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Archive for the ‘Switzerland’ Category

I’m beginning to think that people from some nations are smarter and more rational than others.

That may explain, for instance, why voters in Estonia support fiscal restraint while voters in France foolishly think the gravy train can continue forever.

But I’m not making an argument about genetic ability. Instead, what I’m actually starting to wonder is whether some political cultures yield smarter and more rational decisions.

Switzerland is a good example. In a referendum this past weekend, an overwhelming majority of voters rejected a proposal to impose a minimum wage. Here are some excerpts from a BBC report.

Swiss voters have overwhelmingly rejected a proposal to introduce what would have been the highest minimum wage in the world in a referendum. Under the plan, employers would have had to pay workers a minimum 22 Swiss francs (about $25; £15; 18 euros) an hour. …critics argued that it would raise production costs and increase unemployment. The minimum wage proposal was rejected by 76% of voters. Supporters had argued it would “protect equitable pay” but the Swiss Business Federation said it would harm low-paid workers in particular. …unions are angry that Switzerland – one of the richest countries in the world – does not have a minimum pay level while neighbouring France and Germany do.

Every single Swiss Canton voted against the minimum wage.

That means the French-speaking cantons voted no, even though the French-speaking people in France routinely support politicians who favor bad policy.

That means the German-speaking cantons voted no, even though the German-speaking people in Germany routinely support politicians who favor bad policy.

And it means that the Italian-speaking canton voted no, even though the Italian-speaking people in Italy routinely support politicians who favor bad policy.

So why is it that the same people, genetically speaking, make smart decisions in Switzerland and dumb decisions elsewhere?

I don’t have an answer, but here’s some more evidence. As you can see from these passages in a New York Times story, the Swiss have a lot more common sense than their neighbors.

“A fixed salary has never been a good way to fight the problem,” said Johann Schneider-Ammann, the economic minister. “If the initiative had been accepted, it would have led to workplace losses, especially in rural areas where less-qualified people have a harder time finding jobs. The best remedy against poverty is work.” …“Switzerland, especially in popular votes, has never had a tradition of approving state intervention in the labor markets,” said Daniel Kubler, a professor of political science at the University of Zurich. “A majority of Swiss has always thought, and still seems to think, that liberal economic principles are the basis of their model of success.”

Even the non-Swiss in Switzerland are rational. Check out this blurb from a story which appeared before the vote in USA Today.

…some who would be eligible for the higher wage worry that it may do more harm than good. Luisa Almeida is an immigrant from Portugal who works in Switzerland as a housekeeper and nanny. Almeida’s earnings of $3,250 a month are below the proposed minimum wage but still much more than she’d make in Portugal. Since she is not a Swiss citizen, she cannot vote but if she could, “I would vote ‘no’,” she says. “If my employer had to pay me more money, he wouldn’t be able to keep me on and I’d lose the job.”

Heck, I’m wondering if Ms. Almeida would be willing to come to Washington and educate Barack Obama. Minimum Wage BensonShe obviously has enough smarts to figure out the indirect negative impact of government intervention, so her counsel would be very valuable in DC.

But if Ms. Almeida isn’t available, we have another foreigner who already has provided advice on the issue of minimum wages. Here’s Orphe Divougny, originally from Gabon, with a common-sense explanation of why it doesn’t make sense to hurt low-skilled workers.

By the way, this isn’t the first time the Swiss have demonstrated common sense when asked to vote of key economic policy issues.

In 2001, 85 percent of voters approved a plan to cap the growth of government spending.

In 2010, 59 percent of voters rejected an Obama-style class-warfare tax plan.

No wonder there are many reasons why Switzerland ranks above the United States.

P.S. I wrote earlier this month about Pfizer’s potential merger that would allow the company to reduce its onerous tax burden to the IRS by redomiciling in the United Kingdom.

Well, Jeff Jacoby of the Boston Globe has weighed in on the issue and I can’t resist sharing this excerpt.

…the outrage isn’t the wish of an American corporation to lower its tax bill. It is a US tax code so punitive and counterproductive that it can drive a company like Pfizer, which was launched in Brooklyn in 1849, to turn itself into a foreign corporation. The United States has the highest corporate tax rate in the developed world. That puts American companies at a serious competitive disadvantage, since their rivals elsewhere are able to channel more of their profits into new investment, hiring, and productivity. What’s worse, ours is the only country that enforces a system of “worldwide” taxation, which means that American firms have to pay tax to the IRS not only on income earned in the United States but on their foreign earnings as well. Other nations content themselves with “territorial” taxation — they only tax income earned within their national borders. US corporations like Pfizer that have significant earnings overseas are thus taxed on those earnings twice: first by the government of the country where the money was earned, and then by the IRS.

Amen, amen, and amen.

Our tax system imposes a very punitive corporate tax rate.

It then augments the damage with worldwide taxation.

And the system is riddled with onerous rules that cause America to rank a lowly 94th out of 100 nations for business “tax attractiveness.”

In other words, when greedy politicians complain about Pfizer’s possible inversion, it’s a classic case of blaming the victim.

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What happens when you mix something good with something bad?

To be more specific, what happens when you have a big success story, like the spending cap in Switzerland that has dramatically slowed the growth of government, and then expect intelligent and coherent coverage by a government-run media outfit that presumably wants a bigger public sector?

Well, the answer is that you get a very muddled story.

Here’s some of what Swiss Info, which is part of the Swiss Broadcasting Corporation, wrote about that nation’s “debt brake.”

The mind-boggling…debt racked up by governments…has turned some heads towards Switzerland’s successful track record… Swiss voters approved a so-called ‘debt brake’ on federal public finances in 2001, which was put into operation in 2003. A decade later, the mountain of government debt – that soared to dangerous levels during the 1990s and early 2000s – has been reduced by CHF20 billion ($23 billion) from its 2005 peak. The ratio of debt to annual economic output (gross domestic product or GDP)…fell from 53% to 37% between 2005 and the end of 2012.

There’s nothing wrong with that passage. Indeed, you could almost say that Swiss Info was engaging in boosterism.

Moreover, the story points out that other nations have been going in the wrong direction while Switzerland was enjoying success.

…as Switzerland was chipping away at its mountain of debt, other countries were building theirs up. …Since the middle of 2007 public sector debt alone has soared 80% to $43 trillion, according to the Bank for International Settlements.

And the story even notes that other nations are beginning to copy Switzerland.

The Swiss debt brake is the perfect model for other countries to embrace… Germany applied its own version of the Swiss debt brake in 2009, followed by Spain and other European countries.  …“Switzerland came up with the blueprint for what I am sure will be the standard fiscal model of the future,” said Müller-Jentsch.

So why, then, do I think the story has a muddled message?

The answer is that there is no explanation of how the debt brake works and therefore no explanation of why it is a success.

A reader will have no idea, for instance, that the debt brake is actually a spending cap. Readers also will have no way of knowing that red ink has been controlled because the law properly focuses on limiting the growth of spending.

By the way, it wouldn’t have required much research for Swiss Info to include that relevant data. If you do a Google search for “Swiss debt brake,” the first item that appears is the column I wrote in 2012 for the Wall Street Journal.

In that piece, I explained that “Switzerland’s debt brake limits spending growth to average revenue increases over a multiyear period” and I added that “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 why didn’t Swiss Info mention any of this very relevant information? Is it because it tilts to the left like other government-owned media outfits, and the journalists didn’t want to acknowledge that spending restraint is a successful fiscal policy?

I have no idea whether that’s the case, but there is a definite pattern. When I appear on PBS, the deck is usually stacked in favor of statism. Moreover, you won’t be surprised to learn that I’ve had similar experiences with government-run TV in France. And it goes without saying that the BBC in the United Kingdom also leans left (though at least they seem to believe in fair fights).

This video from Swiss Info is similarly vague. It’s a favorable portrayal, but people who watch the video won’t know how the debt brake works or why it has been successful.

P.S.  I don’t know the details about the German version of the debt brake, but it’s probably having some positive impact. The burden of government spending has not increased in that nation since 2009, at least when measured as a share of GDP. Though the Germans also weren’t as profligate as other nations (including the United States) in the years before they adopted a debt brake, so I’ll have to do more research to ascertain whether the German approach is as good as the Swiss approach.

P.P.S. In any event, the moral of the story is that good fiscal policy should be based on the Golden Rule of having government grow slower than the productive sector of the economy.

