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Zucman on tax evasion and the U.S. trade deficit John B. Benedetto [U.S. International Trade Commission]1 Copyright: John B. Benedetto, 2016
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Abstract Economist Gabriel Zucman’s paper “The Missing Wealth of Nations” proposes that a substantial part of the large U.S. net debt of the last 15 years is actually accounted for by U.S. tax evaders who have opened accounts in foreign tax havens, and then have reinvested their money in the United States. To make his finding consistent with balance of payments data, he speculates that U.S. export data are underestimated (and thus the U.S. trade deficit is not as large as thought). My paper explores this assumption, and provides evidence that the U.S. trade deficit is not substantially less than reported by the U.S. government. I then discuss theoretical reasons why Zucman’s estimates might not mean the U.S. trade deficit is underestimated.
Introduction Economist Gabriel Zucman’s paper “The Missing Wealth of Nations” proposes that a substantial part of the large U.S. net debt of the last 15 years is actually accounted for by U.S. tax evaders who have opened accounts in foreign tax havens, and then have reinvested their money in the United States. Such investments would look like foreign investments in the United States, but would actually be U.S. domestic investments. Zucman concludes that as a result, the U.S. capital account surplus must be lower than reported. The capital and current accounts must always balance. Thus, if Zucman is correct in his estimates of tax evasion, these misidentified investments would also make the U.S. current account deficit smaller than is currently reported, because the current account must match the capital account2 in magnitude. However, for the U.S. current account deficit to be smaller, the U.S. trade deficit (the largest component of the U.S. current account deficit) almost certainly must be smaller as well. Zucman speculates that the U.S. trade deficit is actually smaller than reported. The U.S. trade deficit would have to be substantially wrong, though, in order to be consistent with Zucman’s analysis. My paper points out that such an outcome is highly unlikely. Nonetheless, while Zucman is likely mistaken in asserting that the U.S. trade deficit is much smaller than reported, he raises the interesting issue of how the U.S. current account deficit (and its trade deficit) might be affected by tax evasion and other ways of hiding capital flows, which may be large problems internationally. My paper will discuss potential issues of both fact and interpretation that might arise from hidden capital flows in terms of how they might fit with U.S. trade deficit data. 1 Economist with the U.S. International Trade Commission. The views and conclusions expressed in this
article are solely those of the author, in his personal capacity. They are not necessarily the views of the United States, the U.S. International Trade Commission , or any individual Commissioner. The author thanks Andre Barbe and Wendy Willis for their contributions. All errors are the author’s. 2 The International Monetary Fund (IMF) and U.S. Bureau of Economic Analysis (BEA) use the term “financial account” to describe most of what is called the “capital account” (the traditional term in economics) in this paper.
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