact of widening wealth inequality in the last quarter of a century has been a particularly American phenomena. One that clearly has causes in the peculiarities of the structure of the US economy and society. Conflating this US trend as a global trend is a false narrative.

The concentration of wealth in the UK has not followed the same pattern as the US over the last quarter of a century. There is no analogue to the US experience of the tech billionaires. The evidence is that the concentration of income and wealth has not increased in the UK over the last quarter of a century It has remained essentially unchanged

Furthermore, the scale of offshore finance is falling. Financial wealth administered offshore has fallen relative to global financial wealth. Those same measures used by the global campaigners to ‘expose’ the role of offshore finance have fallen

Far from helping widen inequality, the contribution of offshore finance, if there had been one, would have, by deductive logic, fallen in recent years

The case that offshore finance has been the cause of widening UK inequality cannot be reconciled with these facts. They are thus ignored.

These two basic facts - that the concentration of income and wealth in the UK has remained essentially unchanged for 25 years and that offshore finance has shrunk in that time exposes the narrative that offshore finance is a cause of growing wealth inequality for what it is:

‘A convenient untruth.'

'That the concentration of income and wealth in the UK has remained essentially unchanged for 25 years and that offshore finance has shrunk in that time exposes the narrative that offshore finance is a cause of growing wealth inequality for what it is.

A convenient untruth.'

The International Sustainability Institute determined to publish a programme of simple Policy Shorts with the objective of exposing various fiscal fallacies currently accepted as fact by the global policy consensus. The Policy Shorts being brief papers setting out the basic facts of a thesis.

The first, that offshore finance is the cause of widening wealth inequality in the UK, is the topic of this first paper.

For a long period, western policy makers have distracted and diverted attention from policy failings by pointing at the bogeyman of offshore finance.

The current charge against offshore finance is of being the cause of widening global inequality. An emotional and populist cause. Conveniently distracting for western governments.

This paper is a challenge to that As set out in the synopsis, the case against this charge is strong and simple.

These papers are designed to be quick reads We do not plan to take the reader on an econometric research journey but provide a short simple explanation of compelling narratives.

In this Policy Short we provide the compelling counter narrative to the charge currently levied against offshore finance in six sections.

The first section further sets the scene. It outlines our rationale and our motivation for this paper Addressing a wrong Correcting an injustice. Our proposed programme on fiscal sustainability rests on the premise that the global policy consensus on fiscal and monetary policy has been woeful for quite a sustained period. Correcting such actions requires a reset of conventional wisdom. Part of that incorrect conventional wisdom is the

misunderstanding of the role of offshore finance

We then present data on the concentration of wealth in three parts.

An historic 100-year view of Britain’s experience with comparisons made to France.

An historic 100-year view of the US experience with comparisons made to Britain.

A more detailed historic last quarter century view of the pattern of change (or not as is our thesis) in the concentration of wealth and income in the UK.

We take data from the World Inequality Database An organisation which counts the United Nations, the European Research Council, the UK Government and the UK’s Economic and Social Research Council amongst its funders and backers. We believe we are therefore justified in treating the data as accurate and robust. That we do not attempt our own primary estimates is because our interest in this Policy Short is to expose the one sided presentation of the global policy consensus. What better way but to use its own data?

We then briefly discuss the scale of any impact of offshore finance on these measures Or rather explain why any impact would only have been decreasing over the period.

We then conclude Finally, in a very short appendix (a seventh section perhaps), we provide a preview of some of the issues we address in the next Policy Short. That of the conflation of issues and inflation of estimates of tax losses associated with offshore finance. A subject clearly related to the topic of interest of this Policy Short.

Continued misdiagnosis of policy problems is to condemn populations to the purgatory of following false policy prescriptions

For this reason alone, the truth of the role of offshore finance needs to be understood. The pressure would be then on governments to present honest appraisals of the causes of the state of public finances to develop better directed policies.

In the last decade there has been a continual conflation of issues to apply pressure on offshore finance as a cause of the failure of governments to balance books.

Rather than a mature recognition that a continued secular rise in spending is inconsistent with enlightenment philosophy, blame and scapegoats are sought for the inability of governments to match income to spending ambitions, to divert attention from underlying failures of policy.

Economic policy at the political level is dangerously faddish, but even at the academic level it is subject to fashions and prone to a herd mentality.

With respect to offshore finance, what started out in 1998 as a legitimate exercise to remove harmful tax practices (that is providing tax benefits to nonresidents unavailable to residents) but with a recognition that tax competition was a good thing (as it helps keep taxes lower than they would otherwise be) has morphed over time into a global view where tax competition is no longer tolerated, and a consensus holds sway amongst policy makers in supranational bodies that high levels of tax is good.

