Tag: Switzerland

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

What’s the Better Role Model, France or Switzerland?

At the European Resource Bank conference earlier this month, Pierre Bessard from Switzerland’s Institut Liberal spoke on a panel investigating “The Link between the Weight of the State and Economic prosperity.”

His presentation included two slides that definitely are worth sharing.

The first slide, which is based on research from the Boston Consulting Group, looks at which jurisdictions have the most households with more than $1 million of wealth.

Switzerland is the easy winner, and you probably won’t be surprised to see Hong Kong and Singapore also do very well.

Switzerland Liberal Institute 2

Gee, I wonder if the fact that Switzerland (#4), Hong Kong (#1), and Singapore (#2) score highly on the Economic Freedom of the World index has any connection with their comparative prosperity?

That’s a rhetorical question, of course.

Most sensible people already understand that countries with free markets and small government out-perform nations with big welfare states and lots of intervention.

Speaking of which, let’s look at Pierre’s slide that compares Swiss public finances with the dismal numbers from Eurozone nations.

Switzerland Liberal Institute 1

The most impressive part of this data is the way Switzerland has maintained a much smaller burden of government spending.

One reason for this superior outcome is the Swiss “Debt Brake,” a voter-imposed spending cap that basically prevents politicians from increasing spending faster than inflation plus population.

Now let’s compare Switzerland and France, which is what I did last Saturday at the Free Market Road Show conference in Paris.

As part of my remarks, I asked the audience whether they thought that their government, which consumes 57 percent of GDP, gives them better services than Germany’s government, which consumes 45 percent of GDP.

They said no.

I then asked if they got better government than citizens of Canada, where government consumes 41 percent of GDP.

They said no.

And I concluded by asking them whether they got better government than the people of Switzerland, where government is only 34 percent of economic output (I used OECD data for my comparisons, which is why my numbers are not identical to Pierre’s numbers).

Once again, they said no.

The fundamental question, then, is why French politicians impose such a heavy burden of government spending - with a very high cost to the economy - when citizens don’t get better services?

Or maybe the real question is why French voters elect politicians that pursue such senseless policies?

But to be fair, we should ask why American voters elected Bush and Obama, both of whom have made America more like France?

OECD Study Admits Income Taxes Penalize Growth, Acknowledges that Tax Competition Restrains Excessive Government

I have to start this post with a big caveat.

I’m not a fan of the Paris-based Organization for Economic Cooperation and Development. The international bureaucracy is infamous for using American tax dollars to promote a statist economic agenda. Most recently, it launched a new scheme to raise the tax burden on multinational companies, which is really just a backdoor way of saying that the OECD (and the high-tax nations that it represents) wants higher taxes on workers, consumers, and shareholders. But the OECD’s anti-market agenda goes much deeper.

Now that there’s no ambiguity about my overall position, I can admit that the OECD isn’t always on the wrong side. Much of the bad policy comes from its committee system, which brings together bureaucrats from member nations.

The OECD also has an economics department, and they sometimes produce good work. Most recently, they produced a report on the Swiss tax system that contains some very sound analysis, including a rejection of Obama-style class warfare and a call to lower income tax burdens.

Shifting the taxation of income to the taxation of consumption may be beneficial for boosting economic activity (Johansson et al., 2008 provide evidence across OECD economies). These benefits may be bigger if personal income taxes are lowered rather than social security contributions, because personal income tax also discourages entrepreneurial activity and investment more broadly.

I somewhat disagree with the assertion that payroll taxes do more damage than VAT taxes. They both drive a wedge between pre-tax income and post-tax consumption. But the point about income taxes is right on the mark.

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

Swiss Monetary Policy: Dangerous Contradictions

The Swiss National Bank is conducting a bizarre, contradictory, and potentially dangerous set of monetary policies.

During the past year, the SNB has mandated the imposition of super-high bank capital requirements. Indeed, the SNB, in its annual Financial Stability Report, even admonished Credit Suisse for not building up a big enough capital cushion. The Swiss capital mandates have caused the rate of growth in money created by Swiss banks (bank money) to plunge.

As can be seen in the accompanying chart, Swiss bank money was 25 percent lower in July 2012 than it was in July 2011. This should be alarming because bank money is, by far, the biggest component of the total money supply. In fact, since the beginning of 2003, bank money has, on average, constituted 89 percent of the total Swiss money supply.

Bank regulations in Switzerland and elsewhere, have resulted in, you guessed it: very tight bank money.

Not being one to sit on its hands, the SNB has turned on its money pumps. Indeed, Swiss state money—the money produced by the SNB—was 305 percent higher in July 2012 than in July 2011.

