German tax scandals | The disgrace of Germany AG | Economist.com

German tax scandals | The disgrace of Germany AG | Economist.com

Feb 21st 2008 | BERLIN
From The Economist print edition

The country's tax scandal is a test of its judicial, not its economic, system


THE word Schadenfreude was coined for just such occasions. On February 14th, in full view of the television cameras, police escorted Klaus Zumwinkel, boss of logistics giant Deutsche Post, from his villa in Cologne to explain to prosecutors his dealings with Liechtenstein, a notorious tax haven. By itself the disgracing of Mr Zumwinkel, who quit Deutsche Post and the chairmanship of Deutsche Telekom the following day, would have been big news. But he is just one of around 1,000 suspects in Germany's biggest-ever tax-fraud case; his alleged million-euro tax dodge is a fraction of hundreds of millions that may have flowed to the Alpine principality rather than into Germany's treasury. In the following days investigators fanned out, searching homes and offices in Munich, Frankfurt and elsewhere, this time without television cameras in tow. In the dock of public opinion are not just a few fat cats but the rich in general.

Germany was already in the throes of an argument about pay, equality and whether capitalism is fair. Globalisation and economic reforms have squeezed the wages of ordinary Germans. Yet the pay of Germany's top managers jumped 17.5% in the 2006-07 financial year, according to Kienbaum, a headhunter. The same class has lately been held responsible for expense-account sex (Volkswagen), systematic bribery (Siemens) and subprime self-abuse (IKB and the state banks of Saxony and Bavaria). Trust in the social-market economy—Germany's mix of capitalism, welfare and workers' rights—is endangered by “a not inconsiderable section of the economic elite”, frets the conservative interior minister, Wolfgang Schäuble. The left, especially the ex-communist Left Party, hopes to benefit from all this, starting with elections in the city-state of Hamburg on February 24th.

But Mr Zumwinkel's downfall does not fit tidily into a fable about the cruelties of capitalism. True, he managed Deutsche Post's privatisation. But the “yellow eminence” (an epithet drawn from the colour of the Post's logo) was a practitioner of socially conscious “Rhineland capitalism” rather than the supposedly heartless American variety that is gaining dominance through the growing clout of the capital markets. His final achievement combined social correctness with self-enrichment. Last year Mr Zumwinkel helped introduce a minimum wage to the postal sector, which had the intended side-effect of discouraging competitors poised to exploit the ending of Deutsche Post's monopoly over letter delivery on January 1st 2008. Mr Zumwinkel cashed in on the resulting rally in Deutsche Post's shares: a mistake, he later admitted. The second named victim of the tax sweep is a public official, Bavaria's data-protection chief. Yet despite the scandals, trust in the market economy has recovered from the low it reached in 2005, according to Allensbach, a polling firm, probably because growth and employment have been strong.

The Liechtenstein affair is more a test of the judicial system than the economic one. The spectacle of tax inspectors pursuing Germany's richest citizens may bolster faith in the rule of law but is the outcome of a bizarre process. Early in 2006 a person known to the German press as “the informant” offered to sell to Germany's foreign intelligence service a DVD stolen from LGT Group, a firm owned by Liechtenstein's ruling dynasty. It tells investigators everything they need to know about hundreds of Germans who established “foundations” in Liechtenstein to manage their money without disclosing their identities. After tax collectors sampled the merchandise, the intelligence agency paid €4.2m for it, a spectacular bargain.

A committee of the Bundestag is examining whether the agency overstepped its authority in joining the hunt for domestic tax cheats. Liechtenstein's crown prince and Mr Zumwinkel's lawyer have both accused the German government of dealing in “fenced goods”. The courts will decide whether that undermines the case. It is not clear how many suspects will face trial. Frightened by Mr Zumwinkel's example, many are turning themselves in.

The tax blitz is “a healthy shock”, says Dieter Ondracek of the German Tax Union, but it will wear off. More inspectors would raise the fear of discovery, a better deterrent than stiffening penalties, Mr Ondracek thinks. The finance ministry wants to federalise tax collection, which is now split among the 16 Länder (states), some of which tame tax inspectors in order to attract investment. The chancellor, Angela Merkel, demanded that Liechtenstein adhere to international standards for fighting tax evasion and money laundering during a visit by its prime minister, Otmar Hasler, on February 20th. Even if the principality yields, competitors will step in. One candidate: the emirate of Dubai.