In recent decades, economic globalisation has led to an increased mobility of financial assets and wealthy individuals across national boundaries.
At the same time, income and wealth have concentrated at the top, particularly in the top 1%, 0.1%, and 0.01 %. This trend has been particularly acute in Russia, the United States, China, India, Sweden, Brazil, and Gulf countries (WIR, 2018).
The search for economic security and financial diversification along with good educational facilities, effective transportation facilities, safe cities, and the possibility of further international mobility to other countries are among the main determinants of the mobility of the wealthy and their families. Motivations for holding financial assets abroad (offshore wealth) are linked to security concerns but are more determined by the desire to lower tax payments at home, hide wealth from tax agencies, and access sophisticated financial systems.
This article explores the relationship between the mobility of wealthy individuals, the mobility of assets, and international inequality (within and across countries). The analysis shows a more direct relationship between inequality and offshore wealth than between inequality and high-net-worth individual (HNWI) mobility although the data for the latter is still scant. Also, the results show that in some countries with high levels of taxation (e.g., Scandinavian countries) the wealthy have a relatively low percentage of their wealth abroad, although in other countries (mainly post-socialist countries and emerging economies) hiding assets from tax authorities seems to be a key motivation for keeping assets offshore.
1. Who are ‘the wealthy’ and why do their assets move across borders?
The wealthy are often defined by their levels of incomes and asset holdings. A rich individual or household will often have both a high level of income and significant wealth. There is a high (but not perfect) correlation between income levels and wealth levels, with mutual feedback mechanisms at work. On one hand, wealth can be acquired through two main mechanisms: (i) wealth transfers (bequests, gifts, and privatisation) and (ii) asset accumulation stemming from savings, with savings depending on income among other variables. On the other hand, wealth that is invested in the capital market, real estate, or in setting up a company will provide the owner with a yield, which is a source of income. In addition, wealth tends to be much more concentrated than income – the Gini coefficients for wealth are systematically higher than the Gini coefficients for income (Solimano, 2017).
At the national level, wealth data is generally obtained from six main sources: (i) household balance sheets; (ii) national wealth surveys prepared by central banks; (iii) tax-based wealth data, including estate tax records at death from national tax agencies in countries where wealth taxes exist; (iv) indirect income tax capitalisation methods using revenue data from capital incomes provided by tax agencies; (v) data provided by wealth-management companies and commercial banks; (vi) lists of billionaires (Solimano, 2017).
These different sources have their own merits and limitations. Consensus has developed, however, in that tax-based information on income and wealth is deemed superior in accuracy compared with self-reporting household or individual surveys. In fact, the under-reporting of income and/or wealth to tax agencies is illegal, often incurring penalties, something which obviously does not apply to individual surveys. In addition, empirical analysis shows that Gini coefficients computed using income levels from tax sources tend to be systematically higher than Gini calculations based on household surveys.
Still, tax elusion/evasion can wealth holdings to be underestimated. Private sources of information on wealth holdings are prepared by wealth management companies and investment banks. They include the World Wealth Report (prepared by Capgemini-RBC), The Global Wealth Report (Credit Suisse), and the Global Wealth Migration Review. The Bank of International Settlements (BIS) is a public repository of offshore wealth registers held in member countries. Some of this data is presented in great detail, as in the case of Switzerland, but in other countries, which also entertain tax havens and cater international depositors, the information is murky. A very comprehensive new source of data for income and wealth distribution is the World Income and Wealth data base. Begun by the Paris School of Economics, it provides internationally comparable tax-based data on income distribution for around 70 countries and data on wealth distribution for 30 countries.
2.1 The main determinants of international mobility for the wealthy
The main determinants of the international mobility of high-net-worth individuals (HNWIs) include the following list of factors:
- Personal safety.
- Availability of high-quality health services.
- Favourable tax treatment in the receiving country.
- Protection of wealth and property rights.
- Good education opportunities for children.
- Visa-free mobility to third countries.
- Cosmopolitan settings and good transport systems.