Thomas Piketty’s seminal work 'Capital in the 21st Century' published shortly after the global financial crisis perfectly caught the prevailing zeitgeist and the worldview

of the book one of globally rising inequality and its causes became conventional wisdom. Irrespective of the actuality of the facts

The book also emboldened others to join the dots to the role of offshore finance in widening wealth inequality. In the current policy environment there is little critical analysis of policy descriptions that support the prevailing policy consensus. Favoured academics' opinions hold forth and their narrative accepted without challenge. General assumptions of cause are presumed, and circumstantial evidence is sufficient to prove a case.

The original charge against offshore finance was that it eroded tax bases through unfair competition and that it facilitated the avoidance of tax and prevented governments from raising revenues to fund public services. They were the cause of a funding shortfall of public services or deficits

After the move to tax transparency made little practical difference to the revenues of western governments, the charges against offshore finance were changed Now offshore finance as a key cause of widening wealth inequality has replaced tax avoidance as the main focus of political pressure.

We believe social outcomes in the UK are ill-served by a policy agenda that is built on the false fashions of the global policy consensus. They are ill served by a policy prescription based on the notion that offshore finance is the cause of widening UK inequality.

This is our motivation to provide a true presentation of the facts.

misdiagnosis

'Continuing

of policy problems is to condemn populations to the purgatory of following false policy prescriptions.'

Chart 1 shows that, from highs of nearly 95% and 75% for the concentration of wealth in the hands of the richest 10% and 1% respectively just before the onset of the 20th century, concentration of wealth in Britain steadily and progressively fell up to the late sixties/early seventies. (Data gaps occur during the period of the two world wars of the twentieth century).

From the mid-seventies, the richest ten percent have owned around 60% of wealth and the richest 1% in the region of 20%. There was a mild reversal of trend in the eighties but as we demonstrate in more detail in the next section, shares of wealth and income were steady through the late nineties to the present day.

These patterns reflect the impact of taxation and government spending. As shown in Chart 2 opposite, public spending grew progressively throughout the first two thirds of the 20th century.

The growth of the size of the UK state met with political resistance during the late seventies and early eighties. This recognition that the inexorable rise of spending was not sustainable was a cross party view James Callaghan's address to the Labour Party conference of 1976 was aimed at dampening spending demands But it was the eighties that saw the Conservatives seek to actively roll back the size of the state and reduce levels of personal taxation.

For us, the main secular point being that the decline in wealth concentration was accompanied by, and clearly paid for, the rise in public sector expenditure and this trend was arrested. The public debate approaches this topic as if they were a major reversal of trend with a widening of inequality continuing over the next forty years to the present day This is not the case

Chart 1: UK wealth shares

Piketty’s work Capital in the 21st Century ('Capital') popularised the narrative of widening global wealth inequality. A touch of irony, given that much of the book demonstrated how much inequalities have fallen over the last two hundred years. But this is a narrative that has been transposed without thought and critique to the UK

His work focused on France and Britain, as two of the oldest democracies having the greatest availability of data

We illustrate the trends in concentration of wealth over the last hundred years for these two large western economies. Similar, if less pronounced trends are evident in German and Italian data

Chart 3: richest 10% wealth share

Chart 2: UK Gov Spending & richest 1%

As Charts 3 and 4 demonstrate, the secular trend (of lessening wealth and income inequality) did come to an end in both France and Britain towards the end of the 1960s and 1970s

There is a hint of a resumption of the growth of inequality in the French data but there is no such trend in the British data. We produce the charts for the shares of the wealthiest 1% and 10% (which contains the wealth of the top 1% by construction) for France and Britain opposite. Concentration of wealth commenced from a higher starting point in Britain than French (as France for historic reasons had undergone a degree of equalisation not experienced in Britain).

There were reported issues with the original data utilised in Capital (this was published and freely available). As explained in the introduction we have sourced data from the World Inequality Database. This being a global organisation established expressly to campaign on this issue We felt that it helpful to our point - that the narrative is not consistent with the evidence - to use data from an antagonist.

Chart 4: richest 1% wealth share

America's splendid isolation

Charts 5 and 6 illustrate historic income and wealth shares respectively of the richest 1% and 10% in the US. As to be expected, shares of wealth are much higher than shares of income A cursory sense check confirms the logic of the situation. Income is more widely distributed than wealth.

The United States did experience a fall in the wealth and income of the richest 1% and 10% during the middle third of the 20th century.

