Yesterday our colloquium speaker was Joel Slemrod, presenting "Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initatives on Evasive Foreign Accounts."
The paper uses IRS data to examine what happened after (and presumably in consequence of) a number of steps being taken to address U.S. individual income tax evasion via the hiding of income in foreign accounts. The relevant changes during the period being studied included (1) persuading a number of tax havens to accept information exchange agreements, (2) ending Swiss bank secrecy in the aftermath of the UBS scandal, (3) increasing penalties and enforcement with respect to non-filing of legally mandated FBAR foreign financial asset and bank account disclosures, (4) enacting and implementing FATCA, and (5) offering voluntary disclosure programs under which individuals who had failed to report foreign income could step forward and avoid criminal penalties (although they would have to pay several years' back taxes plus interest and 20% to 27.5% penalties).
One cannot in the abstract predict how effective such measures will be. For example, they might simply induce people to do a better job of hiding their foreign accounts. But the paper finds that compliant responses were quite large, leading to significant increases in tax revenue and reported foreign source interest, dividends, and capital gains. So the set of initiatives appears to have been quite successful, coming closer to what an optimist than a pessimist might have expected up front.
The paper also finds that there were significant "quiet disclosures." That is, people suddenly started filing FBAR reports and including lots of foreign interest and dividend income on their tax returns, as if all this had suddenly arisen in Year 1 of such reporting and inclusion. It's a fair inference that this commonly involved switching from evasion to compliance without participating in the voluntary disclosure programs. This had the advantage of permitting the quiet disclosers to avoid paying back taxes et al, at the cost of leaving them potentially subject to an audit that could include a criminal tax fraud investigation. The IRS warned people that quiet disclosure was a bad idea given this potential blowback, but in practice appears not, at least so far, to have followed up significantly on the threat.
The size and clarity of the empirical results promise this paper major (and well-deserved) attention. For example, if FATCA repeal starts being discussed, there's strong evidence here that the full panoply of what has been done (including but not limited FATCA) has worked very well.
Also of interest is the size of the offshore accounts that were newly reported by U.S. taxpayers in the aftermath of the suite of new policies. The paper estimates that more than 90% of the newly reported foreign asset values came from accounts worth more than $1 million or more. So these were not small fish by most lights.
Two things that one would like to know more about, and that further work by the authors might be able to help illuminate, are:
(1) How rich are these million-dollar account-holders? Contrast the case of (a) a super-rich individual who shoves a million-plus into foreign accounts, while holding other wealth more transparently, from that of (b) someone whose business, after several decades, sells for a million-dollar profit that gets stashed in a foreign account. So here it's the big enchilada in this individual's portfolio, and he or she, while evidently successful, is not super-rich. One reason that this is of interest is that, insofar as (a) is a common answer, it would tend to undermine the standard assumption that the super-rich mainly just avoid taxes, rather than evade them.
(2) Insofar as foreign accounts were being used to evade U.S. taxes, was it mainly about the principal, or just the interest? If principal, then the full amount deposited in the accounts should have been taxed (whether as capital gain, such as from selling a business, or ordinary income, such as contractor fees) but wasn't. But less was at stake (albeit, still raising an important enforcement issue) if people were just hiding the interest and dividends, etc., that they earned on previously earned after-tax income.
People who took advantage of the voluntary disclosure programs got a really good deal insofar as they were able to hide the principal and wait until enough years have passed so the lookback wouldn't find it.