Taxes and finances in Switzerland – determined by the people
Taxes and finances in Switzerland – determined by the people
State political background and its history
by Dr rer publ. Werner Wüthrich
Switzerland is one of the few countries in the world which has a tolerable grip on its finances and, although without being a member, it has no problems meeting the EU’s Maastricht criteria – total debt must not exceed 60 percent and new debt must not exceed 3 per cent of GDP. What are the reasons for this? If you were to conduct a poll on the street, you would most likely get the answer: “We have the “debt brake” in our constitution. We voted for it.” That is certainly true. But it is only part of the answer. The Swiss have always voted, on all political levels, not just on the debt brake but on all taxes. Such unique political rights form part of the Swiss democracy. At the federal level, tax issues have been decided on the urn for about a hundred years. In the municipalities and cantons, this was the case much earlier.
In recent years, there were again several votes on taxes, such as the Corporate Tax Reform III, the introduction of a federal tax for larger inheritances, or the partial financing of old age provision via VAT. These are demanding topics, but the Swiss population is equal to them. – If you really want to understand Switzerland, you must know the relevant part of its history.
It began almost exactly one hundred years ago, when a proposal was submitted in Switzerland on 6 June 1915, in the middle of World War I, to introduce an income and wealth tax at the federal level – the very first federal tax of all. This was the beginning of a long series of federal financial votes – still continued today. Before the war, the federal government had been financed to 95 percent from tariffs. Income and wealth taxes were reserved for the municipalities and cantons. So at that time this was an extraordinary event well worth remembering.
Litmus test of direct democracy in the First World War
War times are difficult times. In addition to human suffering, economic concerns are at the forefront – both in families and in the state. In World War I, Switzerland was fortunate in not being involved in hostilities. However, there was always the danger that a major foreign power might occupy the Swiss Mittelland region or the Jura in order to be able to bypass their opponents or otherwise achieve a war-important advantage – as happened in Belgium or the Netherlands. The Swiss army therefore remained mobilised till the end of the war and was prepared to ward off foreign troops. The Federal Council was soon faced with the question of how they were to finance all this. Customs and taxes collapsed during the war, because in May 1915 Switzerland was completely surrounded by warring major powers. So customs and taxes fetched nowhere near enough revenue to finance mobilisation as well as the rapidly rising cost of defence spending, and the expense of alleviating the plight of the civilian population.
The federal revenue in 1913 amounted to only 100 million francs. As a result of the mobilisation, the Federal Council expected an additional expenditure of 300 million. Already in 1914, the federal government had issued a first war loan of 30 million – with interest at five percent. Eight more bonds followed. The federal government also received money from the National Bank – that is, via the printing press. In addition, the Federal Council proposed a one-off, progressively designed federal tax on income and assets for the duration of the war as an urgent measure. Because of its wartime authority as the Swiss government, the Federal Council could simply have introduced the war tax without asking the people. But because of their deeply democratic convictions, government and parliament decided to follow the orderly way, working out a constitutional article and presenting it to the people, which was not a matter of course in a war situation at that time. In June 1915, it came to the vote.
High level of political maturity
The surprise was great. There was no question of a defeat, which, up to today the authorities have always had to allow for, especially with regard to taxes. On the contrary: In spite of difficult living conditions, 93 percent of the voters said yes to the war tax – as a one-time tax on income and assets. It was the highest approval rate that has ever been achieved by a federal bill. The vote was also important because German-speaking Switzerland rather sympathised with the German Empire and French-speaking Switzerland with France. The clear result across the country was a clear signal of the desire to stand up together for independence. Cleverly, the army command used soldiers from German-speaking Switzerland at the French frontier and soldiers from the French-speaking part of the country at the border to Germany. Two years later, another vote followed, this time on a stamp duty charged on transactions in securities. In May 1917, the sovereign agreed to this too – if only with a majority of 53 percent. These two popular referendums in the middle of the war were the prelude to a large number of federal tax referendums worth looking at in more detail. No one likes to pay taxes, but the Swiss have shown themselves to be responsible citizens also in financial dealings; they do not just keep their own wallets in view but are willing to make sacrifices when they realise that these are needed by their country.
