When economists such as Gabriel Zucman tell us that governments around the world lose $190 billion annually in revenues due to tax avoidance by the ultra-rich, that points to the work of wealth managers. Such a feat is not accomplished by millionaires and billionaires themselves: they are otherwise occupied, often in accumulating more wealth or in spending it. Instead, the task of mastering the intricate and changing body of laws applying to tax, estates and multi-national transactions falls to a highly-specialised group of professionals. The skills they offer—which enable their clients to defeat the spirit of the laws without violating them formally—cost handsomely. That in itself is a major factor in the growth of inequality: the old saying “it takes money to make money” is true not because wealth accumulation is natural or inevitable, but because rich people can afford the best advisors.
This helps explain an unanticipated result of the 2008 financial crisis: while some expected it to be a great leveller in terms of inequality, the opposite occurred. Although the wealthy initially lost money in the crash, within a few years they had not only recouped it all, but had become wealthier than ever. According to Oxfam, the richest 62 people in the world increased their fortunes by a total of US$500 billion between 2010 and 2015; meanwhile, the majority of the world’s population has yet to recover their losses. This can be attributed in part to the multi-pronged “wealth defence” strategy that professionals can provide to the world’s economic elites. This involves not only the avoidance of taxes and debts that could dissipate clients’ fortunes, but access to exclusive investment opportunities.
States and international organisations like the OECD are aware of the wealth management profession, which gets occasional mention in policy briefs and legislative hearings. But little effort has been made to address the professionals’ role in exacerbating inequality. Instead, the vast majority of political and institutional efforts to combat the problem have been directed at states (particularly offshore) and the wealthy themselves. These efforts have consistently proven to be disappointing. It seems that every time a loophole is closed or a sanction imposed, someone is there to get around it. That someone is often a wealth manager.
Making the poor poorer
Wealth management techniques don’t just make the rich richer: they also make the poor poorer. When professionals help high-net-worth individuals avoid paying their taxes or their private debts, the poor—and the middle class—bear the costs, both directly and indirectly. Indirectly, they pay through a reduction of public services, such as education, health care and transportation, which are critical for making a living and becoming upwardly mobile.
The direct costs come from the surcharges on honest taxpayers and borrowers. Even with service cuts, the fiscal burden of the state must still be borne; tax avoidance by the rich shifts those costs downwards. In the US and Europe, estimates of this surcharge vary between 7% and 15% in additional taxes to cover the underpayment by the rich. At the same time, banks and other financing firms such as car dealerships raise the costs of borrowing to recoup their losses from high-net-worth individuals, who can default on their debts without penalty by using wealth management strategies. The resulting increase in borrowing costs has the largest impact on the poorest members of society, deepening their indebtedness and making upward mobility increasingly difficult to attain.
This has ominous long-term implications for human capital and national development. Drastic cuts in public services are occurring now in Greece, Spain and other EU countries where massive levels of tax avoidance by the wealthiest citizens depleted government coffers prior to the financial crisis. As under-funded states crumble, the most able and talented citizens often leave. Those left behind are ripe—in the words of economist Thomas Piketty—to be “tempted by nationalist solutions
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