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Experts Skeptical of German Tax Amnesty

New tax laws that aim to cut people’s income tax burden and lure billions of euros in foreign bank accounts back into Germany take effect on Thursday.

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The tax amnesty is hoped to tempt stashed away money back into state coffers.

After the German government increased capital gains taxes in the early 1990s, thousands of well-heeled Germans secretly stashed away their fortunes in so-called low-tax safe havens such as Switzerland and Luxembourg.

The center-left government of chancellor Gerhard Schröder has now granted an amnesty for the rueful sinners, hoping to fill empty state coffers with at least parts of the illicit money.

According to conservative estimates about €1 trillion were illegally channeled out of Germany in the heady days of tax evasion in the early 1990s. Swiss banks alone are said to be hiding €100 billion in their vaults – funds that have been illicitly withdrawn from the German revenue service.

Finance Minister Hans Eichel now hopes that at least part of that money will come back to Germany thanks to a new law passed in December. It grants the repentant tax evaders an amnesty and a reduced tax rate of 25 percent rather then usual 48 percent on the profits they gained in the past 10 years.

Government wary of good results

But the government is playing down expectations that they expect a flood of money to come back in under the new law.

"We are rather cautious in our expectations," Eichel said. "We figure on about €20 billion that will be transferred back to Germany. This would mean an additional tax revenue of €5 billion across the board in 2004."

But the offenders shouldn’t wait for too long to declare their riches. The 25 percent tax rate is only valid for those coming clean by the end of 2004. In 2005, 35 percent of their profits will be claimed by the German state, but only until the amnesty expires in March of that year.

Eichel hopes his efforts will match the success rate of a tax amnesty granted by Italy in 2001. The government in Rome was able to lure more than €60 billion back into the country and gained about 1.5 billion in additional taxes. Experts say this was primarily thanks to a purely symbolic tax rate of just 2.5 percent.

Friedrich Merz, finance expert for Germany‘s opposition conservative Christian Democrats, is also doubtful whether a ten times higher tax rate here may really tempt offenders.

"Someone who brings back €100,000, has to pay €25,000 in taxes," said Merz. "It’s extremely doubtful that anyone is willing to strike such a deal."

Swiss banks remain cool

According to Swiss bank sources, the country’s secretive financial institutions remain unruffled by the German decision, and do not fear a major withdrawal of capital.

After all Germany’s super-rich the likes of ex-tennis star Boris Becker and Formula One racing champion Michael Schumacher have meanwhile made their own tax-saving moves. They have removed not only their capital, but also themselves out of their native Germany and now reside in Switzerland.

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