First popular initiatives and votes on the introduction of federal taxes
Encouraged by the voting result of 1915, the Social Democrats launched a popular initiative in 1916. The one-off, heavily progressive federal income and wealth tax was to be kept up permanently beyond the war, because the state would then be in great need of money. In June 1918, 54 percent of voters and most cantons refused. Then, after the war, the question of repaying the “war debt” amounting to about 1 billion francs (according to the value at that time) arose. The Federal Council proposed to continue the one-off tax passed in 1915 for the period of the war, in order to repay the debt at least partly. On 4 May 1919, the people agreed and accepted the plan with a high percentage of 63 yeas. The amortisation tax was to be renewed periodically every 4 years. It was not cancelled until 11 years later. – Then as well as later, it was shown time and again: If citizens are convinced that taxes are really necessary, they agree even with unpopular measures – even at the federal level, as they had learned to do in the communities and cantons.
However, there was also opposition ...
The Social Democrats disapproved of this tax. As an alternative to official policy, they launched a popular initiative in 1921 “for the levying of a one-off tax on wealth” to be paid by the rich. The revenue generated by this tax – said the SP – was not only to be used to pay off the war debts, but also for social purposes. Workers were hit the hardest by the hardships, deprivations and problems of the war. Many Swiss would also have benefited from the war (the so-called “war profiteers”), and it would be more than justified that especially the rich and the profiteers would have to answer for the war debt. The rate for the planned levy was high. Specifically, rich people with assets worth about 10 million Swiss francs would have had to cede 20 percent thereof; and even richer people would have had to pay significantly more. Companies would have had to pay 10 percent of their business assets. (Kölz 2004, Quellenbuch, p. 221, Linder et al., 2010, p. 143) It was clear that this would not be easy. The SP proposed that companies should increase their capital stock and pay the tax in the form of share capital. In this way, the state would have become a co-owner of private companies. The opponents of the proposal protested violently that this would lead to the “nationalisation of the means of production” and – via some detours – to communism as practiced in Russia by Lenin.
At that time there were not that many “rich people”. A small minority composed of just six per thousand taxpayers would have been affected by this tax, but of course these had reason to fear that the overwhelming majority would vote against them. The voting Sunday of 3 December 1922 was to go down in the history of direct democracy. Almost all voters – 89 percent – went to the polls! This record-high voter turnout has never been achieved again. A massive majority of almost 90 percent of the voters rejected the popular initiative. Large sections of the workers voted No. At that time, the SP had a vote share of about 30 percent. The social problems after the war were indeed great. However, this vote showed that most workers were still unwilling to engage in radical “class struggle” by means of referendums.
Making debts – little popular in Switzerland
The 1919 People’s Repayment Tax on War Debts was cancelled in 1931, when the great global economic depression began. The Federal Council and parliament endeavoured, despite the crisis, to continue handling their finances like a “good householder” and to balance their budgets without any debts. They almost always succeeded in doing this. Before the First World War, the federation had not been in debt, by 1939 debt had grown to 1.5 billion francs (for comparison: today’s debt is more than 100 billion, but at today’s monetary value). Therefore this debt mountain was of a relatively modest size, and it was still being criticised – but in a way different from today. At that time, the famous economist John Maynard Keynes recommended that governments act counter-cyclically: in bad times – as they were then – they should cut taxes, spend more, pay debts and invest in infrastructure, and also use the printing press to this effect. This would boost demand and create jobs. In good times, on the other hand, the state would have to spend less, raise taxes, repay debts and, if possible, build up reserves (which could then be used in a later crisis). This counter-cyclical theory was inherently logical and reasonable, popular in professional circles and responded favourably to in politics. Keynes became the most influential economist of the 20th century. In practice, however, his theory proved to be problematic, because politicians usually take seriously only the first part of the theory and understand it as a guide and justification for accumulating debts. So today, debts have reached a record high and continue to rise, so that repayments are no longer even being envisaged – notably in the US. In addition, state financing via the printing press is commonplace today. – Keynes would probably turn over in his grave if he knew in what way his anti cyclical theory is often applied today.
