Hello Gabriel Zucman. You are an economist, professor of economics at the École normale supérieure and director of the International Observatory for Taxation. You are publishing in the newspaper Le Monde a report entitled "When extractive profits land in tax havens: Lessons for taxes on super profits." So we are asking with you, who benefits from this oil shock? So the mechanisms: there are supply difficulties linked to the Strait of Hormuz, also linked to the destruction of a certain number of capacities in Iran. These mechanisms of rising oil prices, are they today transparent and well understood? Gabriel Zucman.
Yes, there is a strictly physical aspect behind all this, which is that you have about 20% of the world's oil transiting through the Strait of Hormuz and which for the moment cannot circulate. And so then the play of supply and demand applies, with a reduced supply. Well, it's the price that increases, and the oil market is a global market with a single price. And so there, we are in a phenomenon of an explosion in oil prices, which went from $60 to $110 in a few weeks, which is of a magnitude comparable to what we were able to know in 2007 and before that in the 70s. And that may be just the beginning; there are a number of economists who think that oil could rise to $150, $200.
It had reached $147, if I remember correctly, in 2007.
That's exactly right. But it may be just the beginning. So we have to understand that we may be at the start of an inflationary crisis of such magnitude that it could slow global growth, cause a rapid increase in prices on a global scale, and it is very important that we start to tackle it seriously and to respond to it. And it is in this context that the note written by my colleagues at the International Observatory for Taxation, Alice Ciochetty and Ninon Moreau-Cassier, is very important, because in their work they highlighted the intensive use that oil companies make of tax havens. In normal times, out of €1 of profit made by oil companies, about 10 cents land in offshore financial centers in Bermuda, Singapore, etc., taxed at extremely low rates. But when it comes to super profits during crisis periods, that figure rises to 20 cents. That's 20% of their profits that they manage to record in tax havens.
There is a lot in what you just said. So, first, I would like us to go back to the initial mechanism because these super profits, they come from the increase in oil prices, so they are mechanical, which to some extent can raise questions since there is no gain in productivity, there is no... what can justify the increase in these profits? Gabriel Zucman.
Yes, that's a good question. It's a pure rent. And indeed, for a very long time, peoples and public decision-makers believed that this oil rent was destined to be socialized. If you look at what happened in the 1970s, the exceptional profits generated by the explosion in oil prices were essentially confiscated by the public authority. There were first the producing countries like Iran, like Venezuela, like Saudi Arabia, who nationalized production, of course. But if you look at what happened in the United States or the United Kingdom, these countries introduced taxes on exceptional profits at quasi-confiscatory rates. Look, for example, at the United States. In 1980, the United States introduced a tax on exceptional profits at a rate of 70%, which came on top of the normal corporate income tax, which at the time was at a rate of 46%. So all told, we were at a rate of 85%, quasi-confiscation. Same thing in the United Kingdom, which created its tax on exceptional profits in 1975 and raised its rate to 70% in 1983. So there was this idea that ultimately this rent, which is the product of war and revolution, it would be unacceptable for it to be appropriated by shareholders, by any private power whatsoever.
I don't know what you teach your economics students, Gabriel Zucman. Well, price is a signal, price is also a way of saying that there is either incorporated labor or a gain in productivity. Here, can that justify, for example, a taxation of these super profits? I see you smiling.
