Center for Freedom and Prosperity Foundation
For Immediate Release
Wednesday, February 14, 2007
The Swiss Tax System: Showing the Benefits of Genuine Federalism and Financial Privacy
CF&P Foundation Issues Third in a Series on Country Tax Systems
(Washington, DC, Wednesday, February 14, 2007) -- Today, the Center for Freedom
and Prosperity Foundation released its third research paper in a series of studies examining different tax systems from around the world. The study, entitled "The Swiss Tax System -- Key Features and Lessons for Policy Makers," is authored by Pierre
Bessard, executive director of the Institut Constant de Rebecque in Lausanne, Switzerland, and represents a comprehensive analysis of the Swiss tax system. Mr. Bessard finds that Switzerland's fiscal decentralization (which promotes relatively low tax rates), respect for financial privacy, and attractive business tax laws combine to generate significant benefits – including the greatest accumulation of per capita wealth in the world, high living standards, and extremely low levels of unemployment. But Switzerland faces important challenges. The burden of taxation has jumped by 50 percent since 1970 because of rising welfare state expenditures, and demographic pressures may lead to even more government in the future. Moreover, high-tax European nations are attacking the Swiss tax system for luring jobs and investments from other countries. These issues and many others are discussed in CF&P Foundation's recent study on Switzerland's tax system.
Link: The Swiss Tax System -- Key Features and Lessons for Policy Makers
Below: Executive Summary and Key Observations
Comments on the study:
Andrew Quinlan, CF&P Foundation ~ "Pierre Bessard of the Institut Constant de Rebecque in Lausanne, Switzerland has written an excellent primer on what works and what does not work in Switzerland. Like our studies on Sweden and Slovakia, this study on the Swiss tax system contains important lessons for U.S. Policymakers."
Daniel Mitchell, Cato Institute ~ "Switzerland has a true federal system, with the central government accounting for less than one-third of the nation's fiscal burden. This has facilitated competition among cantons, which has helped to keep tax rates at reasonable levels. Other nations – including America – should mimic this successful system."
Veronique de Rugy, American Enterprise Institute ~ "Switzerland's tax system has much to admire. It has low tax rates compared to other European nations. There is relatively little double taxation of income that is saved and invested. And financial privacy laws have made the banking system a safe haven for oppressed people around the world."
Note: Over the next few months, the CF&P Foundation will release several more papers reviewing the tax systems of selected countries. The next two studies will examine the tax system of Hong Kong and Russia. We also plan on issuing studies on the tax regimes of Ireland, France, and the United Kingdom. The two previous published papers in the series were on the tax systems of Sweden and Slovakia.
Relatively low tax rates, respect for financial privacy, and attractive business tax laws have given Switzerland a reputation as a tax
haven. But Switzerland is only a low-tax nation compared to its European neighbors. Tax revenues consume nearly 30 percent of gross domestic product, which is higher than the U.S. tax burden. Set up as a federal
system like the U.S., the 26 Swiss cantons are largely independent in setting their own taxes. But unlike the U.S., where the federal government now plays a dominant role in fiscal policy, the Swiss central
government accounts for less than one-third of total taxes and spending. This decentralization is a key feature of the Swiss tax system. Effective tax levels may vary by as much as 300 percent from one canton to
another. Tax levels may also differ significantly among municipalities, which are free to set their own rates. In recent years this highly decentralized setup has played an increasing role in keeping tax levels in
check and introducing innovative tax reforms (in part because tax increases almost always require approval by voters), such as degressive marginal tax rates on higher income brackets. Although Switzerland has not
been immune from public policy mistakes, the country has remained one of the richest in Europe since the late 19th century. Today it enjoys the greatest accumulated wealth per capita in the world, and unemployment,
at around three percent, is low. This would seem to indicate that some of the features of the Swiss system – in particular radical decentralization and the ensuing tax competition – play some part in enhancing
prosperity, in particular by providing taxpayers with more choice and better protection of their property rights.
