Inequality: You Don't Know the Half of It

Inequality: You Don’t Know the Half of It

(Or why inequality is worse than we thought)

By Nicholas Shaxson, John Christensen and Nick Mathiason[1]

22 July 2012

The full version of our research into the underestimation of global inequality is available for download here. The introduction is blogged below.

Introduction

Economic inequality has reached extreme proportions in many countries. But the problem is far worse than we have understood until now. This is because all studies exploring economic inequality have systematically underestimated the wealth and income enjoyed by the world’s wealthiest individuals. The enormous quantity of assets held offshore and in opaque and anonymous structures is not factored properly into anybody’s calculations.Not only that, but the trend of rising inequality in many countries appears to be worse than previously thought,for similar reasons.

At its simplest, our argument is that if an asset is hidden in an offshore bank account, or an offshore trust or company,and the ultimate owner or beneficiary of the income or capital cannot be identified, then this asset and the income it produces will not be counted in the inequality statistics. Almost all these hidden assets are owned by the world’s wealthiest individuals. So it follows that the inequality statistics, particularly at the top end of the scale, underestimate the scale of the problem.

Although many studies do try to compensate for missing offshore data, all experts interviewed for this report agreed that no study comes even close to compensating sufficiently. 

In response to our initial question: do you believe our thesis is valid? The following responses came from the experts we contacted:

Yes, definitely.

- Thomas Piketty, professor, Paris School ofEconomics

Absolutely.

- Sam Pizzigati, Associate Fellow, Institute for Policy Studies (IPS)in Washington, D.C.

I agree with your thesis and I believe - everyone does.

- Milorad Kovacevic, Chief Statistician for the U.N. HumanDevelopment Report Office

I think there’s no doubt whatsoever. . . People say there’s lots of money missed out and that’s true. There is an issue here.

- Branko Milanovic, Lead Economist in the World Bank research group

The main bias is likely to be at the top end of the distribution. But we do not yet have the data needed to correct for this problem across all countries.

- Martin Ravallion Acting Chief Economist and Senior Vice President Development Economics, World Bank

There is absolutely no doubt at all that the statistics on income and wealth at the top understate the problem, for the reasons that you say.

- Stewart Lansley, author of The Cost of Inequality: Why Economic Equality is Essential for Recovery.

The wealth of the very rich is massively under-reported in households surveys and(probably slightly less so) in tax accounts. Proper reporting would drive up the Gini and drive down the wealth share of the poorest 20 per cent.

-Kevin Watkins, nonresident senior fellow, Center for Universal Education,Brookings Institution

Although much of the wealth and income of the poorest is also “missing,” as they are especially hard to access and to survey, their ‘missing’ assets and income are insignificant when compared to those at the top, so they make little difference to the overall inequality picture.

Wealthy people, or High Net Worth Individuals (HNWIs) in the bankers’ parlance, usually have advisers offering all manner of offshore services, ranging from mild (legal) tax planning to the cloaking of assets for the purpose of tax evasion and many other crimes. A private global infrastructure of lawyers, accountants, bankers and company and trust formation agents are dedicated to hiding the assets of the world’s wealthiest individuals – and they have been spectacularly successful, as James Henry’s accompanying report for the Tax Justice Network shows.

Henry’s research, which we believe is the most rigorous and comprehensive study of its kind, reveals that well in excess of US$ 21 trillion is held unrecorded and offshore, conservatively estimated. No estimate of missing wealth on this scale has ever before been constructed. Therefore, both wealth and inequality are being dramatically underestimated toa very significant degree, in every study and in every country.

With the bottom half of the world’s population together possessing barely 1% percent of global wealth while the top10% owns 84%[2],economic inequality is widely and increasingly recognised as a problem in its own right. Research shows that more unequal societies tend to experience slower growth, higher political instability, and a wide range of negative health and social outcomes, as Box 2 explains.

Both the legal and the illegal aspects of this pose big problems for inequality studies.

This paper is a first attempt to lay out the nature of how unrecorded offshore assets and income feed through to our understanding of inequality. Based primarily on our interviews with some of the world’s top experts, it contains relatively little in the way of econometric analysis, and it does not seek to be comprehensive: it should be viewed as a starting point. Our aim is to focus attention on the problem and to spur others to research this field in more depth.
See our full range of reports, appendices and press packs on our new web page.

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[1] Nicholas Shaxson is author of Treasure Islands: Tax Havens and the Men who Stole the World, Random House, 2011. John Christensen is former Economic Adviser to the UK tax haven of Jersey and is director of the Tax Justice Network. Nick Mathiason is business correspondent at the Bureau of Investigative Journalism.

[2] Source: Global Wealth Report 2011, Credit Suisse Research Institute, p10 http://bit.ly/pAHcoa