TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search


So Where Does The Oft Cited $150 Billion Figure Of Offshore Evasion Come From?



Well known tax author and journalist Denis Kleinfeld suggests the following answer to this question.

The Congressional Research Service (CRS) provided a Memorandum of July 23, 2001 referencing an inquiry made by the House Majority Leader as to the method used by attorney Jack Blum to construct the estimate of $70 billion of illegal tax evasion losses due to tax havens. This figure was contained in Jack Blum’s Affidavit submitted in support of the government’s request from the federal court for a John Doe summons for records from MasterCard and American Express.

Dennis Kleinfeld states that, according to the CRS:*Mr. Blum’s estimate was contained in a declaration filed in connection with a petition the Internal Revenue Service filed with the U.S. District Court for the Southern District. In response to your request, we contacted Mr. Blum and discussed his estimate; he was not able to send us a written discussion of his estimating procedure … We did not discuss these particular aspects of the estimating process in our initial conversation with Mr. Blum and our attempts to contact Mr. Blum on a follow-up basis have not been successful.

Mr. Kleinfeld reports that Mr. Blum has been described as follows:

“Mr. Blum is under contract to the IRS, he testifies before Senate committees and has provided an affidavit in support of at least one IRS search warrant.”[1]  This same statement of $70 billion was given by Jack Blum in testimony in 2002. When asked about that number he admitted it was imprecise stating, “You just have to take a guess at it.”

The Senate Permanent Subcommittee on Investigations issued a report entitled “Tax Haven Banks and U.S. Tax Compliance.” This report examined how tax haven banks facilitate tax evasion by U.S. clients that cost U.S. taxpayers an estimated $100 billion each year. This Report, widely cited as authority for the claim that $100 billion is lost in taxes because of evasion of tax through tax havens, is, in fact, merely based on footnote 1 of the Report which cites to information unsubstantiated in five magazine articles that varied widely in terms of authors and opinions regarding the amount of tax losses the U.S. incurs.[2] Mr. Kleinfeld notes that none of the cited articles provide any empirical evidence or known statistical methodology on how the number was calculated. The Report makes no claim that the $100 billion tax loss is based on anything else than these published articles.

IRS Commissioner Charles Shulman, in testifying before the Permanent Subcommittee on Investigations on March 4, 2009, was questioned on the analysis of hidden money criminally held overseas:[3]

Senator McCaskell: “Has there been any analysis done of how much of this money that is being hidden overseas is, in fact, a result of criminal activity?”

Mr. Shulman: “Not that I am aware of. I mean, estimating how much money that is overseas and not being paid to the government. As far as I am aware, there is no credible estimate because it is kind of a chicken and egg. It is over there and we have not found it, it is hard to estimate what is there. And all estimates that I have seen have not broken down criminal versus civil because, again, until we see the cases, it is hard to say.”

Based on a rate of the 15% long terms capital gain that applies to that money over the past 7 look-back years of Statute of Limitation, the currently cited $150B of lost annual tax revenue would require $1 trillion of annual taxable (hidden) income. To generate $1 trillion of capital gains income at a 5% rate of return requires $20 trillion of “noncompliant” offshore dollars.  Is it likely that noncompliant money represents almost double the M2 money supply (Federal Reserve data of March 6, 2014 about $11T, see http://www.federalreserve.gov/releases/h6/current/) and about 20 times the actual amount of paper dollars that are in circulation?

How Much Did the Congressional Joint Committee on Tax Estimate FATCA Will Bring in Annually?

The Congressional Joint Committee on Tax estimated that FATCA will generate $8.7 billion over ten years or average revenue $870 million per year – a very far cry from $100 billion, much less $150 billion, annually.  The $870 million annually appears not too far out of line with the tax collections generated by the OVDI the past six years, albeit the compliance costs to global industry to prepare for FATCA is currently estimated near this same amount based on government reports from the UK, Canada, Spain among other trade partners of the US.  So for the moment, at least offset for compliance costs, it’s probably a wash out.