But the rest of fhe US experience is different to that of the European experience Unlike Europe, the first three decades of the 20th century saw, if anything a widening of inequality with the share of wealth of the richest 10% peaking at 85% at the beginning of the 1930s.

Subsequently, the wealth and income of both the richest 1% and 10% fell steadily, that is after a rapid fall during the Great Depression of the 1930s. Income and wealth shares of the richest 1% and 10% progressively fell for the next half decade. Such fall in shares of wealth and income being accompanied by significant increases in public spending, catalysed by FDR's New Deal in the 1930s.

However, after 50 years these trends bottom out and reverse. Catalysed by Reagan’s Conservative revolution The reversal of the trend for the share of wealth of richest 1% taking place in 1978 when the share of wealth bottomed out at 21.5%. The share of the richest 10% bottomed out at 51.2% in 1984.

Wealth and income shares of the richest then grew more or less continually for the last 20 years of the 20th century and the first 20 years of the 21st century. A structural change that is a phenomenon unique to the US experience.

Chart 5: US wealth shares

Chart 7: richest 1% wealth share

The commonality of the trends of the income and wealth shares of the richest 1% and 10% masks the trend that all of the increase has been effectively accrued by the richest 1%. The share of wealth from a low point of 1978 increased by 13.4 percentage points to 34.9% in 2021. The share of wealth of the richest 10% grew by just 6 4 percentage points from 64 3% to 70.7% over the same time period. Put another way the share of wealth the 'other 9%' of the richest 10% by construction fell.

It is this experience that has its root causes in the particularities of the structure of the US economy and fiscal regime. The rise of the uber Billionaires is a particular US phenomenon. The richest ten billionaires in the US were collectively worth some $1.2 trillion in March 2022. To provide a little context to this number, this amount is just shy of 10% of total UK household wealth. Increasing US wealth concentration driven in most, though not all, cases by significant (founding) shareholdings in highly valued technology firms.

Chart 6: US income shares

Chart 8: richest 10% wealth share

This US experience is continually conflated as a global and a UK phenomenon in large part because hindsight views the Thatcher and Reagan conservative revolutions as one and the same.

Charts 7 and 8 demonstrate the differing and diverging experience of the US and Britain (even with the Thatcher fiscal reforms) which has experienced no increasing trends in concentration of wealth over the last 25 years. The share of wealth of the richest fell across both the US and UK for a prolonged period. They were momentarily the same in the early 1980s. Subsequent growth in the US has resulted in the share of wealth of the richest 1% now being 50% greater than in the UK

The UK's unchanging quarter century

In this analysis we are agnostic about the social and economic impact of wealth and income distribution. We concern ourselves only with its change and one alleged cause. As to be expected share of wealth, averaging just under 5% for the period, of the poorest 50% are much lower than income shares

Given property and pensions are the two highest value assets for the majority of the UK population, this seemingly ‘disproportionate’ share of wealth is soon accounted for by consideration of the large proportion of society that neither own their own property or are the beneficial owner of a private pension.

Charts 9, 10 and 11 opposite support our central assertion that, contrary to conventional wisdom, wealth and income distribution in the UK has remained essentially unchanged for the last quarter of a century.

There is no replication of the experience of the US There has been no explosion of the wealth of the richest 1% which would suggest the popular narrative is indeed fuelled by populist academics and policy makers.

What is quite remarkable perhaps is that no one group (richest 1%, richest 10%, poorest 50%) saw their share of income or wealth change by more than one percentage point over the last quarter of a century.

Quite possibly as a result of labour market policies, minimum wage etc, the share of wealth of the poorest peaked at 6% in 2007/2008. But this quickly fell back and by the time of the end of the Labour administration of 1997 2010 it had fallen below 5%

Taken as a whole, the last quarter of a century, the share of wealth of the poorest half rose from 4.3% to 4.6%, a rise of just 0.3 percentage points or some 8%.

The wealth and income shares of all three groups rose across the period. The richest 1%'s income and wealth shares grew 1% and 3% respectively. The richest 10% saw both shares rise by 1%. The poorest 50% saw their shares of income and wealth rise by 7% and 8%.

To some this may seem marginal, but the poorest 50% experienced the greatest relative increase in share of income and wealth. The 'middle 40%' clearly being the losers in this period which would provide anecdotal support for public opinion holding the view that inequality was on the rise.

Income shares are clearly the more volatile of the two measures within the period. Perhaps counterintuitively (given the political administration) there is some suggestion of a rising trend of income of the richest 10% in the ten years leading up to the global financial crisis. The crisis seems to have had an immediate impact on this cohort’s income as it did the richest 1%.