P.P.S. The Princess of the Levant and I continued our tour of the French Riviera. This photo is from Les Jardins Exotiques at Chateau d’Eze.

photo1(5)

As part of my travels, I’ve learned that the unluckiest people in the world are from Menton and Roquebrune in France. That’s because they were part of Monaco until 1860.

So now, instead of enjoying an income tax of zero under Monegasque rule, they are part of France’s wretched fiscal system.

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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.

The paper looks at changes in the burden of welfare spending over the past 14 years. The story understandably focuses on how the United Kingdom is faring compared to other European nations.

Welfare spending in Britain has increased faster than almost any other country in Europe since 2000, new figures show.  The cost of unemployment benefits, housing support and pensions as share of the economy has increased by more than a quarter over the past thirteen years – growing at a faster rate than in most of the developed world. Spending has gone up from 18.6 per cent of GDP to 23.7 per cent of GDP – an increase of 27 per cent, according to figures from the OECD, the club of most developed nations. By contrast, the average increase in welfare spending in the OECD was 16 per cent.

This map from the story shows how welfare spending has changed in various nations, with darker colors indicating a bigger expansion in the welfare state.

Welfare Spending - Europe

American readers, however, may be more interested in this excerpt.

In the developed world, only the United States and the stricken eurozone states of Ireland, Portugal and Spain – which are blighted by high unemployment – have increased spending quicker than Britain.

Yes, you read correctly. The United States expanded the welfare state faster than almost every European nation.

Here’s another map, but I’ve included North America and pulled out the figures for the countries that suffered the biggest increases in welfare spending. As you can see, only Ireland and Portugal were more profligate than the United States.

Welfare Spending - NA + WE

Needless to say, this is not a good sign for the United States.

But the situation is not hopeless. The aforementioned numbers simply tell us the rate of change in welfare spending. But that doesn’t tell us whether countries have big welfare states or small welfare states.

That’s why I also pulled out the numbers showing the current burden of welfare spending – measured as a share of economic output – for countries in North America and Western Europe.

This data is more favorable to the United States. As you can see, America still has one of the lowest overall levels of welfare spending among developed nations.

Welfare Spending - NA + WE -Share GDP

Ireland also is in a decent position, so the real lesson of the data is that the United States and Ireland must have been in relatively strong shape back in 2000, but the trend over the past 14 years has been very bad.

It’s also no surprise that France is the most profligate of all developed countries.

Let’s close by seeing if any nations have been good performers. The Telegraph does note that Germany has done a good job of restraining spending. The story even gives a version of Mitchell’s Golden Rule by noting that good policy happens when spending grows slower than private output.

Over the thirteen years from 2000, Germany has cut welfare spending as a share of GDP by 1.5 per cent… Such reductions are possible by increasing welfare bills at a lower rate than growth in the economy.

But the more important question is whether there are nations that get good scores in both categories. In other words, have they controlled spending since 2000 while also having a comparatively low burden of welfare outlays?

Welfare Spending - The Frugal FiveHere are the five nations with the smallest increases in welfare spending since 2000. You can see that Germany had the best relative performance, but you’ll notice from the previous table that Germany is not on the list of five nations with the smallest overall welfare burdens. Indeed, German welfare spending consumes 26.2 percent of GDP, so Germany still has a long way to go.

The nation that does show up on both lists for frugality is Switzerland. Spending has grown relatively slowly since 2000 and the Swiss also have the third-lowest overall burdens of welfare spending.

Hmmm…makes you wonder if this is another sign that Switzerland’s “debt brake” spending cap is a policy to emulate.

By the way, Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

No wonder Canada is now much higher than the United States in measures of economic freedom.

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Switzerland’s left-wing party has instigated a referendum for November 24 that asks voters to limit pay ranges so that a company wouldn’t be able to pay top employees more than 12 times what they’re paying their lowest-level employees.

I talked with Neil Cavuto about this proposal and made several (hopefully) cogent points.

Since Swiss voters already have demonstrated considerable wisdom (rejecting a class-warfare tax proposal in 2010 and imposing a cap on government spending in 2001), I predicted they will reject the plan. And I pointed out that Switzerland’s comparatively successful system is a result of not letting government have too much power over the economy.

But I don’t want to focus today on the Swiss referendum. Instead, I want to expand on my final point, which deals with the misguided belief by some on the left that the economy is a fixed pie and that you have to penalize the rich in order to help the poor.

I’ve covered this issue before, and I even tried to educate a PBS audience that economic growth is key.

But maybe this chart is the most persuasive bit of evidence. It shows per-capita GDP in France and Hong Kong over the past 50 or so years. France is a nation that prides itself of redistribution to “help” the poor while Hong Kong is famous for having the most economic freedom of any jurisdiction.

Now look at this data and ask yourself whether you’d rather be a poor person in France or Hong Kong?

Hong Kong v France Per-Capita GDP

Since Hong Kong is richer and is growing faster, the obvious answer is that poor people in France almost surely face a bleaker outlook.

In other words, the welfare state can give you the basic necessities and allow you to survive (at least until the house of cards collapses), but it comes at a very high cost of lower growth and diminished opportunity.

The moral of the story is that prosperity is best achieved by a policy of free markets and small government.

P.S. If you want more evidence on the superiority of markets over statism, check out the comparison of South Korea and North Korea and the difference between Chile, Argentina, and Venezuela. Heck, even the data comparing America and Europe show similar results.

P.P.S. As you might expect, Margaret Thatcher addressed this issue in a brilliant fashion.

P.P.P.S. There’s a lot to like about Sweden, but click here if you want to see an impossibly absurd example from that nation of the equality-über-alles mentality.

P.P.P.P.S. There is some very interesting academic research that suggests humans are hard-wired by evolution to be statists. Let’s hope that’s not true.

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Because we live in an upside-down world, Switzerland is being persecuted for being a productive, peaceful nation that has a strong human rights policy with regards to privacy.

More specifically, politicians from high-tax nations resent the fact that investors flock to Switzerland to benefit from good policies, and they are pressuring the Swiss government to weaken that nation’s human rights laws so that governments with bad fiscal systems have an easier time of tracking and taxing flight capital.

I’ve resigned myself to this happening for the simple reason that it is well nigh impossible for a small nation (even one as well-armed as Switzerland) to withstand the coercion when all the world’s big nations are trying to impose one-size-fits-all policies designed to make it easier to raise tax rates and expand the size and power of government.

Switzerland v IRSBut, as the Wall Street Journal reports, the Swiss aren’t going down without a fight.

Switzerland’s lower house of Parliament voted 123-63 against the measure, which would have enabled many of the Alpine nation’s banks to sidestep the Swiss banking secrecy laws and start handing information to the U.S. Department of Justice about any past help they may have given to Americans hiding undeclared wealth in Swiss accounts. Earlier Wednesday, the smaller, upper house of Switzerland’s Parliament voted 26-18 in favor of the proposed plan. But in the lower house, lawmakers had raised concerns about the heavy-handedness of the U.S. effort to have them sign off on legislation that might have exposed the country’s banks and bank employees to legal hazards. Lawmakers had also raised concerns about the lack of detail in the plan regarding potential fines for banks that would have opted to participate.

I heartily applaud the lawmakers who rejected the fiscal imperialism of the United States government.

As I stated in my recent BBC interview on tax havens, I believe in sovereignty, and the IRS should have no right to impose bad American tax law on economic activity inside Swiss borders (just as, say, China should have no right to demand that the United States help track down Tiananmen Square protestors that escaped to America).

But I’m not opening champagne just yet, in part because I don’t like the stuff and in part because I fear that this will be a temporary victory.

The Swiss have resisted American demands before, and on more than one occasion, only to eventually back down. And it’s hard to blame them when they’re threatened by odious forms of financial protectionism.

That being said, I’m going to enjoy this moment while it lasts and hope that somehow David can continue to withstand Goliath.

P.S. If you want to understand more about the underlying economic and philosophical implications of this issue, I heartily recommend this New York Times column by Pierre Bessard of Switzerland’s Insitut Liberal.

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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?

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I have to start this post with a big caveat.

OECD bureaucrats get tax-free salaries but urge higher taxes for everyone else

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.

Interestingly, the report also endorses tax competition as a means of restraining the burden of government spending.

