Taxing Capital in a Globalized World

Leaks from offshore financial institutions have revealed significant wealth of the rich hidden away from tax authorities worldwide. To address this adverse effect of globalization, more than 100 countries recently adopted a new policy instrument that provides automatic information exchange on financial accounts. Under the new Common Reporting Standard (CRS), banks are required to identify owners of financial accounts and provide information about their assets and capital income to their home countries. Despite its immediate policy relevance, little is known about the effectiveness of such policies to improve tax compliance and uncover hidden wealth. Using several data sources inside the Danish tax authorities and customized tax audits, we study the three ways in which the new policy of automatic information exchange can improve tax compliance. Tax evaders may repatriate their undeclared offshore wealth before the onset of automatic information exchange, they may start to self-report this wealth and its return to the tax authorities, or the tax authorities may detect their evasion in audits that use the new information reports. We document compliance effects of taxpayers along all margins with most of the overall response coming from repatriation of wealth. Our estimates indicate that taxpayers repatriated 15 percent of the hidden wealth.