Steve Forbes' Editorial on Switzerland

[anorlunda]

I just saw this editorial from 2018. I think Mr. Forbes makes some good points.

WHY ISN'T SWITZERLAND held up as an impressive economic model for other countries? Why does the IMF ignore its lessons of long-term success when recommending prescriptions to nations that get into trouble? Swiss growth rates, very dependent on exports, have been good despite the country's low-growth neighbors.

--Taxes. Understanding investment's basic importance to progress, this Alpine nation imposes no capital gains tax. That's right: zero. Its value-added tax (VAT)--7.7%--is paltry by European standards, where punishing double-digit levies are the norm. The corporate tax rate averages 17.7%, better than the rates of most of its peers (the rate varies depending on which canton--the equivalent of a state or province--the company is located in; the lowest is a mere 11.5%). The highest personal income tax rate (federal and local) ranges from 22% to 45%. The comparative range in the U.S. is 37% to over 50%.

Naturally, the IMF and all too many economists recommend burdening taxpayers even more.

--Currency. During the past 100 years, no other nation in the world has matched Switzerland for sound money. Not even close. This utterly underappreciated virtue has been crucial to the country's superb economic performance. Capital creation and investment flourish best when a currency's value is fixed. Yet the IMF routinely tells troubled clients, such as Argentina, to let theirs "float," a euphemism for devaluation, to ostensibly spur exports. Left unexplained is how Switzerland has become an export powerhouse despite its supposedly overvalued franc.

The Swiss federal system--in which its 26 cantons have considerable autonomy--has enabled its German-, French- and Italian-speaking citizens to live peaceably and productively together for more than 800 years.

 

[gleem]

I'm not sure what this means. For example, if you look at the annual GDP or the GDP/capita or GDP taking a factor that measures purchasing power(purchasing power parity, PPP) into account you get some confusing data.

Switzerland is a small country (100 th in the world) with pretty good GDP (20 th in the world) . So its GDP/cap is high (no. 2) in the world. Luxembourg is 169th in pop but first in GDP/cap and only 69th in gross GDP.

Ireland is interesting. GDP is no. 32; GDP/cap is no. 4; population is no. 124

The US GDP is no. 1 GDP/cap is no. 10. Population is no.3.

The highest GDP/cap are small countries. The highest GDPs are large countries.

Taking purchasing power into account GDP(PPP)/cap. Luxembourg is no. 2; Ireland is no. 5; Switzerland is no 9; and the US is no. 10. Norway is no. 6. China is no. 73.

So it doesn't seem like Switzerland is way and above other countries and the US doesn't seem like it is all that bad.

What is the takeaway?

 

[anorlunda]

Switzerland does not have super powers, but it is doing better than its neighbors.

But part of the takeaway is that Switzerland can be even modestly successful with government and taxation policies that are the reverse of the large nations. It calls into question whether those other countries could do better than they do, if they had Swiss-like policies.

 

[gleem]

But it is not clear that government/taxation policies alone are that significant in it economic success. Switzerland seems to have a very interesting history, culture and national identity. I kind of look at trying to figure out why Switzerland is so successful is like trying to find out what type of life style is the most successful. So where to begin. Manufacturing contributes about 27% to the GDP to which the gem and precious metal industry which dominates this part of the the GDP(26%). Switzerland has neither gold nor diamonds. An then there is banking and tourism that contribute the bulk of the GDP, 73%. So its economy is quite different from other nations.

Norway a social democracy has a GDP(PPP) greater than Switzerland so how do you figure that?

 

[Vanadium 50]

Switzerland is a special place. (How many bank havens does the world really need for dictators and war criminals anyway?) But anyway, it's also a place where one can negotiate one's taxes with their canton - usually a fixed amount for ~10 years. This provides financial stability for the canton in a way California, for example (where half the state income tax comes from 1% of the taxpayers) does not get. In California, when Scrooge McDuck moves to Texas, there's a hole in the budget. When Dagobert Duck wants to move from Vaud to Appenzell Innerholden, he's still on the hook for taxes to Vaud.

 

[OmCheeto]

So where to begin. Manufacturing contributes about 27% to the GDP to which the gem and precious metal industry which dominates this part of the the GDP(26%). Switzerland has neither gold nor diamonds. An then there is banking and tourism that contribute the bulk of the GDP, 73%. So its economy is quite different from other nations.

hmmm...
So, following your lead; If every nation were to just stop what they're doing right now, and push for a Swiss type economy, how would that affect the global picture, in say, 10 years, when things have settled down?

mmm... nyet.

I'm not seeing it.