Evidence also suggests that tax autonomy may lead to a smaller and more efficient public sector, helping to limit the tax burden and improve tax compliance… Efficiency-raising effects of tax autonomy and tax competition on the public sector have also been reported in empirical research with Norwegian and German data… Tax autonomy generates opportunities to choose the level of public service provision and taxation, although in practice such “voting with your feet” seems mostly limited to young, highly educated and high-income households. Decentralised tax setting also fosters benchmarking of the performance of jurisdictions belonging to the same government level by voters, even in the absence of “voting with your feet”.

The report also notes that tax competition has reduced corporate tax rates.

Tax competition is likely to have contributed significantly to lowering corporate tax rates in Switzerland over the past 25 years. Indeed, empirical evidence shows that the responsiveness of sub-national governments to tax changes of other subnational governments (“tax mimicking”) is the strongest in the case of corporate taxation (Blöchliger and Pinero Campos, 2011). …Progressive corporate income taxes harm incentives for businesses to grow. Since growing businesses are likely to be high performers in terms of productivity, such disincentives are likely to hit high-performing businesses the most, with losses to aggregate productivity performance, which has been modest in Switzerland relative to best-performing high-income countries.

P.S. This isn’t the first time the economists at the OECD have broken ranks with the political hacks that generally control the bureaucracy. In a 1998 Economic Outlook (see page 166), they wrote that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.”

And in another publication (see page 1), the economists noted that “legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by better enforcement of tax codes. But the root of the problem appears in many cases to be high tax rates.”

These passages sound like they could have been authored by Pierre Bessard!

P.P.S. I hasten to add that none of this justifies handouts from American taxpayers to the Paris-based bureaucracy any more than occasional bits of rationality from the World Bank (on government spending), IMF (on the Laffer Curve), or United Nations (also on the Laffer Curve) justify subsidies to those organizations.

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A reader from New York has a follow-up question for me.

Referencing a “Question of the Week” from last month, in which I expressed guarded optimism that America could be saved, she wants to know what I would do if things go the wrong way.

In other words, what if things go really wrong and America suffers a Greek-style fiscal collapse? And imagine how bad that might be since there wouldn’t be an IMF or European Central Bank capable of providing bailouts to the United States.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But I probably would want my children someplace safe and stable, so I’ll answer the question from that perspective.

The obvious first choice is a zero-income tax jurisdiction like the Cayman Islands that is prosperous and reasonably well governed.

But I’m not sure about the long-run outlook for the Cayman Islands, in part because the politicians there have flirted with an income tax and in part because the jurisdiction inevitably would suffer if the United States was falling apart.

So what’s a place that is stable and not overly tied to the American economy.

Then the obvious choice is Switzerland. That nation’s long-run fiscal outlook is relatively favorable because of  modest-sized government and a very good spending control mechanism.

But while Switzerland is not dependent on the U.S. economy, it is surrounded by European welfare states. And I’m fairly certain that nations such as France, Italy, and (perhaps) Germany will collapse before America.

And even though most Swiss households have machine guns and the nation presumably can defend itself from barbarian hordes in search of a new welfare check, Switzerland’s probably not the ideal location.

Estonia is one of my favorite countries, and they’ve implemented some good reforms such as the flat tax. But I worry about demographic decline. Plus, I’m a weather wimp and it’s too chilly most of the year.

Another option is a stable nation in Latin America, perhaps Chile, Panama, or Costa Rica. I haven’t been to Chile, but I’m very impressed by the nation’s incredible progress in recent decades. I have been to Panama many times and it is one of my favorite nations. I’ve only been to Costa Rica two times, but it also seems like a nice country.

The bad news is that I don’t speak Spanish (and my kids don’t speak the language, either). The good news is that Hispanics appear to be the world’s happiest people, so that should count for something.

“G’day mate, we’ve privatized our social security system!”

This brings me to Australia, the country that probably would be at the top of my list. The burden of government spending in Australia is less than it is in the United States.

But the gap isn’t that large. The reason I like Australia is that the nation has a privatized Social Security system (called Superannuation) and the long-run fiscal outlook is much, much better than the United States.

Plus the Aussies are genuinely friendly and they speak an entertaining form of English.

So if America goes under, I recommend going Down Under.

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I greatly admire Switzerland’s “debt brake” because it’s really a spending cap.

Politicians are not allowed to increase spending faster than average revenue growth over a multi-year period, which basically means spending can only grow at the rate of inflation plus population.

Theoretically, taxes could be hiked to allow more spending, but that hasn’t happened. The Swiss are very good about voting against tax increases, so the politicians don’t have much ability to boost the revenue trendline.

Since the debt brake first took effect in 2003, the burden of government spending has dropped from 36 percent of GDP to 34 percent of economic output – a rather remarkable achievement since most other European nations have moved in the wrong direction.

As part of my self-serving efforts to promote Mitchell’s Golden Rule, I’ve been advocating for spending caps in the United States, and I’ve favorably cited legislation proposed by Congressman Brady of Texas and Senator Corker of Tennessee.

Now I have some new evidence on my side. David Hogberg of Investor’s Business Daily looks at the current fiscal mess in America and discovers – gee, what a surprise – that spending has grown very rapidly since the late 1990s.

President Obama says he wants a “balanced” approach to the fiscal cliff. But critics argue the real problem is spending, which has far outstripped rising tax revenue as well as economic growth. Federal government revenue rose from $1.7 trillion to $2.4 trillion from fiscal 1998 to 2012, slightly exceeding inflation. Revenue growth averaged 2.9% annually, despite two recessions, bear markets — and tax cuts. But federal spending rose nearly twice as fast — 5.7% per year — surging from $1.6 trillion to $3.5 trillion over that same span. The spending spike also exceeds growth in the population.

What’s the solution to this mess? I make the argument for a spending cap.

Dan Mitchell, senior fellow at the libertarian Cato Institute, says the U.S. government needs a spending cap. “It’s an issue of trendlines and that’s everything in fiscal policy,” Mitchell said. “If you are on a path where government spending grows faster than the private sector of the economy, which is your tax base, then in theory there is no level of taxation that will be enough to stabilize the system. … If we had kept government spending down to just increases for inflation and population growth, we wouldn’t be in the trouble we’re in now.” Limiting spending to increases in inflation and population growth over 1998-2012 (an annual average of about 3.3%) would have given dramatically different results. The U.S. would have spent $2.6 trillion in FY 12, about $900 billion less than what it actually did. The latest deficit would be $157 billion, a fraction of the actual $1.089 trillion.

I’ve crunched the numbers to show that we could balance the budget in just 10 years if we just limited spending so that it grew by “only” 2.5 percent annually.

David did the same thing, but looking backwards instead of forward. Here’s the chart included with his article. As you can see, the budget mess would be very manageable today if the Bush-Obama spending binge hadn’t occurred.

IBD Spending Cap

But politicians don’t like spending caps for the same reasons that burglars don’t like armed homeowners. As Veronique de Rugy notes, if we imposed a spending cap, they would be forced to reform entitlements.

While a spending cap would help, some analysts contend that it would need to be coupled with entitlement reform. “If you don’t reform Social Security, Medicare and Medicaid, you’ll have a hard time staying within the cap,” said Veronique de Rugy, senior research fellow at the libertarian Mercatus Center. …”To make it feasible and enforceable you’d have to do a constitutional amendment,” said Mitchell. “But even short of that, at least if you start talking about it and set it as your goal it would get people focusing on the real problem … which is government spending growing faster than the private sector.”

This brings us to the real challenge. How do we get politicians to impose reforms when they benefit from the current system. Barring a miracle, they’re not going to tie their own hands.

But I think our chances of success will be much higher if advocates of good fiscal policy kept reminding the crowd in Washington that the real problem is too much spending and that red ink is just a symptom of the underlying disease.

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I’ve defended Mitt Romney for utilizing the efficient financial services sectors of so-called tax havens.

But I may have been focusing on the trees and missed the forest. By highlighting the perfectly legal nature of Romney’s investments and commenting on the valuable role of tax havens in the global economy, I’ve neglected the main argument, which is that people have a right to do whatever they want with their own money and it’s none of our damn business.

What is our business, by contrast, is what politicians are doing with the money they confiscate from us. This Lisa Benson cartoon helps to make that point, though it would be even better if she had written “Romney’s Stash for His Own Money” and “Obama’s Stash for Our Money.”

Obama, needless to say, is an expert at squandering other people’s money, as illustrated by money pits such as the faux stimulus and the green energy scam.

