Wealthy U.S. households hold trillions of dollars in offshore accounts, with a substantial portion of the money residing in tax havens and shielded by complex partnerships, according to a new study published by the National Bureau of Economic Research.
Written by four university-based and two-IRS affiliated researchers with expertise in business, economics and taxation, the analysis found that roughly 1.5 million U.S. households held about $4 trillion in foreign accounts in 2018, with about half of that sum located in jurisdictions typically classified as tax havens such as Switzerland and the Cayman Islands. The foreign holdings make up about 5% of total U.S. financial wealth.
The likelihood of owning such an account increases sharply with income, the researchers found, and the value of those accounts soars at the very top of the income distribution. While about one in five of those in the top 1% of income own accounts overseas, a majority (60%) of individuals in the top 0.01% own foreign accounts, with almost all their holdings located in tax havens and more than half held through a partnership of some kind. This relatively small group of individuals, who earned at least $3.3 million in 2018, controls about a third of all U.S. assets held in accounts overseas.
Financial partnerships play a significant role in foreign holdings by U.S. households. While less than 2% of all offshore accounts are controlled through financial partnerships such as hedge funds and private equity firms, those partnerships account for about a third of the total value of assets held overseas. The purpose of locating such financial partnerships offshore is typically to avoid taxes, the researchers noted.
An imperfect picture: The data for the study comes from foreign financial institutions, who as of 2015 are required to submit information to the IRS under the Foreign Account Tax Compliance Act (FACTA). The researchers combined that confidential data with information from the IRS to get a picture of who owns what overseas — a challenging task given the complexity of ownership structures such as pass-throughs and trusts.
The researchers said they are aware there are errors in their analysis, such as falsely identifying foreign owners as Americans. But they maintain that their analysis provides a far clearer picture of offshore U.S. wealth than was possible before FACTA data was made available.
“Despite … significant gaps, this paper provides a compelling look at both the magnitude of assets held overseas and the characteristics of their US owners,” says Howard Glickman of the Tax Policy Center. “And the authors conclude that a relative handful of very rich Americans stashed trillions of dollars in wealth overseas principally to avoid US taxes.”