Tax collection

Are Germany's rich paying their way?

Millionaersteuer AP
The OECD has accused Germany's rich of not paying enough taxes.
  • Why it matters

    Why it matters

    The alleged non-collection of tax from Germany’s wealthiest citizens could be holding back the country’s growth.

  • Facts

    Facts

    • A high net worth individual is defined as someone with $1 million (€894,000) of disposable income.
    • The German tax authorities apply special investigative methods to anyone earning more than €500,000.
    • Germany’s high earners – those with incomes above €204,605 – paid almost 23 percent of the country’s total income tax bill last year.
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    Audio

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Germany, it seems, is a good place to be rich.

The internationally recognized definition of a high net worth individual is someone who has disposable income of $1 million (€894,000), not including any other assets such as property or art collections. And in Germany, very little of such wealth attracts the attention of the tax man.

At least that’s the opinion of the Organization for Economic Cooperation and Development, the Paris-based grouping of the world’s richest nations. Its report titled “Tax Administration 2015” says that wealthy Germans are enjoying a sweet life when it comes to tax issues.

The OECD notes there is no special unit within Germany’s tax authority to examine the total assets of high net worth citizens, supporting the suspicions of left-wing politicians that Germany deals too softly and carelessly with its wealthy.

Susanne Klatten picture-alliance
Germany’s tax authorities say they are collecting sufficient tax from Germany’s wealthiest individuals such as Germany’s richest woman Susanne Klatten, heir to the BMW empire. Source: picture-alliance

Joachim Poss, a parliamentary member of the Social Democratic Party, has praised the study. Federal and state governments must ensure “through a pooling of know-how among the officials an effective taxation” of the rich, he said.

Monika Heinold, a Green Party member who serves as minister of finance for the state of Schleswig Holstein agrees. “Among the wealthiest, there is still much potential,” she said.

“We have no backlog in the investigation of millionaires.”

Norbert Walter-Borjans, Finance minister, North Rhine Westphalia

Yet this is not what the local authorities that actually collect the tax – and would profit from tighter tax rules – think. They see no need for stricter regulation.

A survey of Germany’s 16 state finance ministries found that several already make external audits of millionaires “a high priority,” and ensure “intensive examinations” of their bank accounts.

For example, Norbert Walter-Borjans, the SDP finance minister of the industrial state of North Rhine Westphalia dismissed the OECD study. “Officials (of the OECD) who claim a deficit have apparently not looked around, at least in North Rhine Westphalia,” he said. “We have no backlog in the investigation of millionaires.”

German tax authorities have a considerable arsenal of tools to investigate the tax affairs of the rich, including external and individual examination, special retention periods for documents, control reports to other tax authorities, dragnet investigations and triple approval controls for officials. These are all over and above the measures applied to average earners.

Finance ministries understandably fish where the biggest fish swim. They start with risk management systems, which function like dragnet investigations in the fight against terrorism, filtering out suspicious cases using computer programs.

The parameters used are not disclosed so that tax cheats cannot prepare themselves. But one factor is well known: All tax returns for annual incomes of more than €500,000 ($560,000) are automatically selected for examination.

As a rule, the rich employ savvy tax advisers to help them exploit loopholes and navigate the jungle of write-offs and other tax saving possibilities. But tax officials battle them head on, said Mr. Walter-Brogans, pointing to the results in his state. “The examination of millionaires in 2014 led to increased revenues of a total of €49 million in 307 cases; on average €160,000 per case,” he said.

Following the tax scandals of former Deutsche Post boss Klaus Zumwinkel in 2008 and former Bayern Munich soccer club president Uli Hoeness, millionaires know exactly how risky, expensive and dangerous tax evasion can be. The rising number of voluntary tax declarations in the past few years underscore how much cheats now fear German tax authorities.

The head of the DSTG, a union representing Germany’s tax office workers, thinks such clampdowns, and the states’ auditing arrangements, are working. “We do not need any special units for the wealthy,” said Thomas Eigenthaler.

The Federal Audit Office, which a few years ago was critical of the fairness of the German taxation system, agrees. “Lawmakers have reacted to the criticism of the Federal Audit Office and improved the examination of millionaires,” it has said.

While the OECD report gives the impression that Germany does almost nothing to collect taxes of the wealthy, it makes positive references to the tax collection system in Greece. The near-bankrupt country has set up a special department solely to investigate the affairs of the super wealthy, but whether this will improve the catastrophic problem of tax evasion in Greece remains to be seen.

The OECD defended its criticism of Germany. Achim Pross, the organization’s tax expert, said that special departments for investigating the rich were not the “only feasible way” forward. The study, he said, does not make any statement “on the basis of which one could say that the German tax authorities work better or worse than others on the HNWIs.”

Klaus Zumwinkel DPA
Former Deutsche Post CEO Klaus Zumwinkel received a suspended jail sentence of 2 years for tax evasion in 2009. Source: DPA

Reliable international comparisons are lacking. France, for example, seems on paper to treat its wealthy citizens more harshly. In 2013, socialist president François Hollande instituted a wealth tax of 75 percent for millionaires. It led to the immediate departure of 3,000 of France’s ultra-wealthy, including film star Gerard Depardieu. In addition, the top income tax rate is 55 percent, including special levies. Germany’s is 47.5 percent.

Yet the collection of French and other countries’ taxes is not as reliable as in Germany. Stefan Homburg, a tax advisor and professor at the University of Hannover, paints a clear picture. “In hell, the French tax laws would be carried out by the German tax authorities. No other country approaches being more meticulous than Germany,” he said.

In any case, German tax revenues are rising to record levels and the contributions of wealthy citizens are considerable. High earners – defined as those with incomes above €204,605 – paid almost 23 percent of the country’s total income tax bill last year, according to the German ministry of finance.

But whether the wealthy pay enough taxes remains a hot topic. Wolfgang Schäuble, the federal finance minister, believes the current system favors the rich and puts an unfair burden on the middle classes. But in a recent parliamentary vote, the SPD and the Greens advocated for an increase of about 7 percent in the top tax rate. It was voted down.

This article originally appeared in the business magazine WirtschaftsWoche. To contact the authors: karin.finkenzeller@wiwo.de and christian.ramthun@wiwo.de

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