Taxes: Europe’s New Battlefield

By most standards, Switzerland is surely one of the world's most inoffensive nations. Resolutely neutral, this small landlocked country is often associated with gentle pastimes such as clock-making, skiing, and Alpine scenery. Many will be therefore surprised to learn that Switzerland has become the target of angry protests by European Union officials and sundry European politicians. Judging from their tone, one would imagine Switzerland had engaged in gross human-rights violations.

But, instead, the EU's ire is directed against Switzerland's tax rates. The war of words was ignited by the French rock star Johnny Hallyday's decision in late 2006 to move to Gstaad, Switzerland, because he was tired of France's exorbitant tax rates. Mr. Hallyday joins an exodus of individuals and companies from France, Germany, Italy, and Austria taking advantage of Switzerland's 21 percent overall tax rate and considerably lower corporate tax rates. Liechtenstein, Switzerland's tiny neighbor, maintains even lower tax rates and has benefited from a similar flight.

For corporate tax exiles in Switzerland, the situation is especially advantageous. Each canton sets its own corporate tax rates. This has triggered intense competition between cantons anxious to attract new businesses. In January 2006, for example, the central Swiss canton of Obwalden reduced its corporate tax rate to 6.6 percent. Over 11 months, it attracted 376 new companies. No wonder large corporations such as Google and IBM have located their European headquarters in Zurich.

 Outside Switzerland, the response has been extraordinary. Some French socialists have accused Switzerland of "looting" its neighbors. This is somewhat strange, given that no-one is forcing these individuals and companies to move to Switzerland. Some would suggest that the real "looters" are French governments of left and right who have raised taxes over the past 40 years to such levels that even many relatively modestly well-off French citizens have left or invested their capital in offshore tax havens.

The EU's new ambassador to Switzerland has charged the Swiss with effectively offering an unfair subsidy that allegedly violates the European Free Trade Agreement. Such statements seem rather self-serving given the EU's routine subsidization of millions of European farmers to the detriment of farmers in Africa and Latin America.

In response, the Swiss government has stated that Switzerland has no agreement for tax harmonization with the EU and is acting quite within its sovereign rights and according to its federalist principles.

"Tax harmonization" in the EU, incidentally, never means lowering tax rates. It invariably involves raising taxes to the same high level. It was on this basis that, when faced with companies leaving Germany to base their headquarters in 19 percent flat-tax Slovakia, Germany's ex-chancellor Gerhard Schroeder once accused Slovakia of "un-European" behavior. To be truly European, apparently, means giving about half your income to the government.

Missing, however, from this debate is any reflection about how to think about taxation in a morally coherent manner. This is not surprising. Even low-tax-inclined economists almost always consider taxation in terms of how governments can maintain their income while diminishing the effects on economic prosperity. In other words, their focus — rightly — tends to be on efficiency issues. Efficiency is not the same, however, as morality. In much of the world, discussion of the morality of taxes has been reduced to the mantra of equalizing incomes as far as possible. Factors such as merit and risk are given short shrift, especially in Europe.

Indeed, we need to return to sixteenth-century Spain to find anything like a rigorous discussion of the morality of tax rates. This was sparked by rising taxation, currency debasements, and official state bankruptcies initiated by King Philip II as he struggled to suppress rebellion in the Netherlands and ward off threats to Spain's worldwide empire.

Reacting to Spain's subsequent impoverishment, Spanish theologians such as Pedro de Navarra insisted that it was not enough for governments to legislate a tax for it to be considered just. Tax laws, they argued, must meet other criteria of justice. Was there a genuine need for a new tax? Were the proposed taxes proportionate and equitable? Were they moderate or excessive? The same scholars claimed that imposing taxes to support wasteful government expenditures was immoral, even tyrannical. In some cases, they added, people could rightly refuse to pay, especially when taxes were taking nations to the edge of financial ruin.

Instead of using morally charged language to declaim Swiss tax policies, perhaps some EU member-states might consider applying these criteria to their own tax regimes. It is hard to imagine that their high tax rates would survive such scrutiny.

The irony is that the surest way for EU members to discourage potential tax exiles from leaving is to reduce their tax rates. There thus seems in this instance to be a happy symmetry between sound moral analysis and fiscal responsibility.

Taxation need not be theft — even in the European Union.

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  • Guest

    "Was there a genuine need for a new tax? Were the proposed taxes proportionate and equitable? Were they moderate or excessive?"… If those questions were applied to American government, there would be one mass political conniption fit! How would Local, State and Federal politicians and their cronies take care of each other without our tax money? Has any politician left office with less net worth than when he first bellied-up to the public trough?

  • Guest

    There was one, Gross of Iowa was in office years and left it just as poor

    as he went in.

    Lower taxes always bring in more money, Kennedy reduced the Income tax, from 91% to 70% and remember the Feds got big increases that LBJ

    said we could buy butter and the war. Reagan reduced it fro m70% to

    28% and the same happen. The bad thing was that congress always found a way to spend it. Bush reduced it some more, and it will end in

    2010 unless it is extended, which is unlikely with present congress.

    Russia reduced their income tax to flat tax of 13% and the got 3 times

    more than before,most of the small ex-soviet states Estonia, Lavita etc

    have flat rates. This ironic as it was communists that made the progressive taxes,which we adopted .