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Posts Tagged ‘Switzerland’

There’s a lot to admire about Switzerland, particularly compared to its profligate neighbors.

With all these features, you won’t be surprised to learn that Switzerland is highly ranked by Human Freedom Index (#2), Economic Freedom of the World (#4), Index of Economic Freedom (#4), Global Competitiveness Report (#1), Tax Oppression Index (#1), and World Competitiveness Yearbook (#2).

Today let’s augment our list of good Swiss policies for reviewing the near-universal system of private pensions. I’ve been in Switzerland this week for a couple of speeches in Geneva, as well as interviews and meetings in Zurich and Bern.

As part of my travels around the country, I took the time to learn more about the “second pillar” of the country’s pension system.

Here’s a basic description from the Swiss government (with the help of Google translate).

The first pension funds were founded more than a hundred years ago… In 1972 the occupational pensions were included in the constitution. There it represents the second column in the three-column concept… The BVG compulsory scheme applies to all employees who are already insured in the first pillar… Pension provision in the second pillar is based on an individual savings process. This starts at 25 years. However, the condition is an annual income that exceeds the threshold (since 2015: 21’150 francs). The savings process ends with the reaching of the pension age. The accumulated savings in the individual account of the insured [are] used to finance the retirement pension.

If you want something in original English, here’s a brief description from the Swiss-American Chamber of Commerce.

The second pillar is governed by the provisions of the laws on occupational pension provision (BVG)… Employees who are paid by the same employer an annual salary exceeding CHF 21,150 are subject to compulsory insurance. The share of the salary which is subject to compulsory insurance is…between CHF 24,675 (the coordination deduction) and CHF 84,600… An employer who employs persons subject to compulsory insurance must be affiliated to a provident institution entered in the register for occupational benefit plan. The contributions into the pension scheme depend on age and include a minimum saving portion of 7% – 18% of the coordinated salary plus a risk portion. Both are equally shared between employer and employee. The benefits of the insured persons consist in the old age, invalidity and survivors pensions.

One of the interesting quirks of the system is that the mandatory contribution rate changes with age. The older you are, the more you pay.

I’m not sure that makes a lot of sense if the goal is for people to have big nest eggs when they retire, but nobody asked me. In any event, here’s a table showing the age-dependent contribution rates from an OECD description of the Swiss system.

Technically speaking, the contributions are evenly split between employees and employers, though labor economists widely agree that workers bear the real cost.

It’s also worth noting that the Swiss system is based on “defined contribution” like the Chilean and Australian private retirement systems. This means  retirement income generally is a function of how much is saved and how well it is invested.

By contrast, the Dutch private system is based on “defined benefit,” which means that workers get a pre-determined level of retirement income. As evidenced by huge shortfalls in the defined benefit regimes maintained by many public and private employers in the United States, this approach is very risky if there aren’t high levels of integrity and honesty.

Though that doesn’t seem to be a problem in the Netherlands. Speaking of the Dutch system, here’s a chart I shared back in 2014.

It was designed to laud the Netherlands, but you can see that Switzerland also had a large pool of pension assets, equal to more than 110 percent of GDP (according to OECD data, now 123 percent of GDP).

Looking at this data, ask yourself whether Switzerland (or the Netherlands, Iceland, Australia, etc) will be in a stronger position to handle the fiscal challenge of aging populations, particularly when compared to nations with virtually no private pension assets, such as France, Greece, and Japan.

The Swiss regime certainly isn’t perfect, and neither are the systems in other nations with private retirement savings. But at least those nations are in much better shape to deal with future demographic changes. Workers in Switzerland and other countries with similar systems have real assets rather than unsustainable political promises. And it’s also worth pointing out that there are macroeconomic benefits for nations that rely more on private savings rather than tax-and-transfer entitlement schemes.

In other words, the Swiss system is much better than America’s bankrupt Social Security scheme.

P.S. Back in 2011, I compared five good features of the United States to five good features of Switzerland. If retirement systems were part of that discussion, Switzerland would have enjoyed a sixth advantage.

P.P.S. Switzerland does have some warts. It is only ranked #31 in the World Bank’s Doing Business. It also has a self-destructive wealth tax. And  government spending, though modest compared to neighbors, consumes slight more than one-third of economic output.