This explosion in state money has been more than enough to offset the contraction of the all-important bank money component.

In consequence, Switzerland’s total money supply grew at a 10 percent year-over-year rate in July 2012. With double-digit money supply growth, and overall prices declining, it’s little wonder that prices in certain asset classes, such as housing, are surging in Switzerland.

Switzerland’s ‘Debt Brake’ Is a Role Model for Spending Control and Fiscal Restraint

I’ve argued, ad nauseam, that the single most important goal of fiscal policy is (or should be) to make sure the private sector grows faster than the government. This “golden rule” is the best way of enabling growth and avoiding fiscal crises, and I’ve cited nations that have made progress by restraining government spending.

But what’s the best way of actually imposing such a rule, particularly since politicians like using taxpayer money as a slush fund?

Well, the Swiss voters took matters into their own hands, as I describe in today’s Wall Street Journal.

Americans looking for a way to tame government profligacy should look to Switzerland. In 2001, 85% of its voters approved an initiative that effectively requires its central government spending to grow no faster than trendline revenue. The reform, called a “debt brake” in Switzerland, has been very successful. Before the law went into effect in 2003, government spending was expanding by an average of 4.3% per year. Since then it’s increased by only 2.6% annually.

So how does this system work?

Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period (as calculated by the Swiss Federal Department of Finance). This feature appeals to Keynesians, who like deficit spending when the economy stumbles and tax revenues dip. But it appeals to proponents of good fiscal policy, because politicians aren’t able to boost spending when the economy is doing well and the Treasury is flush with cash. Equally important, it is very difficult for politicians to increase the spending cap by raising taxes. Maximum rates for most national taxes in Switzerland are constitutionally set (such as by an 11.5% income tax, an 8% value-added tax and an 8.5% corporate tax). The rates can only be changed by a double-majority referendum, which means a majority of voters in a majority of cantons would have to agree.

In other words, the debt brake isn’t a de jure spending cap, but it is a de facto spending cap. And capping the growth of spending (which is the underlying disease) is the best way of controlling red ink (the symptom of excessive government).

Switzerland’s spending cap has helped the country avoid the fiscal crisis affecting so many other European nations. Annual central government spending today is less than 20% of gross domestic product, and total spending by all levels of government is about 34% of GDP. That’s a decline from 36% when the debt brake took effect. This may not sound impressive, but it’s remarkable considering how the burden of government has jumped in most other developed nations. In the U.S., total government spending has jumped to 41% of GDP from 36% during the same time period.

Switzerland is moving in the right direction and the United States is going in the wrong direction. The obvious lesson (to normal people) is that America should copy the Swiss. Congressman Kevin Brady has a proposal to do something similar to the debt brake.

Rep. Kevin Brady (R., Texas), vice chairman of the Joint Economic Committee, has introduced legislation that is akin to the Swiss debt brake. Called the Maximizing America’s Prosperity Act, his bill would impose direct spending caps, but tied to “potential GDP.” … Since potential GDP is a reasonably stable variable (like average revenue growth in the Swiss system), this approach creates a sustainable glide path for spending restraint.

In some sense, Brady’s MAP Act is akin to Sen. Corker’s CAP Act, but the use of “potential GDP” makes the reform more sustainable because economic fluctuations don’t enable big deviations in the amount of allowable spending.

To conclude, we know the right policy. It is spending restraint. We also know a policy that will achieve spending restraint. A binding spending cap. The problem, as I note in my op-ed, is that “politicians don’t want any type of constraint on their ability to buy votes with other people’s money.”

Overcoming that obstacle is the real challenge.

P.S. A special thanks to Pierre Bessard, the President of Switzerland’s Liberales Institut. He is a superb public intellectual and his willingness to share his knowledge of the Swiss debt brake was invaluable in helping me write my column.

Patriotism, Loyalty, Tax Competition, and ‘Tax Fugitives’

I fight to preserve tax competition, fiscal sovereignty, and financial privacy for the simple reason that politicians are less likely to impose destructive tax policy if they know that labor and capital can escape to jurisdictions with more responsible fiscal climates.

My opponents in this battle are high-tax governments, statist international bureaucracies such as the Organisation for Economic Co-operation and Development (OECD), and left-wing pressure groups, all of which want to impose some sort of global tax cartel—sort of an “OPEC for politicians.”

In my years of fighting this battle, I’ve has some strange experiences, most notably in 2008 when the OECD threatened to have me thrown in a Mexican jail for the supposed crime of standing in a public area of a hotel and advising representatives of low-tax jurisdictions on how best to resist fiscal imperialism.

A few other bizarre episodes occurred in Barbados, back when I was first getting involved in the issue. Here’s a summary of that adventure.