In the 1930s, Parliament and the Federal Council followed the recommendations of Keynes only to a limited extent. When federal revenue collapsed, they discussed wage cuts for federal personnel. Understandably, the staff associations did not accept this and called for a referendum against this federal decree. On 28 May 1933, 55 percent of voters said no. Almost simultaneously, the unions collected 240,000 signatures – almost five times more than required – within just four months, for the popular initiative “For an extraordinary federal crisis tax”. The “war tax” from the time of the First World War was to be reactivated and continued as a “crisis tax” for four years. The “holes” in the state budget were to be plugged with it. The Federal Council and Parliament gratefully accepted the concerns of the staff associations and responded with a federal decree in 1934, which was, however, problematic. They decided to introduce the crisis tax as an income and wealth tax – according to the demands of the trade unions –, but with reference to the difficult economic situation they implemented it immediately for four years by emergency law. This allowed the unions to withdraw their popular initiative, which they did. Opposition to this policy rightly came immediately – and for democratic reasons.
Against the elimination of democracy!
The Federal Council and Parliament had for the first time introduced a tax without a referendum! For this they received a lot of criticism – not only by constitutional lawyers such as Zaccaria Giacometti, but also by many other democratically minded citizens. A Geneva committee quickly collected signatures for the referendum “Conserving People’s Rights in Tax Issues” and at the end of 1934 submitted them with more than twice as many signatures than required. (Hofer 2012) The initiators rightly criticised the fact that the Federal Council and Parliament had ignored the people and violated a good democratic tradition. The Federal Council was uncomfortable with the matter. But instead of quickly organising a referendum, they played for time. They let the popular initiative disappear in a bottom drawer for many years, which was, again, problematic, but at that time still legally possible. Today there are deadlines. After all, the people’s representatives know more about these things a few years later. When the Federal Council and parliament wanted to extend the crisis levy for another two years in 1938, they no longer relied on emergency law, but called for a referendum. By doing this, they in fact admitted that the “Conserving People’s Rights in Tax Issues” initiators had been right. The tax accounted for about one third of the federal income. Their trust in the people was justified. The sovereign strengthened the federal government shortly before the beginning of World War II and agreed to the crisis tax with a majority of 72 %.
Thus in the thirties, Switzerland’s economic policy – essentially determined by the people – differed significantly from the strongly Keynesian policy of countries such as the United States.
Although the Federal Council supported individual industries such as the watch industry, the banks and even the farmers, and although the Swiss franc was devalued – as were other currencies – by 30 percent, the unions’ crisis initiative (submitted with 350,000 signatures) called for far more interventions in economic activities, for the “planned fight against crisis and distress”. This initiative was rejected in the referendum of 1935. With a debt of only about 1.5 billion francs (at the then monetary value), Switzerland was almost debt-free in 1939. Unemployment never rose above 8 percent in the 1930s. While in Germany the rolling commandos of the SA made the streets unsafe, signatures were still being collected in Switzerland – even more so than today. Democracy was an “unarguable matter of course” for the vast majority of its inhabitants. (Guggenbühl 1936).
Taxes during World War II
During the Second World War, the threat situation for Switzerland was more serious and acute than during WWI. Hitler had annected Austria. In the early stages of the war, the German “Wehrmacht” rushed from victory to victory and conquered countries like Denmark and Norway almost at a single stroke. Belgium, the Netherlands and France followed. The danger was great that Hitler would also annex the small Switzerland – especially because the north-south connection through the Gotthard was important to the German war effort. Therefore there were no objections to the Federal Council’s introducing new taxes quickly and without referendum in 1940 and 1941, on the basis of its powers of war: above all, the military tax – a progressive income and wealth tax – and the turnover tax as an excise duty. Both taxes were limited to the time of war. But this also included a wage replacement for the soldiers (which had been missing in the First World War).
In 1944, the military tax and the turnover tax were extended until 1949 – as a temporary solution. This was followed by a federal financial reform with the aim of a permanent tax system. This was to become one of the major tasks of domestic politics – involving much direct democracy. In the following years, eight popular initiatives were submitted – on almost all issues and concerns related to tax and finance.
