Montag, Februar 18, 2008

What The Real Problem Is...

Well, Zumwinkler, the head of the German Post Bank, resigned on Friday because he's being nailed with a nasty tax evasion process.

The German government has started a wide-spread anti tax-evasion investigation, aimed mainly at those in higher income brackets that are using loopholes that aren't really loopholes (i.e. exist only in their imagination) to avoid paying German taxes. They've raided many offices searching for monies deposited illegally in countries like Lichtenstein, invested in ways so that income doesn't get reported, usually simply by obfuscation.

Let's take a look, briefly, at tax rates in Germany.

Let's start at the bottom: the first 7 664 € annual income are tax free. The tax rate runs progressively higher to the largest tax bracket, incomes from 52 152 to 250 000 €, where the marginal rate is then 42%. Beyond 250 000 € the marginal rate is 45%.

That is only for income tax: you have, then, as well, your state-mandated social security equivalent payments, which are 23% of your gross income up to a certain level, which for the employee works out to paying 21.4% of your income for social security, up to around 6 500 €/month: earnings beyond that are exempt from social security taxes. We're going to ignore health insurance for the time being...

Add that together, and you can see why tax evasion is probably numerically the greatest white-collar crime in Germany.

Now, what is a poor manager to do? We're talking folks earning beyond 250k €/year: let's take the example of someone earning 265k €/year. That's €22k/month: his income tax withholding on that is about €10k, and his contributions to social security is around €1500. Hence, without any other items, his €22k income has dropped to less than half that, with just a tad more than €10k. Now, while that sounds like a lot, it's not really, given the reasons why such folks earn such monies: their productive lives are being bought for the company, and nothing should distract them (well, that's the reason: reality, of course, is rather different, as we've seen by the number of incompetent and criminal managers...).

If that person can avoid paying taxes on, say, half of his taxable income, that's equivalent to getting a 100% raise. If half of your income is taxed away - and given German demographics, your social security contribution's return on investment will be negative if you are under the age of 60 or so - then you've got great incentives to find ways of avoiding paying those taxes.

Now, I'm not advocating not paying taxes: duh.

But the real problem isn't so much that these folks have to pay higher taxes: it's much more that the state in Germany, which of course has to be financed by taxes, is too large.

The real reason why tax evasion in Germany, amongst white-collar workers and managers, is a problem is that the taxes are, for the real world, too high. Tax evasion, to the extent that it is the problem that it is in Germany, is a symptom, rather than the result.

And given the amounts of waste and fraud - don't get me started, I'd have to spend the rest of my life working on it - in Germany, which of course white collar workers know about quite well, the motivation to play their part in the general welfare is downright negative.

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