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Back in 2009, I shared the results of a very helpful study by Pierre Bessard of Switzerland’s Liberal Institute (by the way, “liberal” in Europe means pro-market or “classical liberal“).

Pierre ranked the then-30 member nations of the Organization for Economic Cooperation and Development based on their tax burdens, their quality of governance, and their protection of financial privacy.

Switzerland was the top-ranked nation, followed by Luxembourg, Austria, and Canada.

Italy and Turkey were tied for last place, followed by Poland, Mexico, and Germany.

The United States, I’m ashamed to say, was in the bottom half. Our tax burden was (and still is) generally lower than Europe, but there’s nothing special about our quality of governance compared to other developed nations, and we definitely don’t allow privacy for our citizens (though we’re a good haven for foreigners).

Pierre’s publication was so helpful that I’ve asked him several times to release an updated version.

I don’t know if it’s because of my nagging, but the good news is that he’s in the final stages of putting together a new Tax Oppression Index. He just presented his findings at a conference in Panama.

But before divulging the new rankings, I want to share this slide from Pierre’s presentation. He correctly observes that the OECD’s statist agenda against tax competition is contrary to academic research in general, and also contrary to the Paris-based bureaucracy’s own research!

Yet the political hacks who run the OECD are pushing bad policies because Europe’s uncompetitive governments want to prop up their decrepit welfare states. And what’s especially irksome is that the bureaucrats at the OECD get tax-free salaries while pushing for higher fiscal burdens elsewhere in the world.

But I’m digressing. Let’s look at Pierre’s new rankings.

As you can see, Switzerland is still at the top, though now it’s tied with Canada. Estonia (which wasn’t part of the OECD back in 2009) is in third place, and New Zealand and Sweden also get very high scores.

At the very bottom, with the most oppressive tax systems, are Greece and Mexico (gee, what a surprise), followed by Israel and Turkey.

The good news, relatively speaking, is that the United States is tied with several other nations for 11th place with a score of 3.5.

So instead of being in the bottom half, as was the case with the 2009 Tax Oppression Index, the U.S. is now in the top half.

But that’s not because we’ve improved policy. It’s more because the OECD advocates of statism have been successful in destroying financial privacy in other nations. Even Switzerland’s human rights laws on privacy no longer protect foreign investors.

As such, Pierre’s new index basically removes financial privacy as a variable and augments the quality of governance variable with additional data about property rights and the rule of law.

P.S. When measuring the tax burden, the reason that America ranks above most European nations is not because they impose heavier taxes on rich people and businesses (indeed, the U.S. has a much higher corporate tax rate). Instead, we rank above Europe because they impose very heavy taxes on poor and middle-income taxpayers (mostly because of the value-added tax, which helps to explain why I am so unalterably opposed to that destructive levy).

P.P.S. Also in 2009, Pierre Bessard authored a great defense of tax havens for the New York Times.

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There was some genuinely good news in 2016, which is more than I can say for 2015 (my “best” development for that year was some polling data, followed by some small-ball tinkering).

Though the good news for 2016 was mostly overseas. Here are the four things from around the world that made me happy this year.

And while we didn’t have any major positive developments in the United States, there was a bit of good news. Yes, it’s “small-ball tinkering,” but I’m always glad for any progress.

So those are the noteworthy good things that happened this year. Now let’s look at the other side of the ledger. What was the bad news of 2016?

Well, the good news (so to speak) is that there was not a lot of bad news. At least if we’re focusing on actual policy changes.

But there are three developments that cause me to worry about the future.

Tomorrow I will write about my hopes and fears for 2017.

Let’s close today’s column with a few special categories.

If there was an award for the most disgusting news of 2016, the NAACP would be the clear winner for their decision to sacrifice black children in order to collect blood money from teacher unions.

And if we also had a prize for most moronic leftist in 2016, there would be another easy winner. Trevor Noah inadvertently showed why gun control doesn’t work even though he wanted to make the opposite point.

Last but not least, if there was a category for surprising news in 2016, there’s no question that Paul Krugman would win that prize for writing something sensible about tax policy.

P.S. My most popular post in 2016 (which also set the all-time record) was the very clever image showing that the enemies of liberty are looters, regardless of their economic status.

P.P.S. My most surreal moment in 2016 was getting attacked on the front page of the Washington Post. I must be doing something right.

