The Claim: $150 Billion in Offshore Tax Evasion in 2014
Consider this claim from President Obama, Congress, and the media: Offshore tax evasion costs the US Treasury more than $150 billion annually.
This figure has grown significantly over the years. It was $70 billion in 2001, $100 billion by 2010, and it’s $150 billion in 2014, according to a recent Senate report.
That’s quite an increase. Either the wealthy are exploiting the system massively, or the numbers are being exaggerated.
Let’s explore the origins of this figure.
Tracing the Origin: Jack Blum’s Guess
The $70 billion estimate came from Jack Blum, an attorney and former congressional researcher, in 2001. Blum used this figure in an affidavit for an IRS summons for records from MasterCard and American Express. He never clarified how he arrived at this number, yet it was adopted by reporters.
In 2008, the US Senate released a report estimating the annual loss from offshore tax evasion at $100 billion. A few magazine articles that didn’t explain the calculation formed the basis of this estimate. Still, the media latched onto it.
Curious about the origin of these figures, I had a colleague ask Blum at a conference how he came up with the $70 billion estimate. Blum eventually admitted, “I guessed.”
Yes, the cornerstone of the US Treasury’s “War on Offshore” is a guess!
This guess has since grown to $150 billion.
Examining the Plausibility: Is $150 Billion Realistic?
Is this amount of tax evasion plausible? Let’s examine the math:
Most offshore tax evasion likely involves wealthy investors, who would be taxed at the highest marginal rate of 39.6%. These investors prefer safe investments. In today’s low-interest environment, these investments might grow at about 4% per year.
Using these assumptions, to incur a $150 billion tax bill, there would need to be $380 billion in unreported annual income (divide $150 billion by 39.6%). The capital needed to generate this income would be about $9.4 trillion (divide $380 billion by 4%).
Putting It in Perspective: Global Financial Implications
To put this in perspective, the US GDP is around $16 trillion, and the global GDP is about $66 trillion. This implies that 14% of the world’s GDP is hidden offshore by US taxpayers alone. If non-US taxpayers evade taxes at the same rate, it’s $38 trillion—amost 60% of global GDP—would be hidden globally in illegal offshore schemes.
How likely is it that $38 trillion is floating around the global financial system, unnoticed by tax authorities?
It’s simply not believable.
The Absurdity: Nearly 60% of World’s GDP Hidden?
While tax evasion exists, the idea that almost 60% of the world’s GDP is hidden away is absurd.
Even if people had attempted this, do you think the IRS and other tax authorities would allow it?
Highly unlikely.
Remember, this all started with a guess from a government researcher.
The Story Continues: Lobbyists’ Plans for the $150 Billion
And the story doesn’t end there…
Lobbyists are eager to spend the supposed $150 billion in new tax revenues. The US Public Interest Research Group Education Fund (USPIRGED) published a report on possible uses for this money. They suggested Pell Grants for 10 million students, doubling federal spending on education, and a $1,068 tax cut for every American taxpayer.
But those counting on this $150 billion are in for a disappointment. It doesn’t exist and probably never will.
A guess is not a reality.
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