Editor’s Note: Chuck Collins is the director of the Program on Inequality at the Institute for Policy Studies, where he co-edits Inequality.org. He is the author of the new book, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions. The opinions expressed in this commentary are his own.
The revelations from the Pandora Papers have rocked the world. They showed that wealthy celebrities, political figures, billionaires and heads of state around the globe are sheltering assets in offshore tax havens, including here in the United States.
As with the Panama Papers that were released five years ago, not too many Americans were caught up in the Pandora Papers. The leaks came from 14 offshore wealth service providers in countries where wealthy Americans typically don’t seek services, like Cyprus and Seychelles.
But rest assured, ultra-rich Americans are deploying the same tools described in the leaks to avoid paying taxes: shell companies, complex trusts and bank accounts in tax havens. They just don’t have to go offshore.
Our country’s wealth defense industry — the armada of tax attorneys, accountants and wealth managers that aid the super-wealthy — has doubled down on moving billions to dynasty trusts, which are engineered to accumulate wealth for centuries free from the wealth transfer tax, and deploying special trusts like Grantor Retained Annuity Trusts (GRATs), where appreciation flows to their heirs free from the gift tax. A recent ProPublica expose documented that more than half of the richest 100 Americans use GRATs to avoid their estate tax obligations.
The mechanisms are complicated. But most Americans understand that billionaire tax avoidance is harming ordinary US taxpayers by shifting obligations onto everyone else. When wealthy people pay lower effective rates, the cost of public services — education, infrastructure, defense and environmental protection, for instance — falls on the non-wealthy. A Pew Research Center survey shows that roughly 80% of Americans are bothered that the rich and some corporations are not paying “their fair share.”
In the immediate term, failing to shut down the hidden wealth system will undermine President Biden’s Build Back Better program of infrastructure and other public investments. Democrats want to pay for the plan, in part, by raising taxes on the wealthy. But when the wealthy are hiding much of their income and assets in trusts and shell companies, those progressive taxes won’t raise as much revenue. That’s why Biden’s plan to invest in rebuilding the IRS’s capacity to oversee the tax hide-and-seek games of the wealthy is so important.
Over the longer term, the creeping cancer of the hidden wealth system has fueled extreme wealth inequality in the US and worsened the racial economic divide. Since the Panama Papers were released in 2016, total US billionaire wealth has doubled, from $2.4 trillion, according to Forbes, to almost $5 trillion today.
Even during the pandemic economy, the wealthy have realized tremendous financial gains. America’s billionaires have seen their wealth grow by nearly $2 trillion since March 2020, even as the rest of the country suffered mass casualties and unemployment. Meanwhile, the percentage of households with zero financial reserves has increased, especially along racial lines. An estimated 28% of Black households and 26% of Latinx households have zero or negative financial wealth, compared to 14% for White households.
The first step in fixing this is for the US to clean up its own internal tax havens. Several members of Congress have proposed the ENABLERS Act, which would establish due diligence reporting laws for “middlemen” entities involved in the flow of wealth — such as attorneys, art dealers and wealth managers. Like bankers, they would be required to report suspicious activities under an amended Bank Secrecy Act.
Federal laws should also override state trust laws that create forever dynasty trusts by imposing limited lifespans on trusts — say, 80 years — at which point the trust terminates and assets are subject to taxation. Lawmakers should outlaw certain forms of trusts and loopholes like GRATs that serve no business purpose other than tax dodging. And Congress should fund President Biden’s plan to help the IRS police the tax shenanigans of the super-wealthy, ensuring they pay their fair share.
The fact that the US is recognized as a global haven undermines American credibility in the fight to uproot global corruption. But the real harms at home are the unbuilt hospitals, the unfilled potholes, the uncared-for veterans and children, and the persistent racial wealth divide in homeownership and economic opportunity.
A fairer tax system — and a fairer society — begins with bringing this hidden wealth into the sunlight.