P.S. Lest anyone think I’m being partisan, the headline of this would be just as accurate if I added “How Bush Spent My Money” or “How Romney Would Spend My Money.” Bush, after all, followed the same fiscal agenda as Obama, and Romney’s track record suggests he will be similarly profligate.

P.P.S. Which makes me miss Bill Clinton, who was frugal by comparison. Or Ronald Reagan, who actually did the right things for the right reason.

P.P.P.S. You can find more Lisa Benson cartoons herehere, here, here, herehere, and here.

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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 oped, 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.

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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 Organization for Economic Cooperation 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 nutjob 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.

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About a year ago, I spoke at a conference in Europe that attracted a lot of very rich people from all over the continent, as well as a lot of people who manage money for high-net-worth individuals.

What made this conference remarkable was not the presentations, though they were generally quite interesting. The stunning part of the conference was learning – as part of casual conversation during breaks, meals, and other socializing time – how many rich people are planning for the eventual collapse of European society.

Not stagnation. Not gradual decline. Collapse.

As in riots, social disarray, plundering, and chaos. A non-trivial number of these people think the rioting in places such as Greece and England is just the tip of the iceberg, and they have plans – if bad things begin to happen – to escape to jurisdictions ranging from Australia to Costa Rica (several of them remarked that they no longer see the U.S. as a good long-run refuge).

This was rather sobering. I’ve never been an optimist about Europe’s future, as I explain here and here, but is the situation really this bad?

Well, the U.K. government seems to think things will get worse. Here are some excerpts from the Telegraph.

British ministers privately warned that the break-up of the euro, once almost unthinkable, is now increasingly plausible. Diplomats are preparing to help Britons abroad through a banking collapse and even riots arising from the debt crisis. The Treasury confirmed earlier this month that contingency planning for a collapse is now under way. …Recent Foreign and Commonwealth Office instructions to embassies and consulates request contingency planning for extreme scenarios including rioting and social unrest. …Diplomats have also been told to prepare to help tens of thousands of British citizens in eurozone countries with the consequences of a financial collapse that would leave them unable to access bank accounts or even withdraw cash. …Analysts at UBS, an investment bank earlier this year warned that the most extreme consequences of a break-up include risks to basic property rights and the threat of civil disorder. “When the unemployment consequences are factored in, it is virtually impossible to consider a break-up scenario without some serious social consequences,” UBS said.

Let’s think about what this means, and we’ll start with an assumption that European politicians won’t follow my sage advice and that they’ll instead continue to kick the can down the road – thus making the debt bubble even bigger and creating the conditions for a nasty collapse.

I’ve learned over the years that things are usually never as bad as they seem (or as good as they seem), so I don’t expect that a nightmare situation will materialize, but I certainly can understand why wealthy people have contingency plans to escape.

But what about the rest of us? We don’t have property overseas and we don’t have private jets, so what’s our insurance policy?

Part of the answer is to have the ability to protect ourselves and our families. As explained here, firearms are the ultimate guarantor of civilization.

In my discussions and debates about this issue, I’ve traditionally relied on these four arguments:

1. Respect for the Constitution. The Founding Fathers were wise to include “the right of the people to keep and bear arms” in the Bill of Rights. The Second Amendment recognizes the value of a well-armed citizenry, and today’s politicians (or courts) shouldn’t be allowed to weaken that fundamental freedom.

2. The presumption of liberty. It’s sometimes said that everything that isn’t expressly forbidden is allowed in the United States, whereas in Europe it’s the other way around, with everything forbidden unless explicitly permitted. This certainly seems to be the case for guns, with most European governments prohibiting firearms ownership for the vast majority of people.

3. Personal protection against crime. As the first image in this post powerfully illustrates, it doesn’t really matter if cops are only a few minutes away when a person only has a few seconds to protect against danger. And since the evidence is overwhelming that gun ownership reduces crime, this is a powerful argument for the Second Amendment.

4. Ability to resist government oppression. Totalitarian governments invariably seek to disarm people, as this poster indicates. And with the majority of the world still living in nations that are not free, private gun ownership is at least a potential limit on thuggish governments.

But perhaps we now need to add a fifth reason:

5. Personal protection against social breakdown. If politicians destroy the economic system with too much debt and too much dependency, firearms will be the first and last line of defense against those who would plunder and pillage.

Here’s a thought experiment to drive the point home. If Europe does collapse, which people do you think will be in better shape to preserve civilization, the well-armed Swiss or the disarmed Brits?

I hope we never have to find out, but I know which society has a better chance of surviving.

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Greetings from Montreux, Switzerland, on the shores of Lake Geneva. There aren’t many places where palm trees are framed by snow-capped mountains. Heck, even I managed to take a decent photo.

But let’s shift back to the world of public policy. Every time I’m in Switzerland, my admiration for the country increases. Here are five ways Switzerland is better than the United States.

1. The burden of government spending is lower in Switzerland. According to OECD, the public sector consumes only 33.1 percent of economic output in Switzerland, compared to 41.1 percent of GDP in the United States.

2. Switzerland has genuine federalism, with the national government responsible for only about one-third of government spending. The United States used to be like that, but now more than two-thirds of government spending comes from Washington.

3. Because of a belief that individuals have a right to control information about their personal affairs, Switzerland has a strong human rights policy that protects financial privacy. In the United States, the government can look at your bank account and does not even need a search warrant.

4. Switzerland has a positive form of multiculturalism with people living together peacefully notwithstanding different languages and different religions. In the United States, by contrast, the government causes strife and resentment with a system of racial spoils.

5. Gun ownership is pervasive in Switzerland, and the Swiss people value this freedom. Moreover, how can one not admire a nation where all able-bodied males have fully automatic rifles in their homes? To be sure, the United States is very good by world standards in protecting this freedom, so the  Swiss don’t really have an advantage on this issue, but it’s still worth mentioning.

Notwithstanding my admiration for Switzerland, there are five reasons why I don’t plan on expatriating.

1. I’m not rich and don’t particularly see how I will get rich anytime soon. Switzerland is not a cheap place to live.

2. It would be very time-consuming and expensive to go to Georgia Bulldog games, and I doubt the games would be on TV.

3. Speaking of sports, the Swiss share the disturbing European propensity to follow soccer.

4. It’s not warm enough.

5. Even though it’s considered a bit uncouth among some libertarians, I do have certain patriotic impulses. I’m not about to surrender my nation to the plundering thieves from Washington.

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The United States, Canada, and Switzerland are the only developed nations that have some degree of genuine federalism (Germany and Australia don’t count by my standards), and Switzerland is the only country where the central government is smaller than the local/regional governments. This is one of the reasons why Switzerland is so admirable, as partly explained in this Center for Freedom and Prosperity article on the Swiss tax system.

But perhaps other nations are learning from Switzerland’s success. The United Kingdom is devolving some power to Scotland, as reported by the Irish Times. This is just a small step, and it’s unclear how it will work since Scotland leans left and is heavily subsidized by England. But the value of federalism is that jurisdictions compete with each other and cross-regional subsidies are reduced. So if Scotland wants to use its new powers to make the wrong choices, at least only the Scottish people will suffer.

Scotland is to get substantial new powers to set its own income tax rates and win new rights to borrow money in phase two of the devolution of greater autonomy to the Scottish parliament. The measures were described by Scottish secretary Michael Moore as the most significant transfer of financial power out of London since the formation of the UK more than 300 years ago, making Holyrood more accountable to voters. …The proposals form the centrepiece of a new Scotland Bill drafted by the UK government, which will allow the Scottish government to increase or cut income tax rates by up to 50 per cent for basic rate taxpayers, and by 20 per cent at the highest rate. The measures also go further than expected by offering the Scottish government much greater borrowing powers, and more quickly, than originally recommended by a cross-party commission on devolution chaired by Kenneth Calman. …In addition, Holyrood will be allowed to introduce new, Scotland-only taxes, with Westminster’s approval, and have control over stamp duty and landfill tax. In all, the powers will give Holyrood control over about £12 billion or 35 per cent of its current spending: its block grant from the treasury, worth £29 billion a year, will be cut by an equal amount.

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I’ve always had a soft spot for Switzerland. The nation’s decentralized structure shows the value of federalism, both as a means of limiting the size of government and as a way of promoting tranquility in a nation with several languages, religions, and ethnic groups. I also admire Switzerland’s valiant attempt to preserve financial privacy in a world dominated by greedy, high-tax governments.