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Most folks in Washington are still digesting last night’s debate between Tweedledee and Tweedledum. If that’s what you care about, you can see my Twitter commentary, though I was so busy addressing specific issues that I failed to mention the most disturbing part of that event, which was the total absence of any discussion about the importance of liberty, freedom, and the Constitution.

But let’s set aside the distasteful world of politics and contemplate U.S. competitiveness. Specifically, let’s examine America’s position in the latest edition of the World Economic Forum’s Global Competitiveness Report. This Report is partly a measure of policy (sort of like Economic Freedom of the World) and partly a measure of business efficiency and acumen.

The bad news is that we used to be ranked #1 and now we’re #3.

The good news is that being #3 is still pretty good, and it’s hard to beat Switzerland and Singapore because they have such good free-market policies. And that’s where America falls short.

Indeed, if you look at the top-10 nations and the three major measurements, you’ll notice that the United States ranks extremely high in “efficiency enhancers” and “innovation and sophistication factors,” both of which have a lot to do with the private sector’s competitiveness. But we have a mediocre (at least for developed nations) score for “basic requirements,” the area where government policy plays a big role.

Moreover, if you look at the the biggest obstacles to economic activity in the United States, the top 4 deal with bad government policy.

The tax treatment of companies is easily the main problem, as you might expect since we rank #94 out of 100 nations in a study of business tax policy.

Let’s now look at the indices where the United States scored especially low out of the 138 nations that were ranked.

America’s lowest scores were for exports (#130) and imports (#134), though I take issue with the Report‘s methodology, which is based on trade flows as a share of GDP. The problem with that approach is that the United States has a huge internal market, equal to about 22 percent of the world’s economic output. That’s why our trade flows aren’t very large relative to GDP. Being surrounded by two major oceans also probably has some dampening effect on cross-border trade flows. Yes, America is guilty of some protectionism, but I think our ranking for trade tariffs (#33) is the more appropriate and accurate measure of the degree to which there is a problem.

America also got a very bad score (#128) for government debt, though at least we beat Italy (#135), Greece (#137), and Japan (#138). In case you’re wondering, Hong Kong was #1, as you might expect from a well-run jurisdiction with small government and a flat tax.  Though I must say that it is rather disappointing that the Report doesn’t include rankings for the overall burden of government spending. After all, government debt is basically a symptom of an underlying problem of a bloated public sector.

And there also was a very low score for the business cost of terrorism (#104), which is probably an unavoidable consequence of being the world’s leading superpower (and therefore a target for crazies). That being said, I imagine America’s score could be improved if we weren’t engaging in needless intervention – and thus generating needless animosity – in places such as Syria and Libya.

Here are two indices that deserve special attention. As you can see the United States gets a poor score for wasteful spending and a terrible score for the punitive taxation of profits.

With this information in mind, let’s now remind ourselves about last night’s debate. Did either candidate propose to control spending and reduce pork-barrel programs? Nope.

Did either candidate put forth a realistic plan to lower the corporate tax rate? Hillary’s plan certainly doesn’t qualify since she wants a bunch of class-warfare tax hikes. And while Trump’s plan includes a lower corporate rate, it’s not a serious proposal since he is too timid to put forth a plan to restrain government outlays.

And since neither candidate intends to address America’s looming fiscal crisis, it will probably be just a matter of time before America drops in the rankings.

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While Switzerland is one of the world’s most market-oriented nations, ranked #4 by Economic Freedom of the World, it’s not libertarian Nirvana.

Government spending, for instance, consumes about one-third of economic output. That may be the second-lowest level among all OECD nations (fast-growing South Korea wins the prize for the smallest public sector relative to GDP), but it’s still far too high when compared to Hong Kong and Singapore.*

Moreover, while the Swiss tax code is benign compared to what exists in other European nations, it also is not perfect. One of the warts is a wealth tax, which is a very pernicious levy that drains capital from the private sector.

Let’s look at some excerpts from a report in the Wall Street Journal, starting with a description of the Swiss system.

Switzerland has taxed wealth since the late 18th century. Its 26 cantons in 2014 levied taxes on net wealth with rates varying from 0.13% in the lighter taxing German-speaking parts to 1% in French-speaking Geneva. Swiss wealth taxes are also special because they apply from wealth as low as 25,000 Swiss francs, ensuring large swaths of the middle class incur them. Typical taxpayers pay a rate of just over 0.5%.

