Monday, February 08, 2010

Tax evasion and welfare fraud

Hey all,

now that all the technical stuff is going to the zynamics company blog , I will have some room here for writing about other topics. Beware: Politics might be involved, or just general rants.

Tonight I will write a little bit about tax evasion and welfare fraud. I somehow wound up in a discussion about the topic, and the end result was that I spent 20 minutes doing a bit of research on the topic.

Background: The German government was offered a CD containing data of people that have moved money into swiss bank accounts, presumably to evade taxes. The person offering the CD claims that it contains almost exclusively data of tax evaders, and demands a fee of 2.5 million EU to provide the CD to German authorities.

This situation has spawned a debate about the legality of the situation: Is it "right" for the German government to buy data that was obtained in a presumably illicit fashion ? (I intentionally avoid "illegal" here -- the person that obtained the data might be in breach of contract with his employer, but it is unclear whether he broke any criminal laws)

Clearly, it is a tricky question - but the difficulty of this question is not the topic of this blog post.

Recently, a German politician (who, ironically, was repeatedly involved in corruption affairs, most notably in the CDU-party-donations affair) by the name of "Roland Koch" argued that welfare fraud is a serious problem in Germany, and that 15% of all welware recipients do not actually want to work. He argued for annuling benefits of these 15% in a large conservative newspaper (the FAZ).

So in todays discussion, the question came up: What is actually the "bigger" crime (in terms of financial damage): Tax evasion of welfare fraud ?

It is relatively straightforward to calculate the cost of welfare fraud: Germany spent 21.7 billion EU in 2008 on the "Hartz-4" system. This includes administrative overhead. Assuming that Mr. Kochs claim has merit, and assuming that overhead is also inflated due to fraud, ~3.3 billion EU are lost annually to welfare fraud.

It is much more difficult to calculate the cost of tax evasion. There are many numbers that are difficult to justify, and most appear to be made up arbitrarily. The only halfways reliable number I could find was from this article:

The amount of money generated from tax investigations that followed evasion was ~1.6 billion EU in 2004. Inflation-adjusted to 2008 at 2% inflation, this ends up being ~1.73 billion.

This implies something rather interesting:
  1. Assuming that every third tax evader is caught (which I deem more realistic, just by gut feeling, e.g. without any scientific base), tax evasion is already a much bigger problem than welfare fraud.
The question of course is: What is the actual rate of tax evasion to "getting caught" ?


Barry Kelly said...

My take on this is somewhat more cynical.

Governments care about petty theft, muggings, etc., but don't particularly care about white collar crime that results in losses in the millions, or other fuckups that may result in losses of billions in banks etc. Similarly, they care about welfare fraud, but those people wealthy enough to try their hand at tax fraud are of somewhat less concern.

The wealthy are powerful. If you squeeze them too tightly, they move elsewhere. The wealth of the wealthy is also often bound up in capital structures. The more you try to lay claim to it, the more you end up hurting the industry and economy of your own country.

So the government plays a balancing act. It has harsh penalties for petty crimes and welfare fraud to keep the poor in their place. It's also pretty heavy on the middle classes, to keep tax income high, so tax fraud isn't welcomed here either. But the wealthy? There are all sorts of tax efficient structures for them, and they can get away with extraordinary damage to society at large, and still get bailed out by the government, because of the power they have.

BuschnicK said...

Herdentrieb blogged about this a while ago: