On 26 September 2021, Swiss voters will decide whether to introduce a tax increase on money earned from company ownership and investments.
The initiative named ‘Reduce tax on salaries, tax capital fairly’ aims to have income derived from investments and company ownership taxed at 150% of the rate applied to other income.
The argument put forward by the initiators, a group belonging to the young Socialist Party, is that income such as salary reflects human toil, while income connected to ownership and investment is passive.
The group claims that the 1% richest are living at the expense of the rest of the population and that this is exacerbated by the current tax system, essentially, arguing that the current system of progressive taxes is insufficiently redistributive and therefore unfair. With their proposed change they claim the rich would pay more tax and everyone else would pay less. Those paying the extra proposed tax can easily afford it, they argue.
The wording of the initiative is unclear regarding what gains or income related to investments and company ownership would be subject to the higher taxes, so it could include capital gains. The point at which the proposed tax increase would kick in is also absent from the wording, although a figure of CHF 100,000 has been suggested.
Switzerland’s government is against the plan. Both the Federal Council and Parliament advise voting against it.
The government says that the portion of income coming from investments and other assets in Switzerland has remained broadly stable since the mid 90s. In addition, it says that taxation in Switzerland is already highly redistributive. Switzerland has a wealth tax and both wealth and income tax rates are progressive, rising in line with rising amounts. Currently, the top 1% of earners pay 40% of Switzerland’s tax, a share far higher than the 10% of the revenue they earn. This means the average rate of tax paid by this group is already 6 times the rate paid by the other 99%.
The government also says that incomes in Switzerland are spread more equally than across most of the OECD. The Gini coefficient, a measure of inequality, was 0.299 in Switzerland in 2020 – a score of 0 is perfect equality and 1 is complete inequality. On this measure, Switzerland (0.299) is more equal than most OECD nations, including Canada (0.301), France (3.01), Greece (0.306), Portugal (3.17), Italy (0.330), Spain (0.330), the United Kingdom (0.366), the United States (0.390) and many others. Costa Rica (0.497) had the highest gini coefficient – all data here.
In addition, the new tax would act as a disincentive to invest in Switzerland, something that would weigh on household savings, the entrepreneurial and corporate investment activity that generates jobs, and the nation’s prosperity, said the government. Companies create jobs and companies need investment.
Furthermore, Switzerland’s existing wealth tax and partial double taxation of dividends already make the country quite unattractive for entrepreneurs and wealthy residents, a group whose choice of residence is sensitive to tax rates, said the government.
Based on the tax revenue figures presented by the government above, if a fraction of the highest earning 1% left Switzerland and took 10% of that group’s income and wealth with them, the tax on the remaining 99% would need to rise by an average of 7% to keep tax revenues at their current level. This would mean an average tax payer in the 99% would need to pay CHF 107 for every CHF 100 in tax they currently pay – see note1.
The government also argues that the plan would be unfair. Revenue from investment is not passive. It does not come from doing nothing, it says. Entrepreneurs often toil away for years on low salaries in the hope that the future value of their companies might one day compensate them for their years of salary sacrifices, something known as sweat equity. Taxing the return on this toil at 50% higher rates would be unfair.
Because of the way unlisted companies are currently valued, Switzerland’s wealth tax can be a headwind for entrepreneurs. Shares in start up companies paying founders subsistence salaries can lump founders with a significant wealth tax burden at a time when they’re struggling to ensure their companies survive and make ends meet.
The plan could also affect pensioners living off money earned, saved and invested during their working lives.
Finally, the government says that it is very unlikely that the plan would raise the extra sums expected and that the change would likely increase taxes for far more people than the 1% of tax payers initiators claim.
1 (((100%−(40%×90%))÷90%)−((100%−(40%×100%))÷90%))÷((100%−(40%×100%))÷90%) = 7%. The equalising tax increase on the 99% would be large because 1% of the population currently pays 40% of taxes.