Government “Stats” Strike Again

Did you know you can charge an iPhone with just an onion and a glass of Gatorade?

“Really?” you say.

No, that’s a fib, although it’s become very popular over the Internet.

Thankfully, other than perhaps some wasted sports drink and onion-induced teary eyes, there’s not a lot of danger in that one.

Other “fibs,” on the other hand, are somewhat more problematic. Case in point: the whopper used by President George W. Bush to persuade Americans to go to war against Saddam Hussein’s Iraq in 2003. Bush and his cronies convinced voters that Saddam had accumulated “weapons of mass destruction.” As we learned later, of course, there were no such things. But US taxpayers spent over $2 trillion to finance a war based on a lie.

Voters have short memories, and politicians constantly invent new problems to scare us into doing their bidding. It’s an ancient political principle: If the king’s subjects are frightened, they will do whatever he wants.

The mainstream media aren’t much help. Journalism is about access – and politicians dole out morsels of information to their favored reporters so they can scoop the competition. In most cases, the media act more like lapdogs than watchdogs. Non-truths (and nonsense) don’t get questioned.

Here’s another big, fat, hairy lie being trotted out right now by President Obama, Congress, and the mass media: Offshore tax evasion costs the US Treasury more than $150 billion annually.

That’s today’s number. In 2001, it was $70 billion annually. By 2010, the number was $100 billion. According to a recently published Senate report, it’s now $150 billion.

That’s one hell of a jump. Either the rich are totally sticking it to “the man,” or someone has been massaging the numbers just a tad.

Let’s look at the history, shall we?

The $70 billion figure originated with Jack Blum, an attorney and former congressional researcher. Blum cited this figure in 2001, when he signed an affidavit in support of an IRS summons for records from MasterCard and American Express.

He never explained how he arrived at this number, but thanks to the credibility that comes with such things, reporters starting using that number in their own articles.

In 2008, the US Senate issued a report entitled Tax Haven Banks and US Tax Compliance. It estimated the annual loss to the US Treasury from offshore tax evasion at that time to be $100 billion. Yet the only evidence the report presented to support this monumental figure was in a footnote citing five magazine articles, none of which provided any guidance as to how the $100 billion figure was calculated.

But that didn’t matter; the media had a feeding frenzy anyway.

I was always personally curious, and last summer, I was finally able to get my answer.

A colleague of mine found out that the guy who started all this – Jack Blum – would be speaking at an offshore conference. At my request, he asked Blum to give an on-the-record response on how he came up with his original $70 billion estimate. After dodging the question once, Blum finally admitted, “I guessed.”

I kid you not: The centerpiece of the US Treasury’s “War on Offshore” is based on a friggin’ guess!

And on the strength of this initial guess, the number has risen steadily from $70 billion to $100 billion to a mind-blowing total of $150 billion.

Is this astounding amount of so-called “tax evasion” even possible? Let’s look at the numbers:

  • The bulk of the income tax evaded offshore probably comes from wealthy investors. Thus, their untaxed offshore income, if taxed, would likely be subject to the highest marginal tax rate of 39.6%.
  • Wealthy investors generally seek out safer investments. They tend to be conservative. In today’s zero-interest-rate environment, it’s hard to imagine a portfolio of conservative investments growing much faster than 4% annually.

Given these assumptions, these offshore tax evaders would need to generate around $380 billion in unreported annual income to ring up a $150 billion tax bill. (Divide $150 billion by 39.6%.) The pool of capital required to generate this much income comes to $9.4 trillion. (Divide $380 billion by 4%.)

To get a sense of how large a number this is, the gross domestic product of the US is around $16 trillion. The GDP of the entire world is around $66 trillion. This means that the equivalent of around 14% of the world’s GDP consists of money hidden away offshore from the IRS by US taxpayers alone.

And, assuming that non-US taxpayers evade tax by moving capital offshore at the same rate as US taxpayers, that means about $38 trillion –equivalent to nearly 60% of global GDP – is hidden away globally in illegal “offshore tax schemes.”

Now, let me ask you a simple question: How likely is it that $38 trillion (that's with a “t”) is sloshing around in the global financial system, utterly invisible to the world’s tax authorities?

I don’t know about you, but I find it simply preposterous, as should anybody who knows how to do basic mathematical calculations.

While people definitely do avoid taxes, to think that an amount of money as great as nearly 60% of the world’s production is hidden away is beyond believable.

Even if people tried, do you think the heavy-handed IRS and its counterparts would even permit such a thing in the first place?

I highly doubt it.

Let’s not forget, this all started with a government researcher’s GUESS.

If only the story ended here…

Of course, lobbyists are already lining up to spend the $150 billion in new tax revenues. The US Public Interest Research Group Education Fund (USPIRGED) published a report entitled What America Could Do With $150 Billion Lost to Offshore Tax Havens. Among other spending priorities, USPIRGED suggests providing Pell Grants for 10 million students, doubling federal spending on education, and even a $1,068 tax cut for every person who files taxes in America.

I hate to break it to those naïve enough to believe a government guess, but don’t count on that $150 billion anytime soon. It doesn’t exist and likely never will.

A guess does not a reality make.

Mark Nestmann

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