Here are the wealth tax rates in the various cantons, based on a recent study of the system.

As noted in the WSJ story, that study contains strong evidence that the tax is hurting Switzerland.

…according to a new paper, …taxing wealth leads declared wealth to disappear. Based on experience in Switzerland, which uses wealth taxes the most, reported wealth falls around 20 times as much in response to an increase in a wealth tax as it does to an equivalent increase in a tax on capital income, such as dividends or capital gains. …Economists at the University of Lausanne and Massachusetts Institute of Technology found that a 0.1 percentage point increase in Swiss wealth taxes caused a 3.5% reduction in reported wealth. That’s equivalent to 100,000 Swiss francs going missing for a person worth 3 million francs. …they conclude in a study investigating changes in wealth tax rates on Swiss taxpayers’ reported wealth from 2001 to 2012.

Why is there such a big response?

For the same reason that class-warfare taxes don’t work very well in the United States. Simply stated, taxpayers have considerable ability to rearrange their financial affairs when governments try to tax capital (or capital income). And that ability is especially pronounced for those with higher levels of income and wealth.

Individuals have greater control over their reported wealth–especially financial wealth such as bank deposits, stock and bonds–than their reported income.

By the way, the story also included this nugget of good news.

Thanks primarily to tax competition, many nations have eliminated wealth taxes over the past 20 years.

…only five members of the Organization for Economic Cooperation and Development still levy annual taxes on individuals’ total financial and non-financial wealth… That is down from 14 nations two decades ago.

And if you want more good news, the Swiss cantons also are lowering their tax rates on wealth.

Here’s another map from the study. It shows that a couple of French-speaking cantons have imposed very small increases in the tax since 2003, while the vast majority of cantons have moved in the other direction, in some cases slashing their wealth tax rates by substantial amounts.

Since I’m a big fan of Switzerland, let’s close with some more good news about the Swiss tax system. Not only are tax rates on wealth dropping, but there’s no capital gains tax. And there are no taxes on interest.

So while there is a wealth tax, which is a very unfortunate and destructive imposition, the Swiss avoid many other forms of double taxation on income that is saved and invested.

*The burden of government spending also is excessive in Hong Kong and Singapore. Based on historical data, economic performance will be maximized if total government spending is less than 10 percent of GDP.

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Programs about the improbable success of Chile and Estonia already have aired on nationwide TV, and those were joined last weekend by a show about the “sensible nation” of Switzerland.

Here’s the 28-minute program.

When I first watched the program, I was slightly irked that there was very little discussion of the role of fiscal policy and the importance of spending restraint and competitive tax rates.

Moreover, there was no direct mention of Switzerland’s very successful spending cap, even though the “debt brake” has generated superb results.

Indeed, Switzerland is the only nation from Europe or North America that gets high scores from Economic Freedom of the World for both fiscal policy and rule of law (a notable achievement since Wagner’s Law tells us that it is very difficult to stop government from expanding once the private sector generates a lot of wealth that can be redistributed).

But I confess I’m biased about the importance of tax and spending issues.

And as I thought about what I had seen, I realized that the program’s focus on federalism and decentralization made sense.

Yes, Switzerland has a modest-sized government. And, yes, the debt brake has been a huge success. But those good outcomes are in part the result of a system where most government still takes place at the local (commune) or state (canton) level.

In other words, Switzerland generally still has the type of system America’s Founding Fathers envisioned, with a small central government.

I’ve already pointed out that the level of redistribution in Switzerland is relatively low because of its decentralized model.

But there’s another feature of federalism that’s worth celebrating. As Nassim Nicholas Taleb (of “Black Swan” fame) has pointed out, decentralized systems are much more stable and successful since there’s far less risk of a mistaken policy being imposed on a one-size-fits-all basis.

And countless scholars, including many Nobel Prize recipients, have explained that small, competing nations were a key reason why Europe became a rich continent in the first place.

Sadly, most Europeans have forgotten this lesson and have created the EU superstate in Brussels (which helps to explain why I’m delighted that the United Kingdom voted to escape that sinking ship).

