It's no secret that the mega-rich sometimes avoid and even evade their taxes (the former is legal, the latter is not). In 2016 the Panama Papers uncovered a vast web of offshore shell companies that just one Panamanian law firm, Mossack Fonseca, had set up to shield clients' assets. While such shell companies are not intrinsically illegal, they are a sign that tax dodging is rife among global elites, including the leaders of several nations. In 2015, a leak at HSBC's private banking division provided a rare glimpse into Switzerland's opaque banking sector.

A new paper by Annette Alstadsæter of the Norwegian University of Life Sciences, Niels Johannesen of the University of Copenhagen, and Gabriel Zucman of UC Berkeley, suggests we are just scratching the surface of what these leaks mean. The authors use data from the Panama Papers and the HSBC leak to reassess the extent of tax evasion in Norway, Sweden and Denmark, treating the three countries as a single area. Prior estimates of Scandinavian tax evasion, they conclude, severely underestimated the problem. (See also, The Panama Papers: 7 Questions.)

The authors calculate that the richest 0.01% of Scandinavians – the 1,062 households that had over $44.5 million in net wealth in 2006 – evade around 30% of their taxes. The rate of personal tax evasion for the population as a whole is a tenth as high, at around 3%.

Source: Alstadsæter, Johannesen and Zucman.

Previous estimates based on random audits showed the top 0.5% (the highest-earning cohort the data singled out) evading around 4% of taxes, whereas the average rate for all income groups was 2.3%. The gulf between these estimates and those in the new paper show just how much random audits miss, the authors argue.

Source: Alstadsæter, Johannesen and Zucman.

The Illusion of Equality

The most important implications of this study have to do with measuring wealth inequality. If the richest household in every 10,000 only reveals two-thirds of its wealth, there is actually a good deal more wealth concentrated at the top than anyone previously realized. Extending the analysis to the top 0.1% – that is, the richest household in every 1,000 – yields even more previously undetected top-heaviness.

According to the authors, 40% of Norwegian households in the top 0.1% stashed wealth offshore in the mid-2000s, hiding half their assets on average. In other words, 20% of the wealth owned by the top 0.1% was unknown to tax authorities, meaning that instead of a previously estimated 8%, the top 0.1% owns around 10% of Norway's wealth. Instead of falling by a third since the 1930s – from 12% to 8% – the top 0.1%'s share fell half as much.

Source: Alstadsæter, Johannesen and Zucman.

The extent of tax evasion – and therefore wealth inequality – may in reality be more or less severe than the authors' 30% estimate. The authors explore an unlikely scenario in which Scandinavians exclusively use Swiss bankers' services when they want to hide their wealth, shunning Jersey, Hong Kong, the Cayman Islands, Singapore, the Bahamas, Luxembourg and other tax havens. (Because the Swiss central bank tallies all the assets held in the country's banks by national origin, the authors have a baseline for offshore Scandinavian wealth.) If that were the case, the rate of tax evasion among the top 0.01% would be closer to 10%.

If, on the other hand, Scandinavians hide their wealth offshore at the same rate as residents of other countries (3.7% of the total), the richest household in every 10,000 could be evading 60% of their taxes. None of these estimates is complete, however, because they ignore swaths of potential black market activity. (See also, Offshore Accounts Hold a Tenth of the Stock Market.)

Source: Alstadsæter, Johannesen and Zucman.

Unruffled

Some in Scandinavia are outraged by this revelation. Audun Lysbakken, the leader of Norway's Socialist Left party, shared an article from Aftenposten, Norway's largest newspaper by circulation, about Alstadsæter and her colleagues' findings. "The nurses, the industrial workers, the drivers and the teachers are paying their taxes," Lysbakken wrote. "Some of the richest do not. What a shame!"

Many, however, are taking the findings in their stride. One Norwegian Twitter user, linking to the same article, shrugged, "This must have been a surprise to many? New research: The wealthiest evaded the most taxes."

Norway, Sweden and Denmark all have extremely high personal tax rates, so the idea that the wealthy would engage in evasion is not shocking. "Most people do not seem very surprised, and it has not caused public outrage," said Charlotte Wold, a news associate at Investopedia and a native Norwegian speaker, after gauging reactions in the Norwegian press and social media (the translations above are hers). Zucman, in an email to Investopedia, countered that "the study actually attracted considerable attention in Scandinavia."

Nor is the revelation that Scandinavia is less equal than previously thought particularly traumatizing in a region that is famously egalitarian, relative to the rest of the rich world. With income Gini coefficients of 0.252 (Norway), 0.254 (Denmark) and 0.281 (Sweden), the Scandinavian countries were the second-, third- and 11th-most equal societies in the 35-member OECD in 2014; the most equal was another Nordic country, Iceland (0.244). The U.S., by contrast, was the third-least equal at 0.394. These figures measure income inequality, which is not the same as wealth inequality: an income Gini of 1 would mean that a single person earns all the nation's income, while 0 would mean that everyone earns an identical amount. (See also, A Brief History of Income Inequality in the United States.)

Wait for It

Despite muted reactions so far, Alstadsæter, Johannesen and Zucman's work could be just a prelude. "In future work," the authors write, "we plan to apply our methodology to estimate the tax gap and its distribution in as many countries as possible." Zucman told Investopedia, "Scandinavians generally pay their taxes and hide little wealth in total. Our results are thus likely to be even stronger in most other countries," including other European countries, developing countries and possibly the U.S.

"In any case," Zucman added, "our results underscore a basic truth: in a world where wealth is globalized and where a big industry has specialized in helping the ultra-rich avoid and sometimes evade their taxes, our ability to track great fortunes – and to tax them appropriately – faces considerable challenges." He says that statistical tools need to be adapted to "the reality of globalized capitalism"; leaks and random audits are "not enough." He mentions a proposal he made in a 2015 book to create a "world financial registry" to track who owns what securities. "Most countries," he points out, "have had land and real estate registries for centuries." (See also, Panama Papers Reveal the Secrets of Dirty Money.)

Besides increasing transparency, Zucman recommends beefing up enforcement. Banks that have pleaded guilty to criminal conspiracy to defraud the IRS have kept their banking licenses and paid tiny fines, compared to their profits. "If tax evasion ceases to pay," Zucman says, "it will disappear."

Charlotte Wold contributed reporting and translations to this article.

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