The struggle for the federal finance reform begins
In 1949, the Federal Council and parliament made a first attempt at developing a permanent federal tax and financial system. As usual, the Federal Council first conducted a consultation to find out how the cantons, the associations, parties and interested citizens envisioned the planned financial regulations for the federal government. It was known that the bourgeois parties favoured excise duties such as the turnover tax and customs duties. The Left, on the other hand, favoured progressive income and wealth taxes, which put a greater burden on the well-earning and wealthy. It was controversial whether a special repayment tax would have to be set up again to pay off the huge debt mountain piled up during the war years. – All in all, a compromise would have to be found, which would take into account the diversity of interests and which a majority of the people would consent to. That would not be easy.
No to the federal tax and financial regulations of 1950
Federally-minded forces – including the Catholic-conservative People’s Party – presented a first project for a regulation in which a direct federal tax did not even feature. They were not concerned primarily with taxes, but with “real democracy”. The focus was on federalist considerations: during the crisis and the war, a shift of power to Berne had taken place, they said, and this power-shift was to be prevented from going any further. On the contrary, centralism would have to be partly dismantled, in order to preserve the traditional decentralised structure of Switzerland and to dissolve the power accumulation in Berne. For this reason, the direct federal tax on income and assets might be dispensed with. This type of tax should be reserved exclusively for the municipalities and cantons. Each canton could undertake to repay its share of the war debt. Other ways would have to be sought – for example, the rates of the excise duty (“Warenumsatzsteuer” WUST) or those of the capital gains tax might be increased. If need be, corporate profits might be moderately taxed. (Schweizer Monatshefte Bd. 27, 1947/48) – The idea found support especially in central Switzerland, in the French-speaking parts of Switzerland, and also among bourgeois parties. Parliament prepared a bill. The left was against it and demanded progressive income and wealth taxes to be introduced also in the federation. In 1950, this was put to the vote. Almost 65 percent voted no. Almost all the cantons of the French-speaking part of Switzerland and part of the central Swiss cantons voted yes. In the debate it became clear that this was not just about the money or the fair distribution of tax burdens, but also about federalism. It would be difficult to find a compromise.
Immediately after this vote, the Federal Council and parliament drafted a bill extending the transitional arrangement from the time of the war for another 4 years, until 1954. The people approved this with a clear majority. So time was gained for new proposals by the people. These followed quickly, and in no case did it take very long to collect the necessary signatures:
The PdA (Communists) came forth with a popular initiative which, for social reasons, aimed at a completely different direction. It contained the following key sentence: “The Confederation is not authorised to levy turnover taxes.” The initiative received only 19 percent of ayes in the vote.
“Peace tax” – like this …
In 1950, there was a war in Korea that threatened to escalate into nuclear war. Fears increased that tensions between East and West might get worse. The councils (Federal Council, National Council, and Council of States) decided on an armaments programme, and military spending doubled in the course of a few years. In addition, civil protection was to be massively expanded. The questions of financing remained open. The parties and the two chambers of parliament were not able to come to a mutual agreement. The Social Democrats spoke of a “peace tax” and meant a special tax on larger assets. As early as in 1941 and 1942, the Federal Council had charged large assets with a special tax in addition to the military tax – the “Wehropfer” (“military tax”). The bourgeois parties, on the other hand, proposed a surcharge on the turnover tax. The starting position was similar to that of the 1950 tax and finance bill: the Left stood for redistributive direct taxes, while the right went for indirect taxes.
In 1951, the SP launched the popular initiative “for the finance of armaments and the protection of social achievements”. It demanded a one-off tax on assets for three years and a surcharge on the military tax. In Parliament, a counter-proposal prevailed that put more emphasis on the turnover tax. Therefore the people had to decide.
