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Commentary: Germany: A Nation Of Tax Dodgers (Int'l Edition)


International -- European Business: COMMENTARY

COMMENTARY: GERMANY: A NATION OF TAX DODGERS (int'l edition)

A lawyer in Bonn, engaged for a minor landlord-tenant dispute, cuts his fee by one-third if he's paid in cash. A taxi driver near Dusseldorf offers a rider a 3-mark discount on a 12-mark ride in return for permission to keep his meter off. And in what is now a yearend ritual, magazines such as Capital run special reports on how to avoid paying German taxes. "Zero Taxes for Two Years," a headline screams.

Germany faces a growing tax mess: On Nov. 11, the government admitted that its estimated tax take for this year and next will fall $23 billion short of expectations. Finance Minister Theo Waigel also concedes that Germany's personal and corporate income tax rates, which top out at 60%, are so high they all but invite evasion. Waigel blames opposition Social Democrats for blocking the government's big bid for tax reform last summer. But the total tax burden on the average German has gone up about five percentage points, to 45%, during the 15 years that Waigel's boss, Chancellor Helmut Kohl, has been in power.

A panel of economists known as "the Wise Men" got it right on Nov. 14 when they castigated the government and opposition both for making the system overly costly and convoluted. "Politicians on all sides have made mistakes," gripes Jurgen B. Donges, an economist at the Institut fur Wirtschaftspolitik in Cologne. To tackle Germany's budget and unemployment woes, the country's politicians urgently need to put real tax reform at the top of their agenda.

TIME BOMB. If they don't, Germany's budding tax rebellion will get worse. Rich Germans have long had their Swiss and Luxembourg bank accounts. But now, average individuals and small-company owners are saying, "I'm not going to take it anymore," and finding ways to finagle, barter, and cheat their way out of paying. "It's like a sport," says Gerhard Grebe, an economist with Bank Julius Baer & Co. He calls the trend a "time bomb" likely to explode in 1999, when monetary union will remove the exchange risk if companies move to lower-tax countries. Then, he says, even more money will flow out.

Germany's quiet tax revolt shows up most strikingly in estimates of the nation's burgeoning off-the-books economy. A study published in October by Friedrich Schneider, an economist at Johannes Kepler University in Linz, Austria, figures that Germany's black economy doubled in size, to $317 billion, between 1990 and 1997, rising from 12% to 15% of gross domestic product. That's still far from Italy's level of more than 26%, and some economists put the German figure lower. But no one denies that it's a fast-growing segment of the economy: Hamburg, for instance, now has more off-the-books workers than unemployed ones, according to a local study--and the city's unemployment rate was 11.6% in October. Schneider estimates that half of Germany's tax shortfall is due to the black market.

Moreover, without a radical revamp of Germany's tax system, the black economy is sure to keep growing. Contrary to popular belief, it's not just outsiders from wage-poor countries who engage in off-the-books work. With unemployment at 11.8% nationwide, there are plenty of idle Germans doing it. And the tax system hits working stiffs hard, encouraging moonlighting. An average German worker making just $29,300 a year pays a total of 45% in income taxes and levies for church, retirement, and nursing home insurance.

The government's use of taxes as a tool for social engineering has added to the mess. The most popular tax deductions in recent years were aimed at promoting new housing and office developments in the former East Germany. The government has allowed taxpayers to write off up to 100% of their equity investment in such projects and take 100% deductions over 10 years for renovations of old buildings.

Such deductions probably have contributed to the army of off-the-books workers in the east. Studies show that construction is the biggest sector of the shadow economy. And because the construction deductions need not be taken at any particular time, it's impossible for the government to predict its tax receipts.

Waigel is now taking a knife to the construction write-offs. That's a good start, but it's far from serious tax reform. Even the reforms Bonn failed to pass last August wouldn't have lowered Germany's overall tax burden. Taxes must be cut and simplified to encourage compliance. Politicians should reconsider a proposal for a plain, three-tier tax system that kicked off the tax debate two years ago. Otherwise, more and more Germans will start privately voting against the system.By Thane Peterson


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