So the moral of the story, from both the video about Switzerland and from all the other evidence in the world, is that federalism is good policy.

Let’s close with an interesting example of Swiss federalism in action. The canton of Zug is known for being a low-tax haven in a country famous for having a reasonable tax regime. Well, the town of Zug is on the cutting edge of digital money.

…the town council has hopes Zug’s trend as a financial tech hub continues  — having embraced the new identity with this legislative move. …As the pilot program is first implemented it will initially allow payments up to 200 Francs, and possibly introducing the ability to pay larger amounts later in the future. …analysis will ultimately determine whether or not the town council will continue allowing Bitcoin payments for municipal services. …Bitcoiners will be taking notice of this small town, and it already has the added benefit of being located in Switzerland  —  which is known for its business friendly environment and relatively small regulatory burden. …In fact, Switzerland’s business environment and relatively free-market economy even helped to convince the Bitcoin wallet and exchange, Xapo, to relocate to Switzerland last year. …the town of Zug itself also provides its citizens with a relatively hands-off approach to the local economy. The Swiss town of  Zug showcases one of the lowest tax rates in the world. This combination of a hands-off approach by the government and large tax benefits has made the small town into a successful economic hub where global trade flourishes.

Wow, this says a lot about the quality of governance in Switzerland that a nation that doesn’t need Bitcoin (unlike, say, Greece or Argentina) nonetheless welcomes it as a competing currency.

Yet another reason why Switzerland is one of the world’s best nations.

P.S. Today’s column is about Switzerland, but I can’t resist pointing out that Hong Kong and Singapore both score highly for rule of law and small government. And Chile deserves honorable mention as well. For what it’s worth, the Princess of the Levant’s home country of Lebanon apparently has the world’s small fiscal burden, but the low score for rule of law suggests that the real story is that the government is simply too incompetent to collect and redistribute money.

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At the risk of oversimplifying, libertarians want to minimize the level of government coercion is society. That’s why we favor both economic liberty and personal liberty. Simply stated, you should have the right to control your own life and make your own decisions so long as you’re not harming others or interfering with their rights.

That’s a philosophical or moral argument.

There’s also the utilitarian argument for liberty, and that largely revolves around the fact societies with more freedom tend to be considerably more prosperous than societies with lots of government.

I’ve repeatedly made this argument by comparing the economic performance of market-oriented jurisdictions and statist ones.

Let’s look at some new evidence. Based in Lausanne, Switzerland, the Institute for Management Development is a highly regarded educational institution that publishes an annual World Competitiveness Yearbook that basically measures whether a nation is a good place to do business.

So it’s not a measure of economic liberty, at least not directly. And the quality of governance matters for the IMD rankings (presumably based on something akin to the European Central Bank’s measure of “public sector efficiency“).

But you’ll notice a clear link between economic liberty and competitiveness.

Here are the top-10 nations. (you can look at the rankings for all nations by clicking here).

As you might suspect, there’s a strong correlation between the nations that are competitive and those that have smaller governments and free markets.

Indeed, three out of the top four jurisdictions (Hong Kong, Singapore, and Switzerland) rank in the top four for economic liberty according to Economic Freedom of the World.

And I’m happy to see that the United States also scores very highly, even if we only rank 17 out of 157 for economic freedom.

Indeed, every country in IMD’s top 10 other than Sweden is ranked in the top quartile of EFW.

You also probably won’t be surprised by the countries getting the worst scores from IMD.

Congratulations to Venezuela for being the world’s least competitive nation. Though that might be an overstatement since IMD only ranks 61 jurisdictions. If all the world’s countries were included, Venezuela presumably would beat out North Korea. And maybe a couple of other squalid outposts of statism, such as Cuba.

It’s also worth noting that Greece gets consistently bad scores. And I’m not surprised that Argentina is near the bottom as well (though it has improved since last year, so hopefully the new government will continue to move in the right direction).

By the way, it’s worth noting that economic freedom is a necessary but not sufficient condition for competitiveness. Jordan, for instance, ranks in the top 10 for economic freedom but gets a low score from IMD, presumably because the advantages of good policy don’t compensate for exogenous factors such as geopolitical risk and access to markets.

The moral of the story, though, is that free markets and small government are the recipe for more prosperity. And those policies are probably even more important for nations that face exogenous challenges.

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