Noteworthy from this debate is the following episode: Max Weber (SP) was a member of the initiative committee and was later elected to the Federal Council. As head of the Federal Department of Finance he had to represent the counterproposal of the Parliament in public. Everyone knew that his heart beat for the popular initiative and he was not a friend of massive rearmament. Weber had become a pacifist through the influence of Leonhard Ragaz and was strongly beholden to religious socialism. He had been sentenced to prison when he had refused military service. Nevertheless Parliament had elected him into the federal government. Weber campaigned for moderation in his own political party and emphasised time and again that the initiative “Peace Tax” has nothing to do with the SP initiative “For a one-time tax on wealth” from the year 1922 (which had been rejected with 90 percent of nays). And he was successful: The popular initiative was rejected, but with 44 percent of ayes. It received more votes than the parliament’s counterproposal, which was also rejected.
… or differently
Shortly after this, a committee submitted another popular initiative in the form of a general suggestion. The Chevalier initiative also proposed a “peace tax”: military spending was to be cut in half in the year 1955 and half of the money saved this way was to be spent on youth welfare services and cheap housing, and the other half on the reconstruction of war-devastated areas in the neighbouring countries. It was one of the very rare cases in which parliament declared an initiative void because they argued that it violated the principle of “unity of matter” and was not practicable. (Hofer 2012)
At almost the same time, another initiative committee also launched a popular initiative in the form of a general suggestion: As public companies of municipalities and cantons such as the Cantonal Banks and the drinking water, electricity and gas supply companies did not have to pay taxes, they were to make a contribution to armaments financing. This would put them on equal term with private companies in regard to taxes. – The voters rejected this initiative as well.
No to the federal financial and tax regulations of 1953
In 1953, Federal Councillor Max Weber presented the second bill for a federal financial reform, which parliament had in the meanwhile elaborated. It had the following cornerstones: The financial system would be permanently anchored in the constitution. The maximum income tax rate for the Swiss direct federal tax would be raised from 9.65 to 15 percent. In return, the taxation of assets for natural persons was omitted. Furthermore, the turnover tax was included as an excise tax with a free list for essential goods. (Kölz 2004, Quellenbuch, p. 339) – It was a compromise, and all the major state parties issued the “aye” slogan. The bill was fought, especially by business committees, which still favoured indirect taxes. In their eyes, the bill went too far, and Max Weber had given it a socialist character. – With a high voter turnout of 60 percent, the bill was rejected by 58 percent of voters and by most cantons. Federal Councillor Max Weber was very disappointed and resigned on the voting day, which is unusual in Switzerland, because defeats in the vote are not uncommon and the federal councillor concerned is not blamed, since the Federal Council is a collegiate body. Six years followed without any Social Democrats in the government.
Instead of what had been proposed, the people immediately thereafter extended the transitional regime for federal taxes until 1958. So time was gained again for new proposals. There were indeed proposals, but these did not target tax revenue, but expenses of the federal government.
Federal financial referendum – Yes or no?
As early as 1953, two popular initiatives had demanded that it was not enough for the people to determine federal taxes, but that they should also keep an eye on the ever-increasing expenditure of parliament and administration – in order to be able to intervene if necessary. A majority in the federal councils took a positive attitude to the proposal but worked out a counter-proposal. This provided for submitting a one-time expenditure of more than 10 million francs or a recurrent expenditure of more than 2 million francs to the optional referendum, so that the signature of 30,000 citizens would then lead to a vote.
The two initiatives committees mentioned above were satisfied with this proposal and withdrew their initiatives. – Therefore, only the counterproposal was submitted to the vote in 1956. The sovereign surprisingly said no to the optional federal financial referendum.
A first résumé
Nobody likes to pay taxes. But if the people are really convinced that a tax is reasonable, they will consent. This became clear in 1915, when the people agreed to the “war tax” with a record of more than 90 percent of ayes, or with the over 80 percent of ayes for the 1938 “crisis levy”. But in peacetime, the people are critical of providing politicians with even more money than before.
In no other area of law the sovereignty of the people is writ as large as when it comes to taxes. It is true that in the 1950s popular initiatives were – in contrast to today – mostly rejected in the referendum, or they were previously withdrawn in favour of a counter-proposal drawn up by parliament. But they always had an influence on politics, and the eagerness to collect signatures never flagged. This was only possible because the post-war generation was able to build on their experiences made in the difficult times before and during the Second World War.