I now have another reason to admire the Swiss. Voters yesterday overwhelmingly rejected a class-warfare proposal to impose higher tax rates on the income and wealth of rich residents. The Social Democrats did their best to make the hate-and-envy scheme palatable. Only the very richest taxpayers would have been affected. But Swiss voters, like voters in Washington state earlier this month, understood that giving politicians more money is never a solution for any problem.

Here’s an excerpt from Bloomberg’s report on the vote.

In a referendum today, 59 percent of voters turned down the proposal by the Social Democrats to enact minimum taxes on income and wealth. Residents would have paid taxes of at least 22 percent on annual income above 250,000 francs ($249,000), according to the proposed changes. Switzerland’s executive and parliamentary branches had rejected the proposal, saying it would interfere with the cantons’ tax-autonomy regulations. The changes would also damage the nation’s attractiveness, the government, led by President Doris Leuthard, said before the vote. The Alpine country’s reputation as a low-tax refuge has attracted bankers and entrepreneurs such as Ingvar Kamprad, the Swedish founder of Ikea AB furniture stores, and members of the Brenninkmeijer family, who owns retailer C&A Group.

It’s never wise to draw too many conclusions from one vote, but it certainly seems that voters usually reject higher taxes when they get a chance to cast votes. Even tax increases targeting a tiny minority of the population generally get rejected. The only exception that comes to mind is the unfortunate decision by Oregon voters earlier this year to raise tax rates.

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After being in 1st place in 2007 and 2008, America dropped behind Switzerland in the World Economic Forum’s Global Competitiveness Report in 2009. The 2010 ranking was just released, and the United States has tumbled two more spots to 4th place, behind Switzerland, Sweden, and Singapore. I’m not a complete fan of the World Economic Forum’s methodology (the Economic Freedom of the World rankings are the best measure of sound economic policy), but it’s almost surely a bad sign when a country moves down in the rankings.  The timing of the fall will lead some to blame Barack Obama, and I certainly agree that his policies are making America less competitive, but Bush also deserves blame for increasing the burden of government and compromising America’s economic vitality. Here’s a blurb from the Associated Press.
The U.S. has slipped down the ranks of competitive economies, falling behind Sweden and Singapore due to huge deficits and pessimism about government, a global economic group said Thursday. Switzerland retained the top spot for the second year in the annual ranking by the Geneva-based World Economic Forum. It combines economic data and a survey of more than 13,500 business executives. Sweden moved up to second place while Singapore stayed at No. 3. The United States was in second place last year after falling from No. 1 in 2008.

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One of my main issues at the Cato Institute (and one of the reasons I was a founder of the Center for Freedom and Prosperity) is protecting and promoting fiscal sovereignty. I don’t want international bureaucracies such as the United Nations or Paris-based Organization for Economic Cooperation and Development telling nations what kind of tax systems they’re allowed to have – especially since those bureaucracies want to undermine tax competition in order to prop up high-tax welfare states. While I realize international tax issues are not that exciting, there is an excellent column in the Wall Street Journal Europe that shows the negative impact when nations (in this case, the United States) seek to tax economic activity in other nations. When foreigners no longer want to invest in America and when Americans are compelled into giving up U.S. citizenship, that’s a sign of a bad tax code:

American expatriates are fast becoming the world’s financial refugees. Onerous legislation from the U.S. government is making it too difficult – and too expensive – for banks to service U.S. citizens that live abroad. …An increasing number are taking the most drastic step and renouncing their citizenship. …bankers, lawyers and accountants are waking up to the wider implications of the new rules. American expats, it seems, may only be the first to suffer. …Foreign banks are, in effect, being asked to act as the international enforcement arms of the Internal Revenue Service. Those banks that don’t comply will be subject to a 30% withholding tax on all payments made to them in the U.S. Many banks and wealth managers have decided it is far easier to politely show their U.S. clients the door. Earlier this month, the law firm Withers conducted a survey of bankers, accountants, independent financial advisers, trust companies and other private client advisors to analyze the impact of the HIRE Act. Over half said they have seen instances where Americans were denied investment and banking services in the last two years. And 95% expect this to increase as a result of the HIRE Act. …The U.S. government already taxes expatriate citizens on their worldwide income regardless of where it is earned or where they live, making them the only people in the developed world who are taxed in both their country of citizenship and country of residence. …there has been an explosion in the time it takes us to keep U.S. expat clients compliant with the U.S. tax regime. He says that their bills have “at least doubled” in the past couple of years. …A number of banks decided that the concept of U.S. citizenship was too nebulous for them to police. Darlene Hart, the chief executive of U.S. Tax & Financial Services says that when the rule came out in 2001 many of her U.S. clients received letters from their wealth managers telling them that their investment portfolios had been liquidated. Now a second wave of banks – especially in Switzerland but increasingly in the UK and the Channel Islands – are closing their doors to Americans because of the added burden of the HIRE Act. …What then are U.S. expats to do if even more banks cut them adrift as a result of those reviews? A small but growing number have decided that the best way to avoid the rules is to hand in their passports. According to U.S. government figures, twice as many Americans renounced their citizenship in the last quarter of 2009 than in the whole of 2008. The numbers are still only in the hundreds but are expected to rise now that the HIRE Act has been signed. Ms. Hart says the last time she checked it was not possible to get an appointment at the U.S. embassy in London to renounce citizenship until 2012. In Bern, you couldn’t get an appointment until June next year. …Those that don’t want to take such a drastic step can move their investments back to the U.S. However, this can be tricky without an address in the U.S. because of the Patriot Act, which tightened up the procedures by which banks verify their clients’ identities. …although it is the U.S. expats that are suffering the most at the moment, the impact of the new law could eventually be felt far more widely. The banks that sign up to the new rules are likely to pay for the required upgrades to their systems by increasing the bank fees for their rest of their customers. And eventually the reverberations from the HIRE Act may also be felt back in the U.S. …Nearly three-quarters of respondents to the Withers survey said they expected to see investment into the U.S. decrease in the coming years because of the HIRE Act. Wegelin & Co. is, for one, advising its clients to exit all direct investments in U.S. securities.

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Regular readers know that I am a big supporter of international tax competition as a mechanism to limit the greed of the political elite. Unfortunately, the statists are having some success in their efforts to undermine the fiscal sovereignty of low-tax jurisdictions. Even the Swiss have been forced to weaken their human rights policy of protecting financial privacy. So does this mean the politicians from high-tax nations will get more money to spend? Probably not. One reason is that “better” enforcement of high tax rates on saving and investment will have the same economic impact as an increase in tax rates. This, of course, will mean less saving and investment, which translates into slower growth and a smaller tax base. Another reason is that restrictions on the ability to shift economic activity across border to escape oppressive taxation will lead many people to find domestic strategies as a substitute means of protecting their income and assets. An article by a Romanian academic explains further and notes that low-tax jurisdictions will continue to enjoy better economic performance.

It is of course illegal not to declare assets and income held abroad, but the fact that some people are driven to this extreme suggests that in some countries taxes have reached unacceptably high levels. In exactly the same fashion, people are also driven to hide some of their economic activity from the tax man, giving rise to the well known phenomenon of the underground economy. In fact, tax evasion is as old as taxes themselves, and the best way to minimize it is to levy reasonable taxes. International tax evasion and the local underground economy provide the two main escape routes. In modern democratic times, they also set implicit limits to the growth of government. They are both illegal, but the local shadow economy is now so widespread that governments know that they cannot enforce compliance without becoming hugely unpopular (suggesting that high taxes are, in fact, not as widely accepted by the population as some would like to think). Limiting international tax competition looks a much easier bet. However, if high-tax countries are successful in stopping the shift of savings to tax havens by enforcing transparency and information exchange, they will displace, but not halt, tax evasion and fiscal competition. The underground economy, both local and international, will grow. In the meantime, wealthy people and their assets will continue to move from high to low tax environments. Over time, the economically more attractive places will still enjoy much higher rates of economic growth.

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This story from Business Week warmed my heart. Switzerland’s cantons are competing to create better tax policy, and this is attracting companies seeking to escape the kleptocracies elsewhere in Europe. This shows the value of tax competition (imagine how bad taxes would be in Germany and France if politicians in those nations didn’t have to worry about taxpayers escaping over the border) and the benefits of federalism (unlike the United States, Switzerland has not made the mistake of letting the central government becoming the dominant force in fiscal policy).

