Cuckoo for Switzerland

Saturday, March 29th, 2008

Cuckoo for Switzerland opens with a famous line about the land-locked nation:

Being small and successful, frankly, is boring to many people. Consider the Cold War spy movie “The Third Man.” In a famous scene, the shady character played by Orson Welles observes, “In Italy, for 30 years under the Borgias, they had warfare, terror, murder, bloodshed—they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland, they had brotherly love; they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.” To add insult to slur, the cuckoo clock is actually from Germany.

A century ago, Switzerland was poorer than Argentina, but times have changed. Part of this is Switzerland’s tax policy — or number of policies:

Indeed, each canton (the equivalent of a U.S. state) is allowed to set its own tax policy, and many sign individual contracts with high-income foreigners specifying what their tax rate will be should they settle in the country. This brings the country both glamorous residents, such as British actor Roger Moore, along with controversial personalities, such as financier Marc Rich. An international commodities trader, he fled the United States in 1983 to live in Switzerland while being prosecuted on charges of tax evasion and making illicit oil deals with Iran during the hostage crisis. He received a pardon from President Bill Clinton in 2001.

Corporate taxes are levied at both the federal and cantonal level. The federal tax rate is the same throughout Switzerland, at 8.5 percent for corporate income, with cantons adding their own modest corporate tax rate on top of that. Cantonal income tax rates also vary. This has resulted in a form of tax competition within the country. In 2004, the canton of Schaffhausen lowered taxes to induce high-income earners to move to it. Other cantons have followed. The latest is the canton of Obwalden, whose citizens voted nine to one last December to impose a 1.8 percent income tax rate. The first $8,700 of income will be exempt, in order to ensure a slight, progressive tilt to the system.

The Swiss finance minister, Hans-Rudolf Merz, has publicly welcomed the flurry of tax competition. In a recent speech, he said that tax competition protects the citizen from the “excessive tax appetite” of governments and that it was one of the most important tools for budgetary discipline. Finally, he stressed that tax competition is a valuable “discovery procedure” leading to new and innovative taxation models. On a federal level, almost everything had been learned from watching the cantons experiment.

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