Switzerland is a special place. (How many bank havens does the world really need for dictators and war criminals anyway?) But anyway, it's also a place where one can negotiate one's taxes with their canton - usually a fixed amount for ~10 years. This provides financial stability for the canton in a way California, for example (where half the state income tax comes from 1% of the taxpayers) does not get. In California, when Scrooge McDuck moves to Texas, there's a hole in the budget. When Dagobert Duck wants to move from Vaud to Appenzell Innerholden, he's still on the hook for taxes to Vaud.

I was very suspicous of that "1% pays 50%" thing.
Turned out to be true.
So I checked a couple of other states: New Hampshire^[1] and Oregon^[2].
AFAICT, from very napkinish number crunching, the top 1% always end up paying ≈50%. At least, here in the states.

--------
[1] America's version of Switzerland { free market heaven }
[2] America's version of France { stinkin' commies }

 

[gleem]

hmmm...
So, following your lead; If every nation were to just stop what they're doing right now, and push for a Swiss type economy, how would that affect the global picture, in say, 10 years, when things have settled down?

mmm... nyet.

I'm not seeing it.

Neither do I. My statement was to call attention to Switzerland's unique economy to consider other factor that might be playing in their success rather than governmental regulation of business. I look at Switzerland as a unique situation that developed over centuries. Every nation has to thoughtfully develop its own strategy to take advantage of its unique resources both material and intellectual.

 

[StatGuy2000]

It seems interesting to me that in this thread, not a single PF member from Switzerland has chosen to chime in and comment.

 

[OmCheeto]

It seems interesting to me that in this thread, not a single PF member from Switzerland has chosen to chime in and comment.

Maybe if they had, they'd point out that Switzerland and the US

are next to each other on the tax chart, and laugh, about this conversation we're having.

 

[epenguin]

The article concludes "its German-, French- and Italian-speaking citizens to live peaceably and productively together for more than 800 years."

That reminds it was famously said that:

"they had brotherly love, five hundred years of democracy and peace, and what did they produce? The cuckoo clock."

 

[Vanadium 50]

It seems interesting to me that in this thread, not a single PF member from Switzerland has chosen to chime in and comment.

I am not Swiss, but I have lived in the Geneva area for several years. (A good fraction of this was in the Pays de Gex, though.)

Maybe if they had, they'd point out that Switzerland and the US are next to each other on the tax chart, and laugh, about this conversation we're having.

First, I don't think Forbes is arguing about the total tax rate so much as how the taxes are structured. As an example, property taxes are generally quite high in Switzerland compared to the US. Likewise for gasoline taxes. Furthermore, Switzerland has much less sovereign debt than the US, and a lower interest rate (currently 0%) so a higher fraction of their government expenditures goes to services rather than servicing the debt. Past frugality allows for a lower tax rate in the present.

Second, the Swiss economy is much less diverse than the US. Here are the export treemaps:
Swiss:

USA:

Finally, the Swiss and American cultures are different and many Americans would have strong feelings about some of the differences.

• The Swiss cantons play a much, much larger role in government than the US states do.
• In America, 31% of the households have firearms. In Switzerland it is close to 100%.
• In America, there is a constitutionally protected freedom of religion. In Switzerland, construction of minarets is illegal.
• In America, if you were born in the country, you are a citizen. In Switzerland, it is possible that your grandparents were born in Switzerland, your parents were born in Switzerland and you were born in Switzerland, and yet you are not a citizen.
• In the US, women have been able to vote for a century. In Switzerland, women were able to vote in every canton only since 1991.

I'm not listing these so we can debate which is better. I am listing these to give specific examples of the cultural differences.

PS What does Forbes mean that the CHF is overvalued? Of all people, he should appreciate the price agreed upon by a willing buyer and a willing seller is properly valued.

 

[anorlunda]

I agree that countries have unique cultures, and circumstances. That's not Forbes' point IMO.

I think the point is that radically different policies regarding taxation and distribution of power can also succeed. It could be possible that radical reform could improve the results for an culture and circumstance.

How does any country know that it's policies are optimum? Math and science are no help. One could use hill climbing optimization. But systematic experimentation is not in the toolbox of most governments. On the contrary, almost all of them are locked into their own unique national dogma. So when we hear heretical suggestions like this editorial, it is rapidly dismissed as not applicable to us.

 

[Vanadium 50]

Ideally, one would change one variable at a time. That, I'm afraid, is impossible. If you took the Swiss tax structure and imposed it on, say, Somalia, I don't think Somalia's economy would suddenly look like Switzerland's.

 

[anorlunda]

Ideally, one would change one variable at a time. That, I'm afraid, is impossible.

So the question remains. How does a country know that it's policies are the best they can do?

 

[Vanadium 50]

I don't think that's the target. The US and Switzerland are both democracies, and thus get the policies that the people choose, whether or not an expert thinks they are the "best" (however that's defined) or not. Or, if you like, given that all policies have winners and losers, "best" is defined in a democracy as the one the most people vote for.