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20.02.2008
The cause of tax evasion are taxesA 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 Defendants will always be able to claim that the information is either out of date, or that the evidence may have been tempered with.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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Comments
anonym
Monday, 25-02-08 08:37
I have difficulties accepting a crime. That is like saying: "i beat someone up because he was annoying me". Instead of complaining about inconvenient taxes, one should stress the public goods offered. If you live in a country that provides a lot of public goods for free, from which you benefit, you should accept to pay for it.
Germans might feel that taxes are too high for two reasons: a lot of money is transferred to East Germany and a lot to the EU.
Moreover: Germany will introduce a flat tax on capital income of 25 percent as of 2009.
Diego Méndez from Spain
Saturday, 23-02-08 21:06
"The cause of tax evasion are taxes." Yes, it is. And the cause of theft is private property. But we want a necessarily tax-supported state system protecting private property, so tax evasion and theft must be socially condemned and state-prosecuted.
Higher taxes means more tax evasion. Aber natürlich! But more tax evasion means higher taxes; and heavier punishment, closer supervision will lead to less tax evasion.
"But then, what stops wealthy German investors to go to Monaco, the Channel Islands, or the Cayman Islands?" The EU and the US must act together on this issue. Why should we let those countries exist in an integrated global financial system if this goes against our most elementary interests?
F. Huber from CH
Saturday, 23-02-08 11:10
I do not regard Switzerland as a "Steuerparadies" or tax haven.
It is a "normal" country with a system of direct democracy, a "Rechsstaat" with a fully developed legal system of law and order, and with well-educated inhabitants. The economy is efficient and productivity is high, a situation arrived at after decades of investing in infrastructure and education : the apprenticeship system was never abolished in Switzerland or in Germany.
Switzerland has a well-balanced economy (with double surpluses in the budget and in trade) based on four sectors which produce high quality products and services:
1. Primary: Agriculture (inc. a fast-growing bio sector and new IPOs like Emmi)
2. Secondary: Industry (firms like Sulzer, Syngenta, Roche, BKW (energy) Rieter, Schindler
3. Tertiary: Services (banking, tourism, global logistic firms (Panalpina, K & N)
4. Quarternary: Kudelski, Google (in Zürich), call centers, alternative
energy sector.
Historically, the urgent need to create jobs in the 1920s/1930s in the canton of Zug (traditionally agriculture-based with a Roman Catholic majority, large families and high unemployment) led to the idea of reducing taxes in order to induce Zürich entrepreneurs to set up workshops also in Zug. The Great Depression and WW2 had a negative impact, but after WW2 it was some US firms who first moved into Zug and set up their European subsidiaries there. Since the 1980s a virtuous circle has been created: Cutting taxes (not every year, but never, afaik, increasing them) actually increased tax revenues in most years, and the surpluses were re-invested in the infrastructure. A city-rail system was built, a new rail station, and hospitals and schools built in the 1960s are being updated, or new ones built, and a university faculty (Finanzinstitut) of the Univ. of Lucerne has been opened in Zug.
However, the new Finanzausgleich system now means that Zug and other cantons with surpluses have to pay some cash contribution to help poorer cantons. And Zug no longer has the lowest tax rates as Obwalden introduced a 2% (two percent) company tax last year and reportedly over 260(mostly small) firms moved in there.
My view is that the final STRATEGIC move for a country whose economy is successful in all four sectors named above (and such a country is Germany today, which also has both budget and trade surpluses) is to cut taxes, and to acquire a reputation for keeping a downward pressure on taxes and on bureaucracy, in order to create more jobs and to establish and protect - LONGTERM - its position as an attractive location.
Joe Noory from USA
Friday, 22-02-08 13:20
The very fact that after all these decades, one still has to explain to people the fact that "someone, somewhere is succeeding doesn't mean that others are doing worse" - is not a promising sign. This invective directed at people acting in thier own interest is irrational. The question for Germans should be to understand why they felt compelled to run away.
That said, I don't believe that things are hopeless. Germany has a large percentage of individual investors, and the mechanism to do that is vibrant. However, even though large economies find difficulty doing this, they would benefit greatly by following the Belgian example and do away with the capital gains tax that discourages financial investments from staying in the country.
Eric Goerke from Germany
Thursday, 21-02-08 09:50
Hi Wolfgang, I am glad you mentioned Slovakia in your examples. Isn't it a rare coincidence that those countries paying the largest part to European Union dump demand the highest taxes and that the countries receiving hudge amounts can afford low taxes and even - as it was the case with Ireland some years ago - amuse themselves over high taxes in germany ?
I agree with you, that the monetary result for the government will be meagre, but may be that is just wanted ? Given the easiness to evade taxes and the historicly rather merciful punishments of tax-evaders one might think that this government is not really keen on catching and punishing them ! So Angi's current tough line against Lichtenstein and Switzerland is jsut hipocrisy especially given the fact that her CDU used a similar model in their party-money corruptionsheme.
Regards
Eric
