Acton Commentary

Tax: 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 off-shore 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 world-wide 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.