The cause of tax evasion are taxes

By: Wolfgang Münchau

A mood of anti-capitalism in Germany has been building up in Germany for a number of years. The German government's decision to purchase a CD with stolen information from a former employee of a Liechtenstein bank as part of a wider jihid against tax evaders has been quite possibly the most popular thing the Grand Coalition has done. Already the first polls are suggesting that the SPD's approval rating is rising.

 

Germany is geographically surrounded by tax havens. Luxembourg used to be the favourite place for Germans to hoard money. For some years now, Liechtenstein has now taken over. It is only a short drive from the south-west German border, and the principality is almost unbelievable discrete.

 

Germany has always had a problem with tax evasion, mainly because of relatively high marginal tax rates. Slovakia with its 19% flat tax has no such problem. Austria, which has one of the lowest tax rates of the industrialised countries, has no such problem either, even though, unlike Germany, it has a direct border with Liechtenstein. Nor have the Swiss. The French have a problem with Switzerland and Monaco. The Italians have a problem with Monaco. And the Spanish have a problem with Andorra. But nobody has bigger problems than Germany (which has problems with Luxembourg, Liechtenstein, Switzerland and even Austria). Germany is a country where business elites enjoy among the lowest pay packages, and the highest marginal taxes.

 

The German government now plans a series of measures to crack down on Liechtenstein. But to what effect? If the German government succeeds to destroy Liechtenstein's business model, this will be bad news for the plucky principality. But then, what stops wealthy German investors to go to Monaco, the Channel Islands, or the Cayman Islands?

 

Also, as I have argued in my FT Deutschland column today, the German government is clearly overplaying its hands in this investigation. The CD is not only stolen, but it is over five years old. No one will get convicted because their name is on the CD. Defendants will always be able to claim that the information is either out of date, or that the evidence may have been tempered with. The German police will need more evidence, for example bank statements, contracts and the like. But the highly publicised raid last Thursday on the home of Klaus Zumwinkel, the former chief of Deutsche Post, has made that unlikely. Everybody with an account at this particular Liechtenstein bank, will have spent the last weekend destroying evidence in their homes. Except for those naive enough to transfer the money directly from their German bank accounts to Liechtenstein, I would not expect the German government to receive large windfall tax receipts, certainly not in the order of several hundred million euros which the government now expects.

 

The German government had hoped that tax evaders, who have not been caught yet, would now voluntarily come forward and repay taxes, without any legal consequences. This is possible under the German legal code. But it not a risk-free an option either, for example, in cases of multiple tax evasion. (No income tax was paid on the original money received, no capital gains taxes on the investments, no income taxes on dividends.) The best chance to escape penalties is not to step forward and fess up, but to ensure that the prosecution has no hard evidence.

 

The bottomline is that the purpose of this tax razzia is to feed the German public's unsatiable anti-capitalist mood, but it is not going to make any fundamental difference. It is a macroeconomic non-event. The only way for Germany to reduce tax evasion is to reduce marginal taxes. A criminal mind causes an individual to be a tax evader. But on a macroeconomic scale, it is taxes that cause tax evasion, and nothing else.

 

 

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