In general, the rich place a high value on personal safety, the protection of wealth, respect for property rights, good education facilities for their children, and visa-free mobility to third countries. At the same time, the rich want to reduce tax payments. This an important motivation for holding wealth offshore.
Increasingly there seems to be a ‘global nationalities market’ in which governments compete to attract a small elite of wealthy people to their countries. Governments are interested in the immigration of the rich because they bring with them fresh capital and market connections and they invest in the local property and equity markets. Several governments offer permanent residence, or even citizenship, in exchange for certain levels of investment in state development funds, real estate, bank securities, and firms (Surak, 2017).
In contrast, governments of high-income countries enforce lengthy review processes for granting work visas and residence permits to unskilled migrant workers, showing the asymmetric nature of the ‘global nationalities market’ in which money and wealth provide a critical advantage for obtaining residence permits and citizenship over plain physical labour.
2.2 The international mobility of assets: Offshore wealth
It is important to distinguish the protection of assets from the protection of people. People may choose to live in a certain country and place their assets in another. An appetite for risk that begets a search for higher returns guides the allocation of international assets by individuals, households, and corporations. Avoiding or reducing a tax burden in a home country is an important motivation in keeping wealth offshore, as is the need for sophisticated financial and legal services, and in some cases, secrecy.
Assets are often placed in special jurisdictions, sometimes referred to as ‘fiscal paradises’ or ‘tax-havens’. These are found worldwide and include the Cayman Islands, the US Virgin Islands, the British Virgin Islands, Switzerland, Panama, Jersey, the UK, the US, Hong Kong, and Macao (see table 2 for more detail).
These jurisdictions offer discretion and/or secrecy to the owners of bank accounts and financial portfolios comprising shares, bonds, mutual funds, and property. They offer low tax rates or no taxation at all on the yields of these assets. Some of these jurisdictions, like Switzerland’s central bank, for example, publish bilateral data by country on offshore wealth held by foreign citizens (see Astedlear, Johannesen and Zucman, 2017).
3.1 Evidence for the mobility of high-net-worth individuals
Research estimates that 82,000 high-net-worth individuals (HNWIs) relocated (Global Wealth Migration Review, 2017) to countries other than their place of birth in 2016. This is a small group of individuals relative to worldwide migrant figures of 250 million (UN-DESA, 2014). It is estimated that nearly 80% of offshore wealth is held by the richest 0.1% of this group (50% in the hands of the top 0.01%).
According to The Wealth Report (2017), the three most preferred destinations for HNWIs in 2016 were Australia, the United States, and Canada. The main origin countries for the wealthy were France, India, China, Brazil, and Turkey. Sydney and Melbourne were the most popular city destinations, followed by Tel Aviv, Dubai, San Francisco and Vancouver. Traditional locations for the rich also include New York and London, due to their prime property markets, cosmopolitan environments, and highly developed financial systems.
Other factors triggering the flight of both people and capital are violence and terrorist activity. France had the largest outflow of HNWIs in 2016, coinciding with the Paris terrorist attacks of late 2015 and the Nice attack of July 2016. Similar data shows Turkey was likewise affected by increases in terrorist activity.
Taxes also provoke the rich to leave home. In 2014, prominent French actor Gérard Depardieu was granted Russian nationality as he left France due its high taxation. Numerous wealthy (and middle-class) Americans live outside the US having relinquished their US citizenship in recent years. Case studies show that a common is not so much the high level of taxation but the complexity of the US tax system, including the high cost of filing taxes every year from outside the US when tax experts fluent in the US tax system are in short supply. Privacy concerns over invasions relating to asset holdings by US tax authorities are reported as another common cause.
3.2 Evidence of offshore wealth
Estimates of total personal financial wealth held as ‘offshore wealth’ in tax havens around the world fluctuate between 11% of global GDP (Alstadsaeter, Johannesen and Zucman, AJZ, 2017) and 13.5% (Boston Consulting Group, see table 1. In total monetary value this amounts to something between US$8.6 trillion (AJZ, 2017) and US$10 trillion (BCG) in 2015. Estimates from the OECD are somewhat higher.