- Switzerland has not enjoyed rapid growth in recent decades. Yet it still ends up in leading positions in income per capita, wealth per capita or competitiveness rankings. For example Switzerland
ranks first in the 2006 World Economic Forum's Global Competitiveness Report. This is known as "the Swiss paradox" and can be explained by Switzerland's long-standing openness toward global trade and investment,
whereby substantial revenues are repatriated from abroad.
- Switzerland's decentralized tax system makes any comprehensive or sweeping tax changes very difficult or lengthy to implement. This has proved a decisive advantage since harmful policies are
often turned down by cantons and voters in referenda. Such failed initiatives include a plan in 2001 to introduce a personal capital gains tax, and another in 1977 to unify cantonal taxes and to introduce a
federal wealth tax.
- International tax competition has long been a way of life for Switzerland, and national tax competition has been important for a number of smaller cantons in central Switzerland. However,
national tax competition recently intensified following a 2004 reform of inter-cantonal financial equalization (a program similar to interstate fiscal transfers in the U.S) with improved incentives for better
tax policies and tax reductions in subsidized cantons.
- A corporate tax reform in 1997 significantly enhanced the tax environment for holding and administrative companies, making Switzerland a favorite location for regional European or world
headquarters. In addition to very low effective tax rates, Switzerland's tax laws do not include any controlled foreign corporation provision, so that profits from foreign subsidiaries are tax-exempt before
distribution. Neither is there a "subject to tax" clause requiring income from foreign subsidiaries to be taxed abroad at a certain level in order to be tax-exempt in Switzerland. Thanks to an extensive treaty
network, including with the European Union, dividends, royalties and interests paid to affiliated companies are mostly tax-exempt.
- Swiss financial privacy laws are relevant to the tax system in that tax authorities do not have access to any financial information not expressly declared by taxpayers. In order to prevent tax
evasion, however, the government imposes a refundable withholding tax on interest and dividend payments to Swiss residents, whereby financial institutions transfer the tax anonymously. The existence of bank
secrecy also has important implications for the tax laws of other nations since Switzerland is a safe haven for foreigners seeking to escape oppressive levels of taxation. And because these nations have to worry
that the geese with the golden eggs can fly across the border, they have much less ability to impose and enforce bad tax laws that discriminate against capital income.
- Swiss legislation distinguishes between tax "subtraction", an administrative offense, and tax fraud, a criminal offense. Tax subtraction occurs when a taxpayer forgets to declare or conceals
income or wealth; tax fraud implies the deliberate falsification of records. This distinction reflects the need for a higher level of government legitimacy in the eyes of citizens and results in higher levels of
tax morale. Switzerland therefore does not recognize ordinary tax evasion as a crime and consequently does not assist foreign governments in prosecuting taxpayers in such cases. As a compromise, since 2005
a withholding tax has been levied on some savings income paid to European Union residents.
- A new corporate tax reform being implemented in 2007 will reduce the double taxation of distributed profits at investor level for larger participations. Dividends are currently more heavily taxed
in Switzerland than in most other European countries, favoring artificially high profit retention by corporations.
- Other weaknesses of the Swiss tax system include the federal income tax, meant as a temporary measure to finance defense efforts in World War II but still in place, and a federal stamp tax on
some capital market transactions, which has driven several financial sector activities out of Switzerland. In addition, the cantonal taxation of capital and wealth can be especially punitive for small and
medium-sized enterprises. And overall tax levels tend to be high in most cantons even if they compare favorably with the least attractive European countries.
Link to paper:
PDF version of paper:
For additional comments:
Pierre Bessard can be reached at firstname.lastname@example.org
Andrew Quinlan can be reached at 202-285-0244, email@example.com
Dan Mitchell can be reached at 202-218-4615, firstname.lastname@example.org
Veronique de Rugy can be reached at 202-862-7165, VdeRugy@aei.org