“Low corporate taxes will help Switzerland attract business, but it’s also creating tension as European governments seek revenue to plug their fiscal deficits.” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. Switzerland reported a fiscal surplus last year, and cantons from Zurich to Schwyz are lowering taxes. “There is still a clear downward trend in taxation,” said Martin Eichler, head of research at BakBasel, an economic consulting firm in Basel, Switzerland. “There is pressure to be attractive to companies and the cantons are saying that if we have to save somewhere, then it won’t be on tax.” Swiss corporate tax rates, including a federal rate of 8.5 percent, range from 11.8 percent in the town of Pfaeffikon in Schwyz to 24.2 percent in Geneva, according to tax consultant Mattig-Suter & Partner. That compares with a corporate tax rate of 28 percent in the U.K. and 35 percent in the U.S. Vaud, running east along the lake from Geneva to Montreux, persuaded Shire Plc to set up an office last month with the help of tax relief on its corporate rate of 23.5 percent, said Eric Maire, the canton’s senior project director for economic promotion. That follows the March decision of Ineos Group Holdings Plc to relocate from its U.K. base. …Tax increases in the U.K. played a “key role” in persuading firms such as BlueCrest Capital Management and Brevan Howard Asset Management LLP to shift part of their London-based operations to Geneva, said Loeffler. Smaller cantons want to emulate Zug, which used a tax rate of 15.8 percent to more than double its number of registered companies to 29,134 since 1990. The canton is home to miner Xstrata Plc and Transocean Ltd., the world’s largest offshore oil and gas driller.

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Okay, the title of this post is an absurd exaggeration, but I am not optimistic about the future of the United Kingdom. Government spending has exploded over the last ten-plus years (the largest expansion in the burden of government spending among developed nations), and this unsurprisingly has led to punitive class-warfare policies. I saved this article from the Daily Mail from a couple of months ago because I was curious to see whether predictions about talent fleeing London would prove accurate:

London will become the most highly taxed financial centre in the world when the new 50 per cent income tax rate for those earning £150,000 or more comes into force next month. Taxes will be higher than for financial workers living in the other key centres of New York, Paris, Frankfurt, Geneva, Zurich, Dubai and Hong Kong, KPMG calculated. The findings will raise fears that Labour’s levies are driving businesses and bankers overseas and threatening Britain’s competitiveness. …Tullett announced last December that it will help employees move abroad if they want to avoid the top rate of tax, and Mr Smith said workers are already looking at relocating. Graeme Leach of the Institute of Directors said: ‘The 50 per cent rate is a policy that should never have been announced. The indirect impact on entrepreneurial aspiration, business confidence and foreign investment is likely to be significant.

As we can see from this Bloomberg article, it appears that the feckless big-government policies of all the major parties are driving productive investors and entrepreneurs to jurisdictions with better tax law. Switzerland seems to be the biggest beneficiary. As you read the details below, one thing to keep in mind is that at least Brits are free to emigrate. The U.S. government imposes repugnant Soviet-style exit taxes designed to ransack successful people who want the freedom to move someplace with more liberty:

…more than 100 bankers, hedge fund managers and wealthy retirees are gathered on a cold March night to plot their escape from Britain. Swiss government officials and Geneva-based financial advisers have come to London to lure rich residents with glowing descriptions of the country’s low taxes, safe streets, private-banking options and convenient ski weekends. …Next door, an overflow crowd of 50 more attendees enjoys wine and canapes as they watch the presentation on closed- circuit televisions in a mahogany-lined library, which includes a chart showing the prevalence of English as a language for doing business in Switzerland. A JPMorgan Chase & Co. banker who declined to be identified confides he’s planning to relocate next year. His main complaint: higher U.K. taxes, a theme the Swiss delegation has pounced upon. “Some people think it’s morally wrong to be working for the government for more than half the year,” says Jonathan Ivinson, a Geneva-based tax partner at international law firm Hogan & Hartson LLP… London’s highest earners must now pay a 50 percent tax on incomes above 150,000 pounds ($227,200) that came into force on April 6, replacing a 40 percent top rate. …During the campaign, both Brown and Cameron said they backed additional curbs on the U.K. financial industry — including a bank transaction levy — and agreed that Britain’s dire financial state would lock in higher tax rates for the foreseeable future: …As the taxman’s take grows larger, Switzerland is shaping up as the most-welcoming alternative for British exiles. Light- touch regulation and the willingness of cantons, as regional governments are called, to negotiate special tax rates for both individuals and businesses have prompted at least 30 London hedge fund managers to consider moving to Geneva in the past year, says Shelby du Pasquier, a Geneva-based partner at Lenz & Staehelin, a Swiss law firm. Investment management and advisory services aren’t regulated in Switzerland, apart from anti-money laundering rules, and the federal government and several cantons last year reduced taxes on dividend payments for entrepreneurs, including owners of hedge fund firms, he says. …Geneva has already attracted some of London’s top talent. Alan Howard, co-founder of Brevan Howard Asset Management LLP, Europe’s largest hedge fund firm, has rented office space in Geneva for 60 traders relocating from London. …BlueCrest Capital Management Ltd., Europe’s third-largest hedge fund firm, has opened a Geneva office for as many as 70 traders and analysts who have worked in London on its two biggest funds. They’re being joined by BlueCrest co-founder Michael Platt and Leda Braga, manager of the $9 billion BlueTrend fund, according to people familiar with the firm’s transitional plans. …The departures of those principals prove that the threat to London’s prominence as a financial center is real, says Stuart Fraser, head of policy at the City of London Corporation, which runs the financial district. …U.K. top tax rates will exceed those in Germany and France for the first time since 1989, according to a study by accounting firm KPMG. A banker earning 1 million pounds a year in London will now take home less than his counterparts in Frankfurt, Hong Kong, New York, Paris, Singapore and Zurich, KPMG says. “The U.K. has abandoned one of its key principles when it comes to tax, which is predictability,” says Bertrand des Pallieres, founder of SPQR Capital LLP, a London-based hedge fund firm with about $700 million in assets as of April. He left the U.K. last year and opened an office in Geneva after the new tax rate was announced. It’s not only funds looking at leaving. Broker Tullett Prebon said in December it would allow its 700 employees in London to move to “more certain tax regimes.” Several of Tullett Prebon’s major desks are now planning to move key personnel, the company says. …London Mayor Boris Johnson estimates that up to 9,000 bankers, hedge fund managers and private-equity executives could leave the city, according to a letter he sent to the Labour government in January. …Marcel Jouault is working to make sure that agitated Britons wind up in Pfaeffikon, a village on the shore of Lake Zurich. Pfaeffikon’s 11.8 percent corporate tax rate and 19 percent personal income levy are both Switzerland’s lowest, helping the village lure funds that handle about $100 billion in investments, according to hedge fund research firm Opalesque Ltd.

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Price fixing is illegal in the private sector, but unfortunately there are no rules against schemes by politicians to create oligopolies in order to prop up bad government policy. The latest example comes from the bureaucrats at the International Monetary Fund, who are conspiring with national governments to impose higher taxes and regulations on the banking sector. The pampered bureaucrats at the IMF (who get tax-free salaries while advocating higher taxes on the rest of us) say these policies are needed because of bailouts, yet such an approach would institutionalize moral hazard by exacerbating the government-created problem of “too big to fail.” But what is particularly disturbing about the latest IMF scheme is that the international bureaucracy wants to coerce all nations into imposing high taxes and excessive regulation. The bureaucrats realize that if some nations are allowed to have free markets, jobs and investment would flow to those countries and expose the foolishness of the bad policy being advocated elsewhere by the IMF. Here’s a brief excerpt from a report in the Wall Street Journal:

Mr. Strauss-Kahn said there was broad agreement on the need for consensus and coordination in the reform of the global financial sector. “Even if they don’t follow exactly the same rule, they have to follow rules which will not be in conflict,” he said. He said there were still major differences of opinion on how to proceed, saying that countries whose banking systems didn’t need taxpayer bailouts weren’t willing to impose extra taxation on their banks now, to create a cushion against further financial shocks. …Mr. Strauss-Kahn said the overriding goal was to prevent “regulatory arbitrage”—the migration of banks to places where the burden of tax and regulation is lightest. He said countries with tighter regulation of banks might be able to justify not imposing new taxes.

