Observing what is happening and what is being done, then putting on my tin foiled thinking cap does reveal a pattern – or a plan.

Tax Evaders: How Germany Is Going To Deal With It

It has been suggested that there is about 1.000 bio. EUR of undeclared funds in Europe. How accurate that figure is or how much tax revenue it could eventually yield could be debated. Suffice to say: we are talking funds in the order of magnitude of Germany’s sovereign debt.

It is definitely money worth going after partly to reduce taxes which definitely IS a consideration in Europe for everybody, not only the richest. Secondly, recapitalising the banks of Europe is going to take up a fair amount of capital – money that can’t be extracted from the present tax payers – not without destroying consumption and investment. Both are having a hard time as it is.

Finally having 1.000 bio. EUR sloshing around on the money market is more than sufficient to destabilise any economy which again is a thing not wanted at all.

There are several techniques all being used simultaneously:

Outright surrender by the taxpayer

The tax evader might turn himself in to the tax authorities and beg for clemency. That may be granted, provided – of course – an investigation into probable criminal fraud has not been started. In Denmark (actual rules differ slightly from country to country) about 800 taxpayers have received a letter, that as investigative steps have been taken, they are not eligible for clemency.

Now the forbearance, that a tax authority exhibit is actually worse than most people’s torture. The rules are that not only are you to pay the back taxes, interest on these taxes plus a fine. Eventually you end up with paying the entire amount you have kept from the taxman. Naturally there is a limit to such bleeding heart forgiveness! If you have not turned yourself in before June 30, 2013 there will of course be a discussion of a possible prison sentence – in addition.

Normally such threats don’t work as tax evaders and their banks have a very high regard for their own cleverness, so they tend to disregard such offers in contempt of civil servants.

There are exceptions: In Germany the high profiled soccer player Uli Hoeness has come forward under extensive publicity – in the nick of time, before the generous offer runs out.

In this context it should be mentioned that over the last couple of years the books of the banks of several EU countries have been opened mutually to the tax authorities of member countries. The general rule is that full bank account information is automatically sent to the tax authorities of the pertinent country. Only Austria and Luxembourg are lagging behind. These countries have only agreed to provide full information on specific request.

A similar agreement was entered into between Germany and Switzerland, but has not been ratified by the German Bundesrat (approximately senate):

–          Partly as the majority of that assembly is from the opposition.

–          Partly because actual tax collection falls under local state jurisdiction and not the union (that distinction is jealously guarded under the constitution).

–          Partly due to dissatisfaction with the lump sum to be paid by the Swiss banks for transactions prior to 2009 (I believe it was).

The last might have some practical merit, as the Swiss banks might not actually know who holds the older account, as it was common practice that only the account number was registered in the bank together with probably a code word.

Attacking the tax shelters

The Greek debacle fortuitously provided yet another weapon to the tax authorities: Going after the banks very existence. The debt in the Greek banks was financed by the Greek state backed by sovereign bonds that was sold at ever higher interest to back the national debt of Greece until Greece to all intents and purposes, defaulted.

Now dirty money – one way or the other – has to be placed somewhere and tax evaders are greedy as well as shady. Some banks were hit badly by the bankruptcy and meager dividend. That was especially true of the banks on Cyprus where a lot of money of very uncertain provenance – not only from Russia (about 1/3 of the deposits), but from all over Europe – had to be placed somewhere. In fact Cypriote banks branch offices in Greece were actually turned over to Greece in a reasonably impaired state.

Typically of Cyprus as with so many tax shelters the bank balances bore no resemblance to GDP of the host country. There was no way Cyprus could ever back their banks, and the result was – as we know now – that the large depositors lost about 60 percent of their deposits after a unnecessarily prolonged process, where the Cypriote state showed gross incompetence in running their own affairs. The only criticism to be levied against the ECB was lack of sufficient brutality. The German Finance Minister Wolfgang Schäuble all along dismissed the awkward meandering of the Cypriote government as unproductive.

The end result produces a flare of temper from Russian Premier Vladimir Putin spewing the usual threats. That stopped about the same time as he must have learned that his old enemy Borosovsky had been totally ruined by the Cypriote collapse (he had lost money in Britain as well) – and they might have added that Borosovsky had hanged himself in the bathroom.

The lesson in this context is that flight into a tax shelter is very likely to be running from the heat into a conflagration.

First of all, depositing serious amounts of money in a country with a disproportionally large banking sector is placing trust in banks in that country that they will not run out of liquidity before you can move your money (whether they are yours is the whole issue of the debate) away.

Secondly, given the disproportionate bank balances in relation to the GDP, there is no way the country can raise the amount of cash to back a flight of deposits – no matter how corrupt the government is. This goes for the guarantee of deposit as well in case somebody accidentally goes over the assets. That does put a lot of confidence into characters as shady as yourself, as the government is likely to have a huge deficit, as your “company” isn’t really a part of the tax base.

