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Europe Testing How Much Tax Is Too Much

Geoff Cutmore|CNBC Anchor
Friday, 5 Feb 2010 | 6:27 AM ET

Here we go again. The German government said this week it's going to buy a stolen CD which apparently contains the names of 1,500 Germans with secret bank accounts in Switzerland.

German Chancellor Angela Merkel
Getty Images
German Chancellor Angela Merkel

Does it matter that it appears the CD is "hot" property ?

There is a lively debate in Germany, led by some opposition politicians, that dealing in stolen materials lowers the state to the same level as the thieves. But the move appears to be very popular across the country as a whole. Polls on the question have shown majority support for exposing tax cheats regardless of the method used.

Angela Merkel needs a populist cause to get behind. The Federal Government has a budget deficit of $120 billion. No matter that undeclared taxes would only bring in $200 million to $300 million -- and that will hardly make a dent in the black hole -- it is a distraction from the real issue of how public spending gets cut.

The story will affect the way foreign banks deal with German citizens. Swiss banks in particular will have to be mindful of the risks associated with opening accounts for Germans.

How Much Tax Is too Much?

Discussion of this topic on "Squawk Box Europe" brought howls of viewer protests on both sides of the story. The middle classes in paid employment, where income tax is deducted at the source, are being squeezed hard.

In the UK, tax changes mean any employee making more than $150,000 a year will end up working for the government until August. That leaves the final four months of the year for them to make something for themselves and their families.

For higher earners in Germany, and other European economies, that are on the payroll, tax rates are only slightly better. So how do higher rate taxpayers remain motivated to turn up to the day job? Are government’s now creating disincentives to wealth creation?

Taxes and Blowout Budgets

Have our politicians joined the dots? Could swinging deficits and tax evasion be connected to innapropriate spending and tax policies? The academic evidence suggests there is a rate at which tax take falls as wealth creators are discouraged from working harder.

Europe’s politicians have a tough choice.

Make unpopular cuts in public services, encourage wealth creation through sensible tax policy, and risk the wrath of the electorate.

Or, take the populist route, tax the wealth creators aggressively, maintain unaffordable public services and win electoral support.

Perhaps the German interest in a stolen bank CD indicates the direction our politicians are likely to take.

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Contact Europe: Economy

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