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Who's to Blame for Germany's Massive Tax Evasion Scandal?

Chancellor Merkel is to press Liechtenstein's leader about his nation's role as a tax haven for hundreds of rich Germans in one of the biggest scandals to hit the EU power. But is the tiny principality alone at fault?

Picture of castle and mountainside in Liechtenstein

This tiny Alpine state has more than scenic attraction for Germany's well-heeled

As tax investigators continue to raid the homes and offices of hundreds of high-flying wealthy Germans alleged to have hidden money in Liechtenstein to dodge their own country's high personal income taxes, outrage is mounting in Germany.

Some believe that the tax haven, which has built its reputation on bank secrecy, is simply thumbing its nose at its European neighbors. Others regard the problem as at least partly home-grown.

That a problem exists is indisputable. Tax evasion is estimated to cost the German state around 30 billion euros ($44 billion) a year, said Dieter Ondracek, head of the German Tax Union. Between 6 billion and 8 billion euros of this money is believed to end up in Liechtenstein.

Liechtenstein's secretive bank practices under fire

LGT logo

Liechtenstein Global Trust is at the center of the tax scandal unfolding in Germany

The Alpine principality Liechtenstein, along with Monaco and Andorra, is one of only three states still blacklisted by the Organization for Economic Co-operation and Development because of their failure to endorse regulations designed to end harmful tax practices.

Jeffrey Owens, Director for Tax Policy and Administration at the OSCE, particularly criticized the lack of transparency in the management of certain financial instruments, such as foundations. State prosecutors in Bochum allege that Deutsche Post CEO Klaus Zumwinkel, who resigned last week, evaded paying tax on some 1 million euros via just such a foundation -- set up by a trustee in the Liechtenstein bank LGT Group and operated anonymously.

The problem of tax havens is an international one that is growing thanks to increasingly borderless financial markets and the sophistication of modern telecommunications, according to Owens. Ireland, for example, recently recovered around a billion euros after an investigation into accounts held in offshore banks.

"This is not a unique German problem," Owens said. "The problem is very much at the Liechtenstein end. It is important that countries should compete on the basis of the service that they provide rather than on the basis of secrecy."

Financial mobility has made problem acute

Klaus Zumwinkel

Former Deutsche Post boss Klaus Zumwinkel is the most high-profile tax cheat uncovered so far

"We need to address the downside of globalization. With a mouse click, you can move millions or billions of dollars around the world. That is why all countries should sign up to the agreement on information sharing. It's a question of maintaining the integrity of the tax system," Owens said.

Dieter Ondracek, whose organization represents staff working in Germany's financial administration, has also appealed to Liechtenstein to work closely with German investigators and close loopholes.

But while the German Tax Union's chairman described the non-EU member as a "disruptive factor" in the European Union, he also blamed the shortage of tax investigators and the lack of transparency in the German system itself for the problem.

"If people are presented with the opportunity, they will be tempted. It is not a problem that is restricted to the elite, but affects German society as a whole," according to Ondracek.

The president of the German taxpayers' association Karl-Heinz Daeke and former constitutional court judge and tax expert Paul Kirchhof have both called for German's Byzantine tax system to be simplified.

"The system has to be radically changed, so that is no longer so complex that people cannot understand it and the financial authorities cannot monitor it," said Daeke.

He also attacked taxation levels in Germany for contributing to the problem.

"The burden of taxation is much too high for the rank and file as well," Daeke said. "It tempts people into criminal acts."

But like Ondracek, Daeke also stressed that people should be aware that they are harming the common good if they do not pay their dues.

Could a simplification of tax laws help?

Man with briefcase for carrying money

Are Germany's complex laws encouraging criminality?

The current scandal could see a renaissance of Kirchhof's radical and controversial reform plans to introduce a flat tax rate of 25 percent and abolish Germany's seven different taxation categories based on the type of income earned.

"The idea that everyone is treated equitably has been violated. People's economic performance is no longer the decisive issue, but rather their ability to outsmart the tax office," said Kirchhof, now a law professor at Heidelberg University.

There is certainly room for improvement. In terms of the efficiency of its tax system, Germany was ranked 102nd in a survey of 102 states carried out by the World Economic Forum as part of its Global Effectiveness Report.

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