Well, it's indeed the ideology behind all this has changed a lot since the 70s. We have to understand that the big oil multinationals and their shareholders, they were very frustrated in the 70s when their profits were confiscated. They sort of promised themselves that they wouldn't be caught again, and they launched, with many others, a project to rewrite the rules of globalization, the rules of international trade, so that this scenario would not happen again. And what happened, and that's what ultimately gave birth to globalization as we've known it since the 80s, with two safeguards, ultimately, from their point of view. The first was the rise in power of international competition between states. The idea was that now states had to... it was a kind of law of nature, and moreover it was a good thing, that states had to compete to attract not oil fields, you can't relocate them like factories, but to attract investment. So companies started to exert pressure by saying, well, if you tax our profits too much, well, instead of drilling here in Norway or in the UK, well, we're going to go drill over there in Russia or Canada. And it's under this threat, under this pressure, that the different countries and the different producing countries in particular lowered their tax rates one after another. The second thing was the rise of tax havens, on which my colleagues Alice Ciochetty and Ninon Moreau-Cassier worked. And the consequence of all this is that the effective taxation of profits and in particular of the super profits of oil companies collapsed over the last half-century. One might think that ultimately taxing oil, taxing gas production, is not very complicated because there is a physical aspect. You can't hide that you have an oil field. But in reality, in reality, there is this relocation of profits to tax havens and the consequence is that while in the 70s the effective rates were around 90% for profits recorded by the American majors outside the United States, today this rate is only 37%. So I want everyone... I want everyone to understand what that means. That means that in the 70s, 90% of the oil rent was socialized and today two-thirds of this oil rent lands in the shareholders' pocket.
Well, but then I would like you to detail this question. So, first question, has the dominant ideology since the 80s become more hostile to tax? Yes, it has clearly become much more hostile to tax. It has above all erected... it's surprising because excuse me, I'm interrupting you Gabriel Zucman because I have the impression that the common conscience, as Durkheim said, is very shocked by what you're evoking, by tax havens. Very shocked. And nevertheless, you can see that for example in 2022, when it came to taxing the super profits linked to the increase in energy prices after the invasion of Ukraine, the measures that were proposed and implemented by the European Commission by France were very very far from what could have been done in the 70s because in this case in 2022 the European Commission had modestly proposed a solidarity contribution at a rate of 33% and not 90% or 70%. And the implementation in France resulted in almost no additional tax revenue, that in fact the super profits of 2022 were not taxed. We could have expected about 3 billion in additional tax revenue and in the end it brought in 69 million. Why? Because the way France transposed the European rule is that in practice almost all oil activities were excluded from the scope of application of this solidarity contribution. And on top of that, as we mentioned, the French oil multinationals have all the know-how or almost to relocate their profits to the tax havens. So, that's an argument that is often invoked and that was also invoked at the time of this proposal you made, Gabriel Zucman, to tax the wealth of the wealthiest individuals at 2%.
And that's what people say, well, if we do it here, these people will go elsewhere. So, to come back to your question about what has fundamentally changed since the 70s, the early 80s, it's the triumph of the ideology of international competition and in particular of international tax competition. The idea that... that's not an ideology, it's a fact. Oh no no, there is indeed international competition between the different tax systems. Yes, but it's not... it's not a law of nature like gravity. That's what's very important to understand, it's a choice. There are laws, there are social or political laws. No, but it's a... except that here, we're not talking about an economic law. That's what's very important to understand. That is to say that it's a political choice. We can choose competition just as we can choose cooperation and harmonization. So there, the big change, the 11th, it's the countries, it's the concert of nations. It's the concert of nations, but it's also each country individually that can choose to accept international competition or to erect it as a law of nature or to fight it because each country individually can always, for example, condition access to its market on respect for certain rules by exporters, by foreign companies. Each country can always say, look, if you want to sell your goods and services with us, well, in fact you have to pay a minimum of taxes, you have to pay your employees a minimum, you have to respect certain standards in terms of biodiversity, you have to reduce your carbon emissions. So there, there is a choice and it's precisely all the... let's say everything that has happened since the 80s has consisted of trying to naturalize what is actually a political and social decision.
Well then there, I'll ask you the question again. Why haven't we done it according to you? What could... So, there are a number of these companies, Total for example, which are French. So it's difficult I imagine, for the French government to say we're going to kick Total out if Total doesn't meet a certain number of obligations.