An interesting study would be to quantify the total amount of funds from Americans repatriating back to the USA because of FATCA and the amount that expatriates to other jurisdictions.  By example, according to the Texas Bankers Association, to date FATCA has resulted in an outflow of $500 million of deposits from the Texas banking system.4 The Florida Bankers Association reported to Fitch that $60 billion and $100 billion in foreign deposits are held in Florida banks, close to 20% of the state’s total deposits.5  In 2012, Fitch estimated that a substantial portion of these deposits would NOT expatriate from Florida.

Will the US be a net winner or loser from FATCA in terms of foreign deposits? Also – in terms of revenue income raised, offset against compliance costs but taking into account that not all compliance costs retard GDP growth (arguably, some compliance costs may add to GDP while others may create a GPP lag).

The Telephone Game

How did the number jump from $60 billion to $100 billion to $150 billion in such a short matter of time?  Perhaps former Secretary of the Treasury O’Neil best poses a response.  Before the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs on July 18, 2001 Secretary of the Treasury O’Neil pointed out the never ending computer life of something not true in his testimony:

“Well, thank you. I was frankly thunderstruck when I got the letter from these distinguished people, because I could not believe that they had read what I said, and I think you will hear today that they were responding to press accounts. As I said before, they did not respond to what I said at all. They responded to misrepresentations in the media, and I am sorry to be so blunt about it, but there is no other way to characterize it. If you look at the pieces that are in this book, if you can find any connection between the representations that were made in these stories and what I have said on the record and off the record, there is no connection whatsoever. But, intelligent people, including these distinguished citizens who have served in their government, took what they read at face value. Many of them know better, because they have been subjected to this, but they had forgotten.

So, when they read it in the newspaper, they filed—you would not believe, I get 2,000 letters a week and many of them are responding to things that I never said, never imagined and never would imagine, but I am still getting letters about it as though it were the real stuff simply because it appears in print. These days, with the wonderful technology we have with Lexis Nexis and all the rest of that, once this stuff is on the record it never goes away. It is always a primary source. So, when I am 95, I am going to be getting letters saying we cannot believe you did not want to prosecute money launderers. I will let them speak for themselves.”


*Congressional Research Service memorandum to House Majority Leader, attention Elizabeth Tobias, Reported Estimate of U.S. Tax Revenue Lost Through Use of Tax Havens, July 23, 2001.

[1] Kleinfeld, Denis, IFC Review, US Scandals Reinforce Warning Signs of FATCA’s Dangers” (July 1, 2013).  See http://www.ifcreview.com/restricted.aspx?articleId=6390&areaId=39 (accessed February 26, 2014).

[2] Permanent Subcommittee on Investigations, Tax Haven Banks and U.S. Tax Compliance, Hearing on March 4, 2009.

[3] Permanent Subcommittee on Investigations, Tax Haven Banks and U.S. Tax Compliance, Hearing on March 4, 2009.

[4] Aubin, Dena, Bankers take fight over U.S. anti-tax dodge rules to appeals court, Reuters, (Feb 5, 2014).

[5] See https://www.fitchratings.com/web/en/dynamic/articles/New-US-Tax-Rules-Could-Prompt-Foreign-Deposit-Outflow.jsp

In accordance with Circular 230 Disclosure

William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

Subscribe to TaxConnections Blog

Enter your email address to subscribe to this blog and receive notifications of new posts by email.



 


One thought on “So Where Does The Oft Cited $150 Billion Figure Of Offshore Evasion Come From?

  1. bubblebustin says:

    We still don’t know what those OVDI and OVDP numbers are. Many people opted out or are going to opt-out of the 2011 OVDI and will see penalties mitigated or reimbursed entirely once these benign actor’s files are finally processed. 2009 OVDP participants can still apply to have their FBAR penalties reduced in keeping with OVDI’s participants. Also, participation in the OVD programs have diminished since Streamlined was introduced.

Comments are closed.