Thirdly, the proposition by banks that the EU and Germany consider it their holy duty to defend depositors no matter their dubious nature in order to defend the common currency is erroneous in the extreme. The EU will defend the economy of the country, but not the banks. In the case of Spain funds is being doled out to give time for the restructuring of the economy – and a reassessment of the tax base, which will include hitherto untapped sources: Pensions and bank deposits. Running away to Germany will only result in depositing money at zero interest and loaned back to Spain at a higher interest. The problem with Cyprus in contrast, was that there was no untapped tax base.

So before placing your ill-gotten gains in a high yield tax shelter it might be advisable to consider the possibility that that country might not be able to guarantee their banks.

Attacking the banks

Depositing funds in banks – thus ensuring the liquidity of the bank – is to be considered risky as well – even provided the economy indubitably can guarantee banks and deposits.

You should be aware that every deposit does leave a trail leading back to your identity and this information is automatically conveyed to your country’s tax authorities. This sort of defeats the tax evader’s purpose.

You could place them in a cagey country like Switzerland, but the question is what is the bank going to do with the money?

Well there are not that many options! As banks have more or less stopped extending loans to each other, the funds end up in either the central banks at zero interest – or even negative interest. The possibility to place funds in prime securities is interesting – if you can get them! These days no German sovereign bond under 5 years maturity has any interest at all – and there is a marginal inflation; but still in real terms the interest is negative for anything under 15 years of maturity.

If you look at the maturity distribution of the German Bundesanleihen and note that the abscissa is logarithmic you see two things:

A ) The volume is lower than the value – meaning that all German sovereign bonds are above par value – meaning as they reach maturity there will be a dead certain loss.

B) There is a freight train coming down the tunnel: There is a large lump of between 4 and 8 years before maturity – some of them carrying a hefty coupon – for Germany. That is a remnant of some very long bonds issued at the time of the German reunification now approaching maturity.

The problem is that you can’t get rid of these bonds, as a rate of 120 means an average loss of about 5 percent if you hold them to maturity – deducted from a coupon of 3-4 percent. Well you can sell them at a price to some German pension funds that are allowed to “strip” them (i.e. separate interest from the principal) – but that again means you can’t buy them either, as only the pension fund is allowed to rejoin them again.

That is the real attack on the banks: You might extend credit to them for next to no money; but they have nowhere to place them. That is probably why stock continues to go up with scant regard for the earning power of the company: Even bank shares are holding their own. If there were a decent growth it could be argued there would be some profits to be earned in the future – for some of the companies; but not across the board.

german sovereign bonds

Tagging the securities

The Tobin tax has been very much misunderstood – the trick is not to generate tax revenue – though that side effect has been emphasized. Looking to the real issue there are two purposes, I can find:

i) Limiting the bingo-parlour revenue of the banks. Greece showed that the gross Credit Default Swap positions to be 70 bio. EUR, but the net was only 3-4 bio. EUR. The trade volume is out of proportion to any sensible need. Lehman Brothers showed that insurance has no point if the insurer can’t meet obligations. This means there will be very little tax revenue generated.

ii) The consideration was that if both the buyer and seller were non-EU there would be no meaning anyway. That is a misunderstanding! The link is the security: Presenting a German Bundesanleihe on reaching maturity would raise the question as to documenting paid Tobin-tax – no Tobin-tax receipt – no pay out. Furthermore your title to the security would lead a trail further and further – perhaps until some seller that might not have declared the possession on his form.

Killing gold

If you have a disinclination to have your name all over your valuables, gold has always been the last refuge of the scoundrel. Apparently not anymore!

The panic surrounding Cyprus should have meant that a lot of frightened would flee into gold with rocketing price as a result – well, it didn’t – instead gold dropped 20 percent. True it regained half, as there was some profit taking by short sellers – it has since come down again to the drop of 20 percent. Bundesbank CEO Jens Weidmann’s proposal to Cyprus, that they should sell their gold reserve might even have been well intentioned. But then again a measly 10 tons should not have been enough to stem a tide. Besides it doesn’t explain why both silver and copper dropped as well.

Strangely enough a price drop fit the German purpose of blocking all escapes for the ill-gotten gains. The message isn’t that ambiguous: “Run to gold – splendid! I with the world’s second largest gold reserve and some influence over the French and Italian (the three together the same size as the US reserve). I might just think of shifting some loose change in my pocket and make it a certainty that you lose what little you have rescued!”

Would Jens Weidmann be so mean to tax evaders? What do you think?

Generally: Do you get my drift? Conspiracy? Well, personally I prefer the word coordinated action!

gold prices average 1999 2003