Table 1: World offshore household wealth
Source: Author’s figures based on Alstadsaeter, Johannesen and Zucman’s online statistical appendix (2017).
Offshore wealth largely escapes taxation in countries of origin and provides additional financial resources for recipient country financial sectors.
Historically, Switzerland has been the foremost supplier of cross-border wealth management services, leading in ‘offshore’ trading as far back as the 1920s. The country took advantage of its neutrality in World War Two to accumulate large deposits from different countries and wealthy Europeans from countries on all sides. Before the financial crisis of 2007-08, Switzerland accounted for 46% of global offshore wealth, which then declined to around 26% by 2015 (table 2).
Switzerland’s decline in importance has been matched by an increase in the relative share of American, Asian, and European (excluding Switzerland) tax havens. The Cayman Island is the most important recipient of offshore wealth in the Americas (accounting for 7.9% of world offshore wealth), followed by the US (7.5%) and Panama (1.6%).
The largest recipient of offshore wealth (most of which comes from mainland China) is Hong Kong, representing 16.5% of the global total followed by Singapore (10%). Among European tax havens, the most important centre is the UK (8.9%) followed closely by Luxembourg (8.3%). Hong Kong’s share of global offshore wealth has seen an almost five-fold increase since 2005, growing more rapidly than any other centre. Singapore’s share of offshore wealth is increasing, and the US and the UK have almost doubled their respective shares of world offshore wealth.
Table 2: Tax havens around the world, share of offshore wealth
Source: Author’s figures based on Alstadsaeter, Johannesen and Zucman’s online statistical appendix (2017). Notes: American havens: Cayman Island, Netherlands Antilles, Bermuda, Panama and the US; Asian havens: Hong Kong, Singapore, Bahrain, Macao; European havens: Luxembourg, Cyprus, the UK, Guernsey, Jersey, the Isle of Man, Austria, and Belgium.
On average, nearly 10% of national GDP is held offshore. This varies from 2–4% for South Korea, Sweden, Norway, Denmark, Japan and China, to around 35% for Greece and Argentina, and up to 40-70% in Russia, Saudi Arabia, Venezuela and United Arab Emirates (AJZ, 2017).
Regional biases exist in the choice of tax havens. Wealth from the Americas ends up in the Virgin Islands, the US, and Panama; French, Belgian and Portuguese wealth goes mainly to Switzerland and Luxembourg; wealthy Russians prefer Switzerland and Cyprus; and Asian wealth goes to Singapore, Hong Kong, Macao, and Jersey.
4. Implications for inequality within and across countries
Global inequality in income and wealth has been on the rise in recent decades. Between 1980 and 2016 a disproportionally sharp increase occurred in the incomes of the richest 1%, which rose twice as much as those of the poorest 50% and more than the middle 40%. The rise of inequality in Russia since the mid-1990s has been particularly sharp. As of 2016, 2,500 Russian citizens possessed investable assets of over U$30 million (Ultra-high-net-worth Individuals, UHNWI) and 100 billionaires. In addition, using recent data based on tax income, wealth, and ‘distributional national accounts’ Novokment, Piketty and Zucman (2017) have shown record levels of inequality and as well as income and wealth concentration at the top of Russian society were exacerbated in the 2000s. The numbers are clear: The income share of the richest 1% is currently around 20-25% (up from 5% in 1985) and reflects current estimates for the US.
Inequality has increased more gradually in China and India as they have transitioned to market economies from communism and from a highly regulated economy respectively.
In mature capitalist countries, the increase in income and wealth inequality has been also more severe in the United States and (to a lesser extent) in the United Kingdom than in continental Europe.
Regions like Latin America, with traditionally high levels of inequality, have remained so. Wealth inequality is particularly high among oil-exporting countries (WIR, 2018).
There seems to be a high correlation between raw material exporters, countries with high levels of inequality (e.g., Russia, the United Arab Emirates, Argentina, and Venezuela), and countries with a high proportion of their GDP held abroad as offshore wealth. Most of this wealth is in the hands of the richest 0.1% and 0.01% of the population.
