07/09/21

SWITZERLAND: Jurisdiction to vote on raising taxes for investors and company owners.

As published on lenews.ch, Monday 6 September, 2021.

On 26 September 2021, Swiss voters will decide whether to introduce a tax increase on money earned from company ownership and investments.

The initiative named ‘Reduce tax on salaries, tax capital fairly’ aims to have income derived from investments and company ownership taxed at 150% of the rate applied to other income.

The argument put forward by the initiators, a group belonging to the young Socialist Party, is that income such as salary reflects human toil, while income connected to ownership and investment is passive.

The group claim that the 1% richest live at the expense of the rest of the population and that this is exacerbated by the current tax system. With their proposed change the rich would pay more tax and everyone else would pay less.

Essentially, the initiators argue that current system of progressive taxes is insufficiently redistributive and those paying the extra proposed tax could easily afford it.

The wording of the initiative is unclear about what gains or income related to investments and company ownership would be subject to the higher taxes. The point at which the proposed tax increase would kick in is also absent from the wording.

Switzerland’s government is against the plan. Both the Federal Council and Parliament advise voting against it.

The government says that the portion of income coming from investments and other assets in Switzerland has remained broadly stable since the mid 90s. In addition, it says that taxation in Switzerland is already highly redistributive. Switzerland has a wealth tax and tax rates are progressive, rising in line with rising income and rising wealth. Currently, the top 1% of earners pay 40% of Switzerland’s tax, a share far higher that the 10% of the revenue they earn. This means the average rate of tax paid by this group is already 6 times the rate paid by the other 99%.

The government also says that incomes in Switzerland are spread more equally than across most of the OECD. The Gini coefficient, a measure of inequality, was 0.299 in Switzerland in 2020 – a score of 0 is perfect equality and 1 is complete inequality. On this measure, Switzerland (0.299) is more equal than most OECD nations, including Canada (0.301), France (3.01), Greece (0.306), Portugal (3.17), Italy (0.330), Spain (0.330), the United Kingdom (0.366) and the United States (0.390). Costa Rica (0.497) had the highest gini coefficient – see all data here.

In addition, the move would act as a disincentive to invest in Switzerland, something that would weigh on household savings, the entrepreneurial and corporate investment activity that generates jobs, and the nation’s prosperity, said the government. Furthermore, Switzerland’s existing wealth tax and partial double taxation of dividends already make the country quite unattractive for wealthy residents, a group whose choice of residence is sensitive to tax rates.

Based on the tax revenue figures presented by the government above, if a fraction of the highest earning 1% left Switzerland and took 10% of that group’s income and wealth with them, the tax on the remaining 99% would need to rise by an average of 7% to keep tax revenues at their current level. This would mean an average tax payer in the 99% would need to pay CHF 107 for every CHF 100 in tax they currently pay – see note1

The government also argues that the plan would be unfair. Revenue from investment is not passive. It does not come from doing nothing, it says. Entrepreneurs often toil away for years on low salaries in the hope that the future value of their companies might one day compensate them for their years of salary sacrifices, something known as sweat equity. Taxing the return on this toil at 50% higher rates would be unfair. Pensioners living off money earned, saved and invested during their working lives might end up paying more tax too.

Finally, the government says that it is very unlikely that the plan would raise the extra sums expected and that the change would likely increase taxes for more people than the 1% of tax payers initiators claim.