$4 Trillion In US Wealth Is Stashed Overseas, Much Of It In Tax Havens
A handful of extremely wealthy US taxpayers holds trillions of dollars in foreign accounts, much of it in tax havens and through partnerships, according to a new study based on data reported to the IRS by foreign financial institutions.
Since 2015, the Foreign Account Tax Compliance Act (FATCA) has required foreign banks, investment funds, and other financial intermediaries to report information about accounts controlled by US taxpayers. Using confidential administrative data reported under FATCA, the researchers estimated about 1.5 million US taxpayers held roughly $4 trillion in foreign accounts in 2018, about five percent of the roughly $80 trillion in total reported US financial wealth.
Who owns foreign accounts?
The study found two very different groups of overseas account holders. The vast majority are immigrants to the US or Americans working abroad. They generally hold relatively small accounts that rarely are in tax havens.
But most of the money is controlled by just a handful of very wealthy taxpayers, often through partnerships with accounts in tax havens such as Switzerland, Luxembourg, and the Cayman Islands. Only about 14 percent of foreign accounts were held in those low- and no-tax countries in 2018. But they represented about half those overseas assets, or nearly $2 trillion.
Wealthy US investors can avoid US tax by setting up corporations or trusts in tax havens, where local tax rates are low and US tax on investment income generally is not withheld.
Ownership of offshore assets was highly concentrated among a small number of very wealthy households. About one-in-five of those in the highest-income 1 percent held assets overseas, increasing to more than 60 percent for households in the top 0.01 percent. And that very small group controlled roughly one-third of the assets in overseas accounts.
For context, in 2018, the Tax Policy Center defined those in the top 0.1 percent as households making about $775,000 or more annually, while the top 0.01 percent made at least $3.3 million.
The role of partnerships
In addition, an outsized share of this wealth was held by partnerships. While only about 1.4 percent of offshore accounts were owned by these entities, they held nearly one-third of all offshore assets of US taxpayers.
Three-quarters of these overseas partnership assets were held in tax havens, and nearly all the partnerships were finance-related such as hedge funds, private equity firms, and investment partnerships. About 43 percent of these partnership were owned by US taxpayers.
By contrast, the half of accounts directly owned by individuals held only about 16 percent of total assets. About 1 percent of accounts and 14 percent of US-owned foreign assets were owned by C corporations and other entities.
FATCA reporting appeared to initially reduce the amount held in these foreign accounts, but the effect was small and only temporary. By 2018, the value of assets sitting in these overseas accounts had returned to pre-2015 levels.
Other studies have found similar, or even higher concentrations, of foreign assets. See here and here. But this was the first with access to detailed administrative data, including all FATCA reports, rather than having to make assumptions from small samples of foreign accounts.
The study was conducted by a team of economists who have researched these issues for many years: Niels Johannesen of the University of Copenhagen, Daniel Reck of the University of Maryland, Max Risch of Carnegie Mellon University, Joel Slemrod of the University of Michigan, and John Guyton and Patrick Langetieg of the IRS. The paper will be presented at the Tax Policy Center-IRS joint research conference in June.
Flawed FATCA
While the new study advances an important discussion about assets held in foreign accounts, FATCA reporting remains flawed. Some financial institutions may have failed to fully report US owners and others may erroneously have misidentified some foreign owners as Americans. The authors were unable to identify about one-in-five owners of partnership assets and could not link 42 percent of individual accounts that held 38 percent of wealth to specific tax returns.
Some critics of the study say FATCA reporting distorts the amount of wealth in overseas accounts by conflating foreign accounts held directly by US investors with holdings by US individuals in domestic funds that, in turn, own interests in offshore funds.
Despite those significant gaps, this paper provides a compelling look at both the magnitude of assets held overseas and the characteristics of their US owners. And the authors conclude that a relative handful of very rich Americans stashed trillions of dollars in wealth overseas principally to avoid US taxes.
There still is much we don’t know. Researchers need to fill in missing information, through perhaps that will only be possible if FATCA reporting is improved. And future studies may tell us whether FATCA is accomplishing its goal of increasing tax compliance.
