Notwithstanding Reprehensible History, Germany Launches Fiscal Attack on Liechtenstein

In a remarkable display of fiscal imperialism, the German government sent spies into Liechtenstein and bribed a bank employee to provide confidential records about German account holders. Unfortunately, this sleazy act of aggression was successful, leading to a series of high-profile raids by German authorities. This has created quite a kerfuffle in Europe, and it should come as no surprise that the bureaucrats at the OECD are using the controversy to push their anti-tax competition agenda. According to a story in the Financial Times:

Pressure grew on Liechtenstein on Tuesday to ease its bank secrecy rules in the wake of a German tax ­scandal centered on the Alpine tax haven. …Angel Gurria, the secretary general of the OECD, said Liechtenstein’s secrecy rules were a “relic of a different time”. …Liechtenstein’s Crown Prince Alois on Tuesday accused Germany of mounting an “attack” on the principality. He condemned as “unacceptable” Berlin’s decision to allow its BND intelligence agency to pay more than €4m ($5.9m, £3.7m) for bank client data allegedly stolen by a former Liechtenstein bank employee. …Jeffrey Owens, the OECD’s chief tax havens expert, said the changes would only make a difference if ­Liechtenstein “were now ready to sign tax information exchange agreements with Germany and other countries.”

This story is troubling on many levels, particularly given Germany’s ugly history of oppression. In the 1930s, Germany had draconian laws to deter citizens from having money outside the country and – like today – it trampled on the sovereignty of its neighbors to get information (see here for more information). Indeed, snooping by the Nazis was the main reason that Switzerland substantially strengthened its privacy laws in the 1930s.

Today’s controversy is motivated by greed for tax revenue rather than anti-Semitism, but the issues are similar. To what extent do nations have the right to compel other jurisdictions to act as deputy enforcers? Most reasonable people understand that there are limits on cooperation between governments. European Union nations, for instance, refuse to cooperate in extradition cases where an American might face the death penalty. Likewise, most nations would never consider helping a totalitarian regime like Saudi Arabia or Iran if it tried to persecute escaped homosexuals.

The tax issue is a bit more challenging because it is easy to demagogue against wealthy people who utilize so-called tax havens (though even OECD officials get a bit squeamish when asked whether financial privacy laws should be totally abolished, since even they recognize that billions of people live in nations that practice some form of religious, political, ethnic, racial, and/or sexual discrimination – not to mention all the people who live in nations that suffer from economic mismanagement, kidnapping, and/or monetary instability).

The head of the OECD considers privacy to be a “relic of a different time.” But why should there be a one-size-fits-all policy? Is there really no room in the world for nations that treat people with dignity and respect their privacy? If politicians from high-tax nations and bureaucracies such as the OECD get to decide, the answer is no. But hopefully Liechtenstein will stand firm against Germany’s vicious bullying. After all, so long as over-burdened taxpayers have safe havens, governments face pressure to improve their tax law. And even the Financial Times was forced to acknowledge, in a schizophrenic editorial that endorsed sending spies into low-tax jurisdictions, that bad tax policy bears part of the blame:

Germany’s problem with evasion is partly the fault of its tax system. Although the abolition of wealth tax has improved matters, marginal income and inheritance tax rates for high earners approach 50 per cent. Tough enforcement will never stop evasion if taxes are punitive.