I’ve been annoyingly repetitious on the importance of making governments compete with each other, largely because the evidence showing that jurisdictional rivalry is a very effective force for good policy around the world. I’ve done videos showing the benefits of tax competition, videos making the economic and moral case for tax havens, and videos exposing the myths and demagoguery of those who want to undermine tax competition. I’ve traveled around the world to fight the international bureaucracies, and even been threatened with arrest for helping low-tax nations resist being bullied by high-tax nations. Simply stated, we need jurisdictional competition so that politicians know that taxpayers can escape fiscal oppression. In the absence of external competition, politicians are like fiscal alcoholics who are unable to resist the temptation to over-tax and over-spend.

This is why the IMF’s new scheme should be resisted. It is not the job of international bureaucracies to interfere with the sovereign right of nations to determine their own tax and regulatory policies. If France and Germany want to adopt statist policies, they should have that right. Heck, Obama wants America to make similar mistakes. But Hong Kong, Switzerland, the Cayman Islands, and other market-oriented jurisdictions should not be coerced into adopting the same misguided policies.

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In a rational world, Switzerland would be a role model for other nations. It is quite prosperous thanks largely to a modest burden of government. There is remarkable ethnic and religoius diversity, but virtually no tension because power is decentralized (sort of what America’s Founders envisioned for the United States). Yet despite these – and many other – attractive features, Switzerland is being persecuted because of strong human rights laws that protect financial privacy. Money-hungry politicians from other nations resent Swtizerland’s attractive policies, and they would rather trample Swiss sovereignty rather than fix their own oppressive tax laws. An official from the Swiss Bankers Association provides some background in a New York Times column:

In Switzerland, this tradition of treating a client’s financial affairs in confidence became law in 1934 when it was codified in Article 47 of the country’s first-ever federal banking act as a contemporary reaction to the economic crisis, various domestic political considerations and well-publicized cases of espionage involving France and Germany. …Banking secrecy, therefore, is not some gimmick the Swiss devised to attract foreign clients to their banks. It reflects the very high degree of trust that exists between the Swiss state and its citizens and it has strong democratic foundations. …The Swiss are proud of their system and they reward it with a high level of taxpayer honesty. It works because the Swiss vote their own taxes, they have a high degree of control over the way tax revenues are spent and over all they believe their tax system to be reasonable, comprehensible, transparent and fair. The principle of self-declaration backed up with withholding taxes and, if necessary, stiff fines supports this “honesty box” system. …Doesn’t Switzerland hear the snapping jaws and cracking whips of foreign finance ministers, tax collectors, O.E.C.D. bureaucrats, cash-dispensing government agents and other denizens of the encroaching real world as they circle round Mother Helvetia intent on biting huge chunks out of her banking secrecy, if not swallowing it whole? …In March last year the Swiss announced they would give up the evasion-fraud distinction for foreign bank clients and adopt  the O.E.C.D. standards on information exchange in tax matters. …However, requests for assistance must be made with regard to a specific individual, and “fishing expeditions” — any indiscriminate trawling through bank accounts in the hope of finding something interesting — remain ruled out. …Switzerland demonstrates to the world that it is possible for a state to collect taxes with a high degree of taxpayer honesty and without the authorities being corroded with suspicion about the financial activities of their citizens. Citizens in a democracy would never allow their police force to have an automatic right of forced entry into their homes just on the off-chance of finding some stolen goods, so why on earth should the state have an automatic right of forced entry into citizens’ banks accounts just on the off-chance of discovering some tax evasion? There must be a limit to the extent to which respect for an individual’s privacy is sacrificed on the altar of international cooperation in tax matters.

Sadly, the United States is part of the effort to create a global tax cartel. An “OPEC for politicians” would be terrible news for taxpayers, though, much as a cartel of gas stations would be bad for driviers. So-called tax havens play a valuable role in curtailing the greed of the political class. Ask yourself a simple question: Would politicians be more likely or less likely to raise tax rates if they knew taxpayers had no escape options?

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A Swiss court just threw a wrench in the gears of an IRS effort to impose bad US tax law on an extraterritorial basis, ruling that UBS does not have to hand over data to the American tax authorities. This ruling nullifies an agreement that the Swiss government was coerced into making with the US government last year. In typical arrogant fashion, the IRS already has indicated that it still expects acquiescence, notwithstanding Switzerland’s strong human rights policy on personal privacy. The Bloomberg story excerpted below has the details, but it’s worth noting that this entire fight exists solely because the internal revenue code imposes double taxation on income that is saved and invested and imposes that bad policy on economic activity outside America’s border. But just as other governments should not have the right to impose their laws on things that happen in America, the United States should not have the right to trample the sovereignty of other nations:

A UBS AG account holder won a Swiss court case preventing data from being disclosed in a ruling that may impede a U.S. crackdown on overseas tax evasion. The failure by U.S. citizens to complete certain tax forms or declare income doesn’t constitute “tax fraud” that would require Switzerland to disclose account data, the country’s Federal Administrative Court ruled in a judgment released today. …“The prosecutors at the Justice Department are not going to be happy with this opinion,” Namorato said in an interview in Washington. “It guts the settlement that they negotiated with the Swiss authorities.” …The Swiss government said in a statement that it will decide Jan. 27 how the Swiss-U.S. agreement can be implemented in light of the ruling. U.S. Justice Department spokesman Charles Miller declined to comment. …The Internal Revenue Service said in a statement that while the agency hadn’t reviewed the ruling it “had every expectation that the Swiss government will continue to honor the terms of the agreement.” …Today’s ruling involved a single test case, and the court said there were 25 more involving similar claims that it will ask the Swiss tax authority to review. “It’s a landmark decision,” said Bernhard Loetscher a partner at Zurich-based law firm CMS von Erlach Henrici AG. “The court considers the case so crystal clear that it invited the SFTA to withdraw the 25 other claims.” …Under the 1996 double taxation treaty, “tax fraud and the like” means fraudulent behavior that causes or attempts an illegal and important reduction in tax owed. Examples included keeping separate accounts of incorrect profit, losses and orders, as well as a scheme of lies. Switzerland distinguishes between tax fraud, which is a crime, and tax evasion, which is a civil offense. “The U.S. will soon start to renegotiate the double taxation treaty, to give up the distinction between tax evasion and tax fraud,” said Zurich lawyer Wolfram Kuoni. “The key battle will be if it will apply retrospectively.”

This battle is part of a broader effort by uncompetitive nations to persecute “tax havens.” Creating a tax cartel for the benefit of greedy politicians in France, Germany, and the United States would be a mistake. An “OPEC for politicians” would pave the way for higher taxes, as explained here, here, and here. But this also is a human rights issue. Look at what happened recently in the thugocracy known as Venezuela, where Chavez began a new wave of expropriation. The Venezuelans with money in Cayman, Miami, and Switzerland were safe, but the people with assets inside the country have been ripped off by a criminal government. Or what about people subjected to persecution, such as political dissidents in Russia? Or Jews in North Africa? Or ethnic Chinese in Indonesia? Or homosexuals in Iran? And how about people in places such as Mexico where kidnappings are common and successful people are targeted, often on the basis of information leaked from tax departments. This world needs safe havens, jurisdictions such as Switzerland and the Cayman Islands that offer oppressed people the protection of honest courts, financial privacy, and the rule of law. Heck, even the bureaucrat in charge of the OECD’s anti-tax competition campaign admitted to a British paper that “tax havens are essential for individuals who live in unstable regimes.” With politicians making America less stable with each passing day, let’s hope this essential freedom is available in the future.

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This has a similar title to an earlier blog post, but the topic is completely different. The U.K.-based Times has a fascinating story about how how tax rates are driving business out of London, thus showing the insanity of class-warfare tax policy. Two excerpts are must reading, though the message will fall on deaf ears at the White House. The first looks at the big picture, noting how Switlzerland is very attractive because of reasonable tax rates and political stability:

As the financial weather worsens in Britain — bankers are being taxed 50% on this year’s bonuses, and from April half of any income over £150,000 will go straight to the Inland Revenue — many of our super-rich are threatening to abandon London. Discreet advisers in Geneva, Zurich and the high-end Swiss ski resorts say that a steady trickle of wealthy Brits have either made the move or are strongly considering a new life in the mountains. In December alone eight British-based hedge funds decided to move there. “They want to be out of the UK by April,” says David Butler of Kinetic, which provides services for hedge funds. “There’s a lot of momentum to leave. Geneva is the most popular choice. These people are a kind of club: they go where the others are.” He predicts that up to 150 funds will follow. …Switzerland is also enormously stable: 100-year mortgages are common, property is a safe investment, and the average income is $68,000, against $44,000 in the UK. The Swiss are unlikely to bring in the kind of arbitrary tax changes that have made London’s bankers so jumpy. …The fear for the British Treasury is that a big international investment bank might relocate. So far, that has not happened. But Bob Diamond of Barclays Capital, one of Britain’s highest-paid bankers, warned last month: “Both financial capital and human capital are extremely mobile.”

