Acton Commentary

Liechtenstein’s Tax War


As the ongoing global financial crisis continues to shake the world’s economies, it’s no surprise banks are under increased scrutiny. Few would have predicted, however, that the spotlight would turn to tiny Liechtenstein.

A war of words has just erupted between the small Alpine principality and Germany over German citizens placing assets in Liechtenstein’s banks in order to reduce their tax bills.

The skirmishing broke out when Berlin admitted that, as part of an investigation into some Germans’ alleged tax evasion, it had purchased data about a Liechtenstein bank’s clients from a former bank employee who allegedly stole the information and broke banking-confidentiality laws.

In other words, Germany purchased information obtained through what may have been a criminal violation of perfectly just, legitimate and — in Liechtenstein’s case — constitutionally-grounded laws. No wonder Liechtenstein’s Crown Prince Alois described German authorities as using “methods that defy the rule of law.”

Europe’s governments don’t like Liechtenstein’s low taxes or the fact that many European companies avail themselves of the principality’s low corporate tax-rates. But that hardly gives Berlin the right to allegedly act as what is commonly known as a receiver of stolen goods — a problem compounded by reports that Germany is offering the material to other countries.

Crown Prince Alois upped the ante, however, when he stated that, “Germany will not solve its problems with its taxpayers by attacking Liechtenstein. Germany has the worst tax system in the world.” Burdensome taxation is just one of the current economic problems facing “old Europe,” against which Liechtenstein stands as a living contrast. In many respects, Liechtenstein exemplifies what a successful free, integrated, prosperous, market-orientated and low-tax European society might look like.

Liechtenstein became a sovereign state in 1806 following the Holy Roman Empire’s dissolution. Until 1918, it was closely linked to the Austro-Hungarian Empire, but entered into a customs and monetary union with Switzerland following World War I. After inter-war instability and a successful effort to avoid being swallowed by National Socialist Germany, Liechtenstein began its rise to prosperity in the 1950s. The growth which made it one of the world’s richest countries had many causes, but central to Liechtenstein’s success were two factors.

The first was the decision to specialize in activities which Liechtenstein did extremely well: financial services and high-tech industries. The second was Liechtenstein’s adherence to Adam Smith’s famous observation, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”

Thus not only have Liechtensteiners profited from the fact that the state takes relatively little of their wealth, but they are not burdened with the type of opulent welfare bureaucracies that characterize “Social Europe.” Hence Liechtenstein’s government regularly runs surpluses rather than deficits. Its unemployment rate is presently 2.7 percent.

Liechtenstein has also managed to avoid some of the social problems characterizing much of Western Europe. Thirty-four percent of Liechtenstein’s population is foreign-born. But it has pointedly rejected the multiculturalist ideology presently crippling many European countries’ ability to escape the shackles of political correctness. Instead Liechtenstein unapologetically focuses on integrating all resident foreigners, including requiring them to learn German, the country’s official language.

Likewise, though a largely Catholic country, Liechtenstein has a strong tradition of religious liberty. This doesn’t involve, however, any nonsense about incorporating shari’a law into Liechtenstein’s civil law.

In short, the rest of Europe could learn much from Liechtenstein. Instead of harassing Germans weary of Germany’s oppressive taxes, the German government would be better off investing its energies in trying — yet again — to reform Germany’s — yet again — faltering economy. Liechtenstein would be a good model.

Not that Liechtenstein is likely to be intimidated by Germany’s recent actions. The country has a proud reputation for defying some formidable bullies. In 1945, a group of Russians fleeing Communist tyranny crossed Liechtenstein’s border seeking refuge from the Red Army. Despite lacking an army and in the face of overwhelming force, little Liechtenstein refused to give up the refugees. In 1993, the Nobel Prize winner Aleksandr Solzhenitsyn called this act an “outstanding lesson in courage.”

Solzhenitsyn contrasted it with the behavior of the Western powers who handed over thousands of anti-Communist Soviet citizens to Soviet forces, who swiftly dispatched them to the degradation and death of Stalin’s Gulag.

Liechtenstein’s present challenges don’t quite fall into the same category of defying criminal regimes like the Soviet Union. But as long as Liechtenstein refuses to bow to Social Europe’s pressures to diminish its freedoms, we’ll know that liberty in Western Europe is alive, albeit not well.

Dr. Samuel Gregg is research director at the Acton Institute and author, most recently, of The Commercial Society (2007).