There is also some suggestion that within the period the wealth shares of the richest 1% and 10% declined slightly at the beginning of the period, then rose marginally after the global financial crisis only to then subsequently decline. There will be numerous explanations, no doubt some arising because of government policy.

But what is evident is that there is no secular rising trend underlying any of these variables. Their values remain broadly constant across 25 years. Despite the relentless media focus on wealth, and income, inequality in the UK, it has remained essentially unchanged in the last quarter of a century. Rather than focus on the successful policies that may have contributed this state of affairs, resources are wasted by being diverted to addressing a false narrative

Chart 9: UK wealth shares

Chart 10: UK income shares

Chart 11: UK wealth and income shares

Scaling any impact of offshore finance

The narrative that has taken hold in the popular consciousness is that in recent decades wealth has become massively concentrated in the hands of a handful of super billionaires. A narrative grounded in the US experience. In the public's mind it has also become a British phenomenon

The previous section illustrated that the experience of the last quarter of a century has been of essentially unchanging UK income and wealth distribution. Our thesis is that there has been no widening of inequality in the UK for offshore to have caused.

The second point of support for the overall thesis of this paper (that offshore finance is not a major cause of widening UK wealth inequality) is that the relative scale of offshore finance has declined over the last decade. If that is the case by logical deduction offshore finance cannot have contributed to a widening of wealth inequality.

We point to two sources for estimates of this decline. The first from Deloittes who publish a biannual review of offshore finance. The Deloitte International Wealth Management Centre Ranking in 2021 stated that 'international market volume (offshore) has more or less stagnated over the period from 2010 to 2019'

It records that 'the share of wealth booked offshore relative to total financial wealth declined from 9% in 2010 to 5% in 2020.' (Chart 12)

Figures published by the OECD also evidence this decline. The OECD publishes annual progress reports on its tax transparency agenda. In its 2019 report it stated that:

'Bank deposits in international financial centres (IFCs) have fallen by approximately 34% over the past ten years for a decline of USD 551 billion'

These cannot be denied. These are the same numbers that are used by certain global tax researchers to estimate the scale of tax losses caused by offshore finance. To contextualise this decline, over a similar period global net financial well more than doubled (Chart 13)

The deductive logic of these statements is obvious. Offshore finance cannot be the cause of widening global wealth inequality if, during a period of massive increase in global wealth, offshore finance has shrunk in size relative and absolute terms

The impact of offshore finance on wealth inequality is often presented as that it 'widens' wealth inequality because most offshore wealth is held by the richest 0 01% Estimates suggest as much as 80% of offshore wealth is held by this cohort. This wealth is unreported in national statistics and thus official figures are misleading. So goes the narrative.

This effect is often presented in a somewhat sensationalist manner. League tables of who holds offshore wealth are presented. Statistics, such as the one above are presented pejoratively. It would be perverse for the poorest 50% to hold their wealth offshore. The Financial Times is not immune to this manner of presentation

What is the actual scale of this impact? Bearing in mind that the richest 0.01% are a subset of the richest 1%, we estimate that this 'unreported wealth' would add just over one percentage point to the share of reported wealth 1 1 percentage points, a rise of 5%. (Chart 14) It is not on a scale that has any material impact on the story of UK wealth distribution.

Irrespective, this is not a dynamic impact on wealth inquality The declining value of offshore assets would result in any impact to be in the direction of lessening inequality. That remains unchanged.

Chart 12: offshore/onshore financial assets

Chart 13: offshore banking assets vs global financial assets

Chart 14: UK wealth shares

Oxfam

Except they are not. Offshore finance had no significant role in increasing wealth inequality in the US where the share of wealth of the richest 1% has grown by 50% in the last 40 years. And it has had no role in widening inequality in the Uk over the last quarter century because there has been none.

This paper is the first of a series of three Policy Shorts in which we highlight policy narratives where the global policy consensus tends not to concern itself with too deep an appraisal of the facts of the case.

This first short sets out one simple premise That offshore finance has not contributed to significant widening of wealth inequality in the UK over the last quarter of a century.

We provided the evidence, neatly distilled onto just three charts that corroborate the view that the UK experienced a quarter a century of essentially unchanging wealth and income inequality.

We explained that the US experience was different and that the reversal of trends back towards a greater concentration of wealth in the last forty years was exactly that. A US experience. One reconciled by US characteristics (that have nothing to do with offshore finance). And one that has been conflated as a global and UK phenomenon.

We then presented the facts of the diminishing scale of offshore finance. Offshore finance as the cause of widening global wealth inequality is an emotional and seductive narrative. Its premise and accompanying facts were accepted with very little critique.