As part of its “harmful tax competition” project, the OECD had called a meeting in 2001 and invited officials from the so-called tax havens to attend in hopes of getting them to surrender their fiscal sovereignty and agree to become deputy tax collectors for uncompetitive welfare states.

Realizing that the small, relatively powerless low-tax nations and territories would be out-gunned and out-manned in such a setting, I organized a delegation of liberty-minded Americans to travel to Barbados and help fight back (as regular readers know, I’m willing to make big sacrifices and go to the Caribbean when it’s winter in Washington).

One of the low-tax nations asked me to provide technical assistance, so they made me part of their delegation. But when I got to the OECD conference, the bureaucrats refused to let me participate. That initial obstacle was overcome, though, when representatives from the low-tax country arrived and they created a stink.

So I got my credentials and went into the conference. But this obviously caused some consternation. Bureaucrats from the OECD and representatives from the Clinton Treasury Department (this was before Bush’s inauguration)  began whispering to each other, followed by some OECD flunky coming over to demand my credentials. I showed my badge, which temporarily stymied the bad guys.

But then a break was called and the OECD announced that the conference couldn’t continue if I was in the room. The fact that the OECD and some of the high-tax nations had technical consultants of their own was immaterial. The conference was supposed to be rigged to generate a certain outcome, and my presence was viewed as a threat.

Given the way things were going, with the OECD on the defensive and low-tax jurisdictions unwilling to capitulate, we decided to let the bureaucrats have a symbolic victory—especially since all that really happened is that I sat outside the conference room and representatives from the low-tax jurisdictions would come out every few minutes and brief me on what was happening. And everything ended well, with the high-tax nations failing in their goal of getting low-tax jurisdictions to surrender by signing “commitment letters” drafted by the OECD.

While the controversy over my participation in the meeting was indicative of the OECD’s unethical and biased behavior, the weirdest part of the Barbados trip occurred at the post-conference reception at the prime minister’s residence.

I was feeling rather happy about the OECD’s failure, so I was enjoying the evening. But not everybody was pleased with the outcome. One of the Clinton Treasury Department officials came up and basically accused me of being disloyal to the United States because I opposed the administration’s policy while on foreign soil.

As you can probably imagine, that was not an effective argument. As this t-shirt indicates, my patriotism is to the ideals of the Founding Fathers, not to the statist actions of the U.S. government. And I also thought it was rather silly for the Treasury Department bureaucrat to make that argument when there was only a week or so left before Clinton was leaving office.

I’m reminded of this bit of personal history because of some recent developments in the area of international taxation.

The federal government recently declared that a Swiss bank is a “fugitive” because it refuses to acquiesce to American tax law and instead is obeying Switzerland’s admirable human rights policy of protecting financial privacy. Here are some details from a report by Reuters.

Wegelin & Co, the oldest Swiss private bank, was declared a fugitive after failing to show up in a U.S. court to answer a criminal charge that it conspired to help wealthy Americans evade taxes. …The indictment of Wegelin, which was founded in 1741, was the first in which the United States accused a foreign bank, rather than individuals, of helping Americans commit tax fraud. …Wegelin issued a statement from Switzerland saying it has not been served with a criminal summons and therefore was not required to appear in court. “The circumstances create a clear dilemma for Wegelin & Co,” it said. “If it were to adhere to current U.S. legal practice aimed at Swiss banks, it would have to breach Swiss law.” …Wegelin has no branches outside Switzerland.

It’s time for me to again be unpatriotic because I’m on the side of the “fugitive.” To be blunt, a Swiss bank operating on Swiss soil has no obligation to enforce bad U.S. tax law.

To understand the principles at stake, let’s turn the tables. What if the Iranian government demanded that the American government extradite Iranian exiles who write articles critical of that country’s leadership? Would the Justice Department agree that the Iranian government had the right to persecute and prosecute people who didn’t break U.S. law? Of course not (at least I hope not!).

Or what if the Chinese government requested the extradition of Tiananmen Square protesters who fled to the United States? Again, I would hope the federal government would say to go jump in a lake because it’s not a crime in America to believe in free speech.

I could provide dozens of additional examples, but I assume you get the point. Nations only cooperate with each other when they share the same laws (and the same values, including due process legal protections).

This is why Wegelin is not cooperating with the United States government, and this is why genuine patriots who believe in the rule of law should be on the side of the “fugitive.”

For further information, here’s a video I narrated on tax competition.

The moral of the story is that “tough on crime” is the right approach, but only when laws are just. At the risk of stating the obvious, the Internal Revenue Code does not meet that test—especially when the IRS is trying to enforce it in a grossly improper extraterritorial fashion.