Academic Reports/Research Papers

An analysis of the efficacy of Tax Justice Network’s methodology in constructing a secrecy index

Summary: In 2013, the Tax Justice Network (TJN) released its most recent financial secrecy rankings, with Switzerland topping the list. According to TJN, the index is constructed to “shine light into dark places” so as to expose jurisdictions that support clandestine financial operations and tax avoidance. The study has received quite a bit of attention, including a recent article in The Economist. TJN`s final secrecy score has two components, one that uses 15 different indicators to measure!“secrecy,”!and one that controls for the weighted size of the financial industry in each jurisdiction. Regrettably, analysis of the study reveals several serious methodological flaws, where numerous assumptions have been made without the aid of economic or statistical theory. For one, absolutely nothing is done to control for the many factors that may influence the size of the financial industry in a given jurisdiction. In fact, financial size is negatively correlated with the financial secrecy variable in TJN’s sample. Additionally, all 15 indicators contribute equal weight to the final secrecy score without any assessment of the validity of this approach. For example, the same weight is given to the existence of bilateral tax treaties and any collection of beneficial ownership information (arguably the biggest secrecy driver), without even considering tax information exchange as a viable alternative for countries without direct taxation. The equal weighting seems additionally strange when one considers that for one of the indicators related to banking secrecy, every jurisdiction receives the worst identical score, effectively ensuring that all areas show a degree of secrecy, while biasing the results against larger financial areas. Finally, as demonstrated, the results are extremely sensitive to even small changes in seemingly innocuous assumptions. As such, TJN`s rankings are essentially a list of large financial centers with superfluous random noise. If subjected to a rigorous peer review, it is this reviewer`s opinion that the study could not be published in a respectable outlet due its several methodological deficiencies.