Thursday, February 28, 2008

Germany and tax evasion: look in the mirror

Germany is currently experiencing a "fiscal scandal" on various dimensions. First, the CEO of German POST (and president of IZA) Klaus Zumwinkel was arrested and uncovered as a tax cheat as he had hidden part of his wealth in trusts in Liechtenstein. Second, German tax authorities obtained a list of people holding such secret funds in Liechtenstein with the help of a €5,000,000 bribe. These events are generating a lively debate in Germany, and elsewhere in Europe, about illegal tax shelters (Luxembourg, Liechtenstein, Austria and Switzerland are often mentioned), but also about the illegal means German authorities took to find evidence.

Strangely, at least to me, much of the blame is put on the tax havens. However, they play a very important role: to keep fiscal policies of the other countries in check. Fiscal competition makes sure governments do not abuse of their fiscal authority. While Germans may think that some of this competition is unfair in that tax havens attract the big tax payers, whining is not the solution.

Germany, and others, need to think why fiscal evasion occurs in the first place. Is it because the tax level is too high, or is it because the marginal tax rate is too high? In fact, one needs to ask whether taxing income (or wealth) is really the best thing to do if it appears so easy to evade. What about concentrating on the value-added tax? What do you want to encourage in an economy? Job creation and investment. This is exactly what you obtain by taxing consumption, not income. And if you worry this is regressive, differentiate the consumption tax by goods (none on essentials, a high rate on luxury goods), or even throw a basic income credit in.

If German authorities really think tax evasion is such a big problem, they need to look in the mirror and take radical solutions.

PS: Speaking of job creation, here is a rather peculiar job, Helicopter cable inspector.

1 comment:

Vilfredo said...

Your prescription is just as valid for the United States, even though tax rates are much lower. One should stop encouraging consumption and get serious about saving and investment.