Well, there are obviously all sorts of economic actors who don't want to pay more taxes and who above all want to convince the rest of the planet that either it's impossible or that it would be toxic, harmful for the rest of society. But in this case, if you look at the case of... the case of Total is particularly interesting, Total in 2022 had made about 10 billion euros in super profits. We thought we were going to tax them a little bit. In the end it wasn't... it wasn't taxed. The amounts at stake are absolutely considerable for the French. That is to say that if we taxed these super profits, let's say at 90%, which once again was the norm in the 70s, 90% but let's assume that Total makes again 10 billion euros in super profits in 2026. It could be much more than that. We don't know the end of the story obviously but well, let's imagine that the 2022 scenario repeats itself. 10 billion in super profit, let's do like in the 70s, we tax them at 90%. What does that represent? It would represent 130 euros per French person, that is to say 650 euros for a family of 5 people, parents with three children. And there, we're only talking about one company and only taxing its super profits, right. That is to say that Total makes 20 billion euros in profit roughly, will perhaps make 30 billion. It's... it's just these 10 additional billion that we would tax. Simply the big lesson of the study by my colleagues at the International Observatory for Taxation, is that if we want to do this effectively, we must not tax the super profits that are just recorded in France because Total, like the other oil companies, manage to reduce that to a pittance. We must tax their global super profits. Okay? Because that's hardly manipulable.
Hardly manipulable. We'll come back to the mechanisms of tax havens since I'd like you to analyze that precisely, but do you think there is lobbying by Total and the oil companies, that there is a weakness of politics in relation to that? That there is the ideology? So ideology is something fascinating because it's something that we believe to be true when in reality it obeys either its interests or its ideological blindness. So where does this refusal to tax come from, since when we listen to you we think that all this seems to hit the mark of common sense. Well, it comes a bit from all that obviously, from lobbying, from ideology. There are still all sorts of economic actors who have a very strong interest in the current organization of the economy and of international relations. Donald Trump said it moreover bluntly. He said "When oil prices go up, we make a lot of money." But who is this we, who is this? It's first the American oil companies. The share price of the world's oil companies has risen by 30% in a few weeks since the start of the strikes in Iran. That's a stock market value increase of $1000 billion in just a few weeks. That's already well above what we could have known at the time of the invasion of Ukraine. And then this we, well, it's also beyond these companies, it's the owners, the shareholders of these companies. It's the America that is dear to Donald Trump. But then precisely this America, since it's the one that today leads the dance on several theaters of operation moreover, is it possible to ensure that France is an island in that world? Gabriel Zucman.
Well, France could quite simply say, first for our own oil companies, we are going to tax their super profits and make sure we learn the lessons of the past and not repeat the 2022 fiasco. And then, for foreign companies, if they want to continue selling their oil, their gas in France, at least part of their super profits must be taxed in France. What Total says, Total says 35,000 jobs are linked to our activities in France, 100,000 subcontractors. Well, the fact that Total makes 20 billion in profits or 30 billion in profits, what impact could all that have on the number of employees in France or on their subcontractors? Well, if you're not nice to us, we're leaving. Yes, except that that's exactly what happened again in the 70s and that these profits were confiscated, socialized around the world in the 70s, which obviously did not kill oil production. Besides, 50 years later, perhaps we would want, I think we should rather organize ourselves so that all this oil is not drilled and stays in the ground given climate change.
Gabriel Zucman, we'll see you in about twenty minutes. We'll analyze this question of tax havens. How does one, when you're an oil company, send part of these profits elsewhere when I was told that tax havens no longer existed? So we'll see how one does it to go into the non-existent. Gabriel Zucman, you mentioned with us a few moments ago the super profits of the oil companies. You explained that there was a time when we didn't hesitate to tax these oil companies making super profits up to 90% for example, which obviously would constitute significant sums for the 10 billion in profits that Total made. And then you also added, this is what a report published today in the newspaper Le Monde indicates, that these profits went partly to tax havens. So there you go, there are different leaks. There is for example Alexandre Jouri who organized the flight of Bachir Saleh, Kaddafi's great financier, my comrade Jean les Marie was talking about it a few moments ago and Nicolas Sarkozy himself explained that tax havens were finished. So, was he wrong?
