by AJ Herrmann

The recent release of the “Panama Papers” has renewed debate about tax havens, global disparities in wealth, and the ability of rich individuals to shelter financial assets from national governments. The Papers are a cache of private data from Mossack-Fonseca, a Panamanian law firm that specializes in setting up shell companies. These companies can be used to disguise the true owners of financial assets such as real estate, stocks, and other investments from tax authorities.

The information in the papers has proven embarrassing for high-level governmental officials from several countries who were found to have controlled offshore shell accounts set up by the law firm. The Prime Minister of Iceland, Sigmundur Davíð Gunnlaugsson, resigned on April 5 after the papers revealed that his wife controlled an offshore shell company which was owed several million dollars by Icelandic banks whose bankruptcies Gunnlaugsson’s government was responsible for overseeing.  Similarly, British Prime Minister David Cameron faced disclosures that he and his wife owned shares in an offshore company controlled by his father. The ICIJ (the journalistic organization that released the papers) estimates that the papers identify over 140 officials in 50 countries who control secret offshore accounts.

While much of the media coverage of the papers has focused on these high-profile disclosures, the papers are symptomatic of a wider issue of hidden wealth. This hidden wealth, despite the character of media coverage of the papers, is a much greater problem for developing economies than the U.S. and Europe. UC Berkeley economist Gabriel Zucman has estimated that 4–8% of the US’s total financial wealth is hidden offshore in accounts similar to those leaked by the Panama Papers. That’s quite low by international standards. Zucman estimates the amount of wealth held offshore is slightly higher in Europe—10%—but much higher in Latin American (20%), Africa (30%), and Russia (50%). The low percentage of hidden wealth in the United States may be a result of the ease of creating shell companies in many U.S. states precludes the need to hide assets offshore.

Further compounding this problem is the difficulty of distinguishing between legal “tax avoidance” (which many corporations and wealthy individuals use to minimize the amount of taxes they pay) and illegal tax evasion. The latter involves hiding assets overseas to evade national tax authorities.  Anonymous shell companies similar to those that Mossack-Fonseca helped create can be used for both purposes, as well as to shelter legitimate assets to prevent graft or blackmail by local authorities or criminal gangs.

While the Panama Papers brought renewed attention to the prevalence of hidden wealth, policy solutions remain limited. Cameron and Gunnlauggsson both appear to have complied with national tax laws. The difficulties they face are political, not legal, in nature.  Many countries have laws that allow for the anonymous control of financial assets. In an address following the release of the papers, President Obama explained: “A lot of it is legal, but that’s exactly the problem. It’s not that they’re breaking the laws, it’s that the laws are so poorly designed that they allow people, if they’ve got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by.” Lest Americans think the problem is confined to other countries, a Bloomberg article earlier this year noted the increasing use of anonymous trusts by foreigner citizens to shelter assets [from their home governments] in the United States: “After years of lambasting other countries for helping rich Americans hide their money offshore, the U.S. is emerging as a leading tax and secrecy haven for rich foreigners.”

One possible solution that economists like Zucman (as well as his collaborator, Thomas Piketty) believe might help is the creation of a global financial wealth registry that allows governments to track who owns assets overseas. This registry could be overseen by an international organization like the International Monetary Fund, and could be used to help national governments track the assets of their citizens. Zucman describes such a system as a “global public good,” especially if combined with a global wealth tax that would incentivize holders of anonymous shell accounts to either report their assets to national authorities or face a tax on their anonymous holdings collected by the IMF. Such a registry would likely face opposition from financial elites worldwide. However, given the recent political attention given to income inequality in the U.S. and other countries, the idea of a global wealth registry deserves renewed engagement by policymakers.

AJ Herrman is an MPP candidate at the Goldman School of Public Policy and is an Outreach Manager with PolicyMatters Journal. Before coming to Goldman, AJ was a managing consultant at the Manhattan Strategy Group in Washington, D.C.