The second excerpt is based on two conversations with former British residents, both of whom are no longer being raped by Gordon Brown and his crowd of redistributionists. This should be a warning to Obama and his crowd, but England actually is not as bad as America in one key respect – investors and entrepreneurs can leave the United Kingdom without being ransacked at the border. People leaving the United States, by contrast, has subject to onerous exit taxes (disturbingly akin to the policies imposed by the Soviet Union and Nazi Germany, albeit motivated by greed and envy rather than hate):

As a British citizen, “I’d get totally clobbered by the taxman if I came back to London”, he admits. He is not wrong. Mike Warburton, tax director at Grant Thornton accountants, says: “If he returned to the UK, he would be taxed on his worldwide income and gains as a UK resident domiciled individual.” Say James has £40m invested, and is getting a paltry return of 2% a year (£800,000); it would give him a tax bill of around £400,000. He would also be clobbered, says Warburton, “on income and gains arising after his return to the UK from any capital built up while he was overseas, and gains are taxable at 18%. Even if he put the capital into an offshore trust, he would still be caught by tax-avoidance rules in the UK. Not an appealing prospect.” In Switzerland, by contrast, life is sweet. All that is required is a deal with the local canton to pay a flat yearly forfait (forfeit). Happily for bankers, it is all negotiable: the better connected your tax lawyer is with the local canton official, the better your deal. The Swiss are famously good at keeping financial secrets, so there is no published list of which canton charges what, but the going rate in Geneva, the most expensive one, is about £180,000 a year. …Another option is to become a resident, which is fairly simple as long as you are rich and from America or the EU, then pay tax at the local rates, which are linked to the value of property and are typically only 20% of income. …Might her London banking friends follow her out here? “Sure, why not?” she says, sipping white wine. “They’re all pretty pissed off at the tax on bonuses and the new top rate of 50%. People like me, we’re motivated by money. If you take so much away in tax, there’s no incentive.” Just look at the tax on a bonus of £200,000. First, there is the new bonus tax of 50%, which costs the company another £87,500. Then there is employer’s National Insurance of £25,600. Then the employee pays income tax at 40% on the £200,000, which is £80,000, and employee’s NI, another £2,000. So the total tax is a whopping £195,100. This represents a 98% tax burden on the net payment of £200,000 to the employee.

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The guns-cause-crime mantra of the left has never made sense, particularly when there are some heavily-armed nations where crime is very low. Israel is a good example, but Switzerland may be an even better country to highlight since it has been living in peace with its neighbors since the Napoleanic Wars. This video helps explain why:

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Tax competition is an issue that arouses passion on both sides of the debate. Libertarians and other free-market advocates welcome tax competition as a way of restraining the greed of politicians. Governments have lowered tax rates in recent decades, for instance, because politicians are afraid that the geese that lay the golden eggs can fly across the border. But collectivists despise tax competition – for exactly the same reason. They want investors, entrepreneurs, and companies to passively serve as free vending machines, dispensing never-ending piles of money for politicians. So when a left-wing group puts together a ranking of the world’s “top secrecy jurisdictions” in hopes of undermining tax competition, proponents of individual freedom can use that list as a guide to world’s most investor-friendly nations. The good news is that an American state, Delaware, is number one on the list. And since being a tax haven is a magnet for investment, this is good news for U.S. competitiveness. The bad news is that American taxpayers are not allowed to benefit from many of Delaware’s “tax haven” policies. Here’s what a left-wing columnist in the United Kingdom wrote about the issue:

You’re a billionaire but you don’t want anyone, least of all the taxman, to know. What do you do? Head for a palm-fringed island paradise or a snow-covered Alpine micro-state? Wrong. The world’s most opaque jurisdictions – the ones that will best shield you and your cash from the light – are mostly in the heart of the most sophisticated and powerful global financial centres. London, Luxembourg and Zurich are in the top five most secretive jurisdictions, according the first comprehensive index of financial transparency ever compiled. Yet top of the pile, beating the British Virgin Islands, Belize or Liechtenstein as the best place to hide wealth, is Delaware. One of the smallest states in the US, it offers the best protection for anyone who does not want to disclose their identity as a beneficial owner of a company. That is one very good reason why the East Coast state hosts 50% of the US’s quoted firms and 650,000 companies – almost equivalent to one company per Delaware resident. …Delaware – the political power-base of the US vice-president, Joe Biden – offers high levels of banking secrecy and does not make details of trusts, company accounts and beneficial ownership a matter of public record. Delaware also allows companies to re-domicile within its borders with minimal disclosure, and allows the existence of privacy-enhancing “protected cell” or “segregated portfolio” companies, among many other stratagems useful for protecting the identity of those who do business there.

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I’m in Switzerland for a couple of speeches in Geneva and one speech in Zurich. I’d like to say I’m also visiting my money, but that would only be true if I had enough money for a Swiss account. Alas.

Switzerland is an admirable nation for many reasons, especially its strong human rights policy in defense of financial privacy. But I also admire its fealty to federalism. Indeed, unlike the United States, it has largely kept the central government from becoming a dominant force in the nation’s fiscal policy. As this study from the Center for Freedom and Prosperity (authored by a Swiss expert) explains, more than two-thirds of taxing and spending takes place at the canton and municipal level. In America, by contrast, the federal government now dominates, with two-thirds of taxing and spending coming from Washington.

One final observation. I’m staying in what might be called the United Nations district of Geneva, and one can’t help but notice all the urbane foreigners – particularly from the developing world – wandering the town and patronizing the tony restaurants. Maybe I’m just a cranky libertarian, but I can’t stop thinking about the tremendous misallocation of human capital this represents (not to mention the huge waste of money). Many of these people are probably the “best and brightest” from their various homelands, and they presumably could contribute to their nations’ prosperity by being back home doing something productive. But thanks to the proliferation of international bureaucracies, few of which can make even an implausible claim of doing anything worthwhile, these people are net liabilities rather than net assets.

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Richard Rahn has an excellent column in the Washington Times, discussing how the Organization for Economic Cooperation and Development is working with high-tax nations to bully low-tax jurisdictions into adopting bad policy. Yet these bureuacrats rather conveniently don’t have to pay any income tax. No wonder they are oblivious to the real-world destructive impact of punitive tax rates. The column also explains that this bullying campaign is backfiring against America since some foreign financial institutions have decided to pull money out of America in order to avoid being turned into stooges for the IRS:

The high-tax countries are using the OECD to threaten low-tax jurisdictions to sign this agreement. It is worth noting that the tax bullies at the OECD and at other international organizations, such as the United Nations, International Monetary Fund and World Bank, who demand that others pay higher taxes, enjoy tax-free personal income courtesy of the world’s taxpayers. Freedom House, an organization that keeps its eye on human rights abuses and anti-democratic activities by countries, lists a number of the countries on the OECD list of cooperating jurisdictions as “not free” or only “partly free” — including Russia, China and the United Arab Emirates. Yet some democratic and free jurisdictions have been listed as noncooperating by the OECD. According to the OECD, the U.S. should be sharing tax information with nondemocratic and/or corrupt countries on its list. Worse yet, the Obama administration is supporting the OECD in this wholesale violation of basic rights. …The good news is that some in low-tax jurisdictions are beginning to fight back. Last week, the head of the oldest bank in Switzerland (who holds a doctorate in economics from a leading U.S. university) said he was no longer going to invest in the United States because he found the new IRS regulations — which foreign banks must follow — so vague, onerous and incomprehensible that he could never be sure his bank was not at risk. In addition, he argued that the economic path the U.S. is taking can only lead to slower growth, and his bank sees better opportunities elsewhere. From the time of the Reagan economic reforms a quarter of a century ago until last year, the United States had the highest average rate of growth of the major developed countries. A substantial part of this growth was fueled by foreign investment in our nation. Those in the Obama administration’s Treasury Department (including the IRS) who are working with the tax bullies at the OECD are driving away much of the foreign investment at a time when it is most needed.

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I explain why the Obama Administration should not export America’s wretched internal revenue code to other nations that have better tax policy and more respect for human rights.

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