Why insufficient Americans in Panama Papers? A Question!
Wealthy potentates from several dozen countries have been identified as global tax evaders in the intriguing “Panama Papers” scandal. But one country is almost entirely absent from the files: the United States.
A massive leak of documents from Panamanian law firm Mossack Fonseca shows that more than 100 prominent people have used the firm’s services to set up accounts in foreign tax havens and avoid paying taxes in their home countries. The firm’s clients include top officials in Argentina, Iceland, Saudi Arabia, Abu Dhabi and Ukraine, along with eight former world leaders, soccer star Lionel Messi, golfer Nick Faldo, the father of U.K. Prime Minister David Cameron, and a relative of China’s leader, Xi Jinping. Funneling money to tax havens isn’t necessarily illegal, but the revelations are certainly embarrassing and they show that some public officials seem to have a lot more money than they should.
Skirting taxes is a global activity, yet the only American who has turned up in the Mossack Fonseca files so far is Marianna Olszewski, an author and financier. Are Americans more honest than taxpayers from other countries? Or do rich Americans simply have better ways of dodging taxes?
It turns out that rich Americans have less need for tax havens than their comrades elsewhere. “People in other countries pay a lot more in taxes than we do,” says international tax expert Lee Sheppard, contributing editor at Tax Analysts. “In other countries, nearly every rich person has a tax haven bank account. Proportionately, the United States doesn’t have as large a problem.”
The top federal income tax rate in the United States is 39.6%, with a threshold of about $415,000 in income for a single filer. In much of Europe, the top rate is a few points higher—but it kicks in at much lower income levels. As for investment income, the capital gains rate in the U.S. is 20%, and 15% on the type of investment known as “carried interest.” In a few investor-friendly European countries—Switzerland, Luxembourg, the Netherldands—the capital gains rate is 0. But in most of Europe it ranges from 15% to 42%. And few countries have as many generous tax deductions as the United States.
Who’s looking for tax havens?
Tax experts generally identify three categories of people who seek global tax havens: criminals; “politically exposed persons,” or PEPs, who enrich themselves while holding office and need to hide the money; and regular rich folk who want to conceal assets from family members, ex-spouses and the like. Many of the characters who turned up in the Panama Papers appear to be PEPs who are more interested in keeping cash from public view than minimizing the tax bills on legitimate income.
For wealthy Americans who just want to maximize the value of their assets, setting up a tax haven account isn’t very appealing. For starters, it’s expensive, requiring costly lawyers, accountants, trustees and other specialists who know how to pull all the levers. And instead of earning a return on your money, as most investors prefer, you pay hefty fees to foreign banks that offset any earnings.
Still, average, not-so-wealthy Americans can open offshore accounts too. Millions already do and they aren’t banking abroad to try to swindle the U.S. government or necessarily maximize their assets. But the IRS is making it harder for people to conceal overseas money. The agency issued new rules recently that impose stricter penalties for people who don’t report foreign assets, a move that has helped triple the number of filings since 2005, according to the IRS.
Today, individuals who hold over $10,000 in foreign-held banks are required to submit records of their accounts to the IRS each year. Under the government’s new, more complex rules on foreign asset reporting issued in 2014, financial institutions must report U.S. customers with accounts totaling more than $50,000 to the IRS. This has become a big enough headache for foreign banks that it’s made opening bank accounts abroad tougher for some Americans.
There are risks, as well. Established havens such as Bermuda and the Cayman Islands cater to certain types of businesses and don’t really want to deal with individuals, because it could sully their reputation with corporate clients. Other havens might take anybody, but your money may not be safe at less reputable institutions on little-known island nations. Allen Stanford spent 20 years operating an outfit in Antigua called Stanford International Bank, and it turned out he was spending his depositors’ money. A jury convicted him of fraud and other charges in 2012, and a judge sentenced him to 110 years in prison.
You could have difficulty accessing the money in your tax haven account as well, if you need it, say, to live on. Finding a way to spend it in the local currency would help, since money converted back into dollars is usually traceable via exchange desks in New York. And if you’re trying to hide money, that won’t do.
There may be further juicy revelations from Panama, and more Americans might surface in the Mossack Fonseca files. And there are certainly a lot of American corporations that use tax havens to minize tax liabilities, a different sort of problem. But if this is one scandal America sits out, nobody will complain.