Figure 1: Global inequality
Table 3: Share of wealth of the richest 1% (decade averages, %, OW [Offshore wealth])
Source: Author’s figures based on Alstadsaeter, Johannesen and Zucman’s online statistical appendix (2017).
Russia, for example, is one country where most of the richest 0.1% of the population’s wealth is held abroad in tax havens. As table 3 shows, in the 2010s, the ratio of wealth to GDP held by this portion of the population appears starkly different when adjusting for offshore wealth. The wealth to GDP ratio of the richest 0.1% is 6.1% when excluding offshore wealth but when offshore wealth is included, that share climbs to 20.1%. This shows that the extent of wealth inequality can be severely underestimated when excluding offshore wealth.
The relationship between inequality and the physical mobility of the wealthy and their families is nuanced and subject to outliers. For example, France appears to have had the largest outflow of high-net-worth individuals (HNWI) in 2016 according to The Wealth Report, yet France is a country with moderately low levels of income and wealth inequality compared with other advanced economies – French inequality is certainly less extreme than that of the US and the UK. However, the second place in terms of HNWI outflows is taken by China, where inequality levels have increased steadily over the last three decades. India also has large outflows and rising levels of inequality, although super-rich outflows are small in relation to its total population. Russia and Brazil, two countries with high levels of inequality also experienced wealth outflows in 2016.
Data demonstrate that some countries with high levels of inequality, such as Russia, the UAE, and Venezuela see a significant proportion of their wealth held offshore, suggesting a more direct relationship between inequality and offshore wealth than between inequality and outflows of high-net-worth individuals. Finally, our results show that the link between tax levels at home and offshore wealth may be tenuous, judging by the low proportion of offshore wealth held by high-tax jurisdictions like Scandinavian countries.
Non-Resident Senior Research Fellow, United Nations University
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Zucman, G. (2013), The Missing Wealth of Nations: Are Europe and The U.S. Net Debtors or Net Creditors? Quarterly Journal of Economics, 128,(3). pp. 1321-64.
 See Solimano (2016), for Latin America and Novokmet, Piketty and Zucman (2017) for Russia.
 The Quality of Nationality Index, QNI (H&P and Kochenov, 2016) ranks countries in terms of levels of economic and human development, peace and stability, visa-free access to third countries (freedom to travel), ability to work without permits and special visas (freedom of settlement), and quality of the legal system. Interestingly, the index gives considerable weight to the fact that citizenship in high-income countries and the European Union enhances the ability to travel without restrictions to other countries. This may be particularly valued by international investors whose citizenship status makes certain entry-visas difficult to obtain.
 Zucman (2013) offers a detailed estimated of ‘hidden wealth’ in fiscal paradises around the world. Astedlear, Johannesen and Zucman, (2017) expand on these results.
 AJZ (2017). The richest 1% of the world’s population holds near 50% of total private wealth (Solimano, 2017). Four large economies (the US, Germany, Japan, and China) represent nearly 60% of HNWIs worldwide.
 Durden (2014).
 Alstadsaeter, Johannesen and Zucman (2017) use the years 2006–07 as a benchmark estimate because since then there has been a proliferation of shell companies (trust funds, foundations, and personal holding companies) which make it more difficult to track the true national origin of offshore wealth.
 Alstadsaeter, Johannesen and Zucman (2017), Statistical Appendix.
 This number is, however, below the 14,000 in China and 69,000 in the United States (The Wealth Report, 2017).
 In Russia, the income Gini coefficient (measuring inequality of income flows) went up (an increase in inequality) from near 25% in the mid-1980s (still the socialist period) to over 45% in 2012-14. In China, three decades of very rapid economic growth in the range of 8-10% per year in a regime of state-capitalism (headed by the communist party) created big wealth for individuals that could capture investment and profit opportunities. For example, the jump in the income Gini in China in the last two to three decades has been comparable with that of Russia. See Solimano (2017).
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