Thomas Piketty’s Capital had the good fortune to popularise wealth inequality as a policy issue at a time when austerity dominated public policy following the global financial crisis.

Gabriel Zucman then took the popularist cause further establishing a role for offshore finance with his work the Hidden Wealth of Nations. Zucman’s work, in particular his estimates of tax losses, have never been subject to proper scrutiny (which is touched upon in the appendix and is the topic of the next Policy Short)

Rather than seeking out a deep understanding of the successful policies that worked to stabilise wealth inequalities in the UK over the last quarter of a century, a finger of blame is pointed in the direction of offshore finance.

A policy focus on offshore finance as a cause of wealth inequality is an unproductive diversion An unproductive diversion that fails to recognise actual facts.

Firstly, there has been no significant widening of wealth inequality in the UK over the last quarter of a century Secondly the scale of offshore finance has fallen and any impact on inequality would have lessened not increased.

Combined these two facts by logical deduction demonstrate that the narrative that offshore finance is the cause of widening UK inequality to be false. As we put it. A convenient untruth.

References

Advani, A. Tarrant, H. LSE (2022), Official statistics underestimate wealth inequality in Britain

Alstadsaeter. A, Johannesen. N, Zucman. G (2017), Who Owns the Wealth in Tax Havens? Macro Evidence and Implications for Global Inequality

Forbes (April 2022), The World’s Billionaires

FT Alphaville, Financial Times (11/09/2017), Chat of the day, offshore tax haven market share edition’

Harvard Kennedy School, Shorenstein Centre on Media, Politics and Public Policy (2017), Income inequality and offshore tax dodging: The rich are richer than we thought Lijun Li, Chris Wellisz, IMF Finance and Development (2019), Counting wealth in offshore tax havens boosts estimates of inequality Inequality.ORG

OECD (2019), Using bank deposit data to assess the impact of exchange of information, 2019

OECD Secretary-General Report to the G20 finance ministers and central bank governors, June 2019

Oxfam Policy & Practice briefing paper (2016), ‘Ending the Era of Tax Havens: Why the UK government must lead the way’

Piketty, Thomas (2014), Capital in the 21st Century World Bank, Databank. data.worldbank.org

World Inequality Database www.wid.world

Zucman, Gabriel (2015), The Hidden Wealth of Nations

'The Tax havens are at the heart of the inequality crisis.'

Zucman et al

Zucman's work, like Piketty’s, has had a profound influence on policy makers and opinion formers. 'The Hidden Wealth of Nations' was first published as a paper in 2013. The book and several revisions and iterations of the paper have been published since Each iteration accompanied by startling (sic) new revelations .

He has successfully defined the narrative. His work has successfully fashioned a pejorative world view of offshore finance without in our view his work and methods being subjected to appropriate challenge.

Concepts and measures are repeatedly conflated in his work. Acolytes repeat the key conclusions of the work without much critique A google search of the phrase above returned the Bank of England, the IMF and the NBER as three of first four websites repeating this statement verbatim. Yet it is illustrative, as it confuses the concepts of stock and flow. GDP is a flow. Wealth is a stock. They measure two diffferent things.

Is the conflation accidental?. Economic researchers would understand that to compare stocks and flows is to compare apples and oranges.

Estimates of global wealth do exist. So why not make the comparison consistent? Is a ratio of 10% too good not to use? Too memorable a statistic?

3% of global wealth is held offshore, it doesn't have the same ring. Would such a small number lead the public to feel the issue is less of concern?

The tendency to conflate even the basics such as this in our view implies research output being published with a view to an accompanying political agenda.Zucman's estimates of global tax losses due to offshore, $200bn (a figure we strongly dispute) seems much less large when presented as a percentage of global tax revenues (1 8%)

Our concern is that this is the prevalent approach within this research 'community'. This research agenda tends to be subjected to little critical peer group challenge This gives us significant cause for concern with published estimates

This first paper is the first of a series of three policy shorts in which we highlight policy narratives where the global policy consensus tends not to subject research output to sufficient critical peer group review

This first paper set out the case that, contrary to the current policy narrative, offshore finance has not played a significant role in the widening of UK wealth inequality

The second will demonstrate that tax losses attributable to offshore are suspect and are deliberated conflated and inflated to serve political agendum of publishing researchers

'We find that wealth equivalent to about 10% of world GDP is held in tax havens globally.'

'The tendency to conflate even the basics such as this [stocks with flows] in our view implies research output being published with a view to an accompanying political agenda.'

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About the ISICI

Founded by Dr Andy Sloan, the International Sustainability Institute Channel Islands was established to further the development of sustainable research and thought, advocating global fiscal, environmental and financial sustainability

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