Ah yes, alas, we are far from the end of tax havens. You know, it's the whole paradox of our era. While it has never been so urgent to slow down and even stop hydrocarbon extraction simply if we want to avoid a catastrophic climate change. In reality, it has never been so profitable for private economic actors to launch into this activity and in particular because the big oil multinationals can relocate such an important part of their profits to tax havens as my colleagues Alice Ciochetty and Ninon Moreau-Cassier explained today in a note published by the International Observatory for Taxation. But then there too, explain to us how one can do it if an oil company is listening to us to send its profits to tax havens. What are the methods to use?
Yes, one might think that this is black magic. How can one make oil drilled in Saudi Arabia or Canada appear? One can make it appear in Bermuda. Well, it's because the oil companies use different techniques of financial engineering, what is called first the manipulation of transfer prices, that is to say intragroup prices. The different subsidiaries of the same multinational company bill each other for services, financial services, the right to use a brand. So that's... that's precisely... that, forgive me, I'm cutting you off because we know that it's an extremely frequent tax optimization mechanism. The fact of housing in a country where the tax on brands is lower, which isn't necessarily a very exotic country. The Netherlands for example has an extremely favorable tax treatment for brands and for registering brand licenses but generally one must not take the tax authorities for wild ducks as they say Gabriel Zucman. And so we know very well that in oil what's important isn't so much the brand in fact. No but it's also distribution, refining etc. And indeed you're right that the oil companies, by the nature of the production of the activity, continue to have tax rates that are higher than those of other sectors of the economy. What's interesting, is that one might have thought that in this extractive activity, there it would really be impossible to claim to have made billions of dollars in Bermuda, in the Cayman Islands. And nevertheless, that's what we see, that's what this study reveals. So there, there's a big problem. The most important point to understand, is that all this, it's not a fatality, a kind of ancient fate against which we would be powerless and we can tackle it. We managed to do it in the past in the 70s and there's no reason that today we can't achieve it.
Well, at least to take up Nicolas Sarkozy's phrase, well when it comes to the BVI, the British Virgin Islands or this type of small states that live on these rents, I imagine it's difficult to exert political pressure on them. But at least, can we consider today that the old tax havens from Switzerland to Singapore are today rendered harmless from this point of view?
No, not even that. There had been a lot of hope in 2021 when 130 countries agreed on the principle of a minimum tax rate of 15% on the profits of large multinational companies. That was important because it was the first time there was an agreement on this question of minimum taxation of large companies. So a concrete demonstration of the fact that international tax competition, we were talking about it, it's not this law of nature, it's a choice. We chose competition for decades but there we had the impression in 2021 that we were heading towards another choice. That of cooperation, of harmonization. Well, alas what has happened since is very worrying since this agreement has been largely emptied of its substance. Moreover, the United States withdrew from it, even though the whole point of this 2021 agreement was that no country was going to be able to escape this minimum tax since the idea, which was the only genuinely interesting idea, was that if a state chose not to tax its multinationals at 15%, then other countries would come and collect the tax that this state chose not to collect. And so in fact that's what had been designed so that no country, not even the United States, could escape it. Alas what happened is that the European Union broadly speaking, accepted... and more generally the OECD countries and the countries that are part of this agreement accepted that the United States not be in this system.
Jean les Marie, who still defends this principle today? Which country defends it?
Not enough... not enough people defend it but it will come back and anyway this agreement was very very limited and very insufficient in its ambition. 15% is extremely low compared to the normal tax rates for our SMEs, even compared to what multinationals generally pay, the oil companies in particular. So, we're going to have to go much further than that in the future. And we'll come back to it simply with a different approach. The right approach, it's not to try to reach agreement among 130 because that amounts in the end to giving a veto power to each country, to the tax havens who benefit enormously from the current system, from the status quo. The right approach is for a single state or a coalition of countries to impose its standard, to say finally if you want to continue selling us, whether it's your oil, your gas, the different goods and services you can produce, well that must be accompanied by minimal rules across a whole range of areas, in particular minimal rules in tax matters. And if you don't pay this minimum tax, for example in France, the standard is 25%. Foreign multinationals should pay 25% to have access to the French market. If you don't do it, you'll lose access to the French market.