When it came to demanding tax issues In the years following the Second World War, the cooperation between people and authorities was so lively and worked so well, that one can speak of a real boom of direct democracy, even at the federal level. This would not have been possible without the willingness of parliament and government to listen to the signals sent out by the people and to draw up mediating counterproposals. Unfortunately, signals from Brussels often cause discordance today.
It is true that direct democracy takes time, but the legal system thus decided is many times more legitimate and rooted in the population than if only representatives of the people in parliament pass a law. And it helps to overcome antagonism in the population, because the citizens are involved in considering questions and in taking over responsibility for their political system at all its levels. This helps to maintain cohesion and social peace – especially when it comes to issues as pivotal as are taxes and finance.
Yes to the 1958 federal financial reform – yes to today’s regulation
In the third attempt, the voters approved the new federal tax and financial regulations, which are basically still valid today. Previously, two other popular initiatives had been submitted: the Lucerne Initiative launched by circles from the FDP (Free Democratic Party) and another SP initiative. These clarified the respective, already known, points of view. (Hofer 2012) The Federal Council and parliament once again faced the difficult task of drawing up a counter-proposal that would address the concerns of the people and, as a compromise, have a good chance in the vote. As was often the case during these years, the people’s representatives in parliament succeeded in bringing it off. Both popular initiatives were withdrawn, and only the counterproposal drawn up by parliament was put to the vote. On 11 May 1958, the people gave it a clear aye, and most of the cantons also agreed.
Key points
The long-term provisional regulation was over, and in the constitution, the federal government was given the power to levy taxes. These were primarily the goods turnover tax WUST, with a free list of essential goods – as of 1995 the MWSt (VAT) –, and the military tax (which was renamed the direct federal tax in 1982), and which is collected for the federation by the cantons. This is composed of a highly progressive income tax with a high tax deduction for low-income earners and of a profit and capital tax for companies. But there was then - as still is today - no wealth tax for natural persons. Private assets are taxed exclusively by the cantons and by the municipalities. Other important sources of revenue for the federal government were and are customs duties, the capital gains tax, the stamp duty, alcohol and tobacco taxes, and taxes on crude oil and its products. The new federal financial regulation entailed the obligation to debt reduction and a fiscal equalisation scheme between the cantons. And it comprised two peculiarities that strengthened the position of the people and of direct democracy.
Maximum rates and time limitation in the constitution
The upper limits for goods turnover tax/VAT and for the military tax/direct federal tax are written directly into the constitution. In the financial regulation of 1958 this was put down as follows: “[…] the tax on the income of natural persons is calculated according to a progressive tariff and may not exceed 8 per cent of the total taxable income”; and for the turnover tax: “[…] in case of detailed deliveries the tax may not exceed 3.6 per cent, and for wholesale deliveries 5.4 per cent.”(Kölz 2004, Quellenbuch, p. 352) This regulation accords the sovereign a strong position. If the Federal Council and Parliament want to raise taxes, they must change the Federal Constitution, and therefore that kind of vote will be obligatory in which not only the popular majority but also the majority of the cantons is required. Federalism is protected because the majority of today’s 26 cantons must agree, and in this way, populous cantons cannot overrule the small ones. This still applies today.
Furthermore, the federal financial regulations of 1958 were limited to 5 years. The basis for levying taxes would change constantly and would therefore also have to be checked periodically, so that every few years a new vote would be needed. – That is also still true today, although the periods of time between the votes have been extended. They were initially 5 years, then 10, later 12 and today 14 years. The last vote on today’s federal financial system as a whole was in 2006, so the next one will follow in 2020.
These obstacles to the federal government’s raising taxes will continue. But Parliament feels uncomfortable with them and therefore attempted several times to reduce or abolish them (in 1970, 1977, 1979 and 1991). Without success – the sovereign rejected what would have entailed its own disempowerment. For example, it would have been possible to anchor the maximum rates not in the constitution but in a federal law. In that case, Parliament would have been able to raise taxes, and a vote would not automatically have followed; it would only have been made necessary by the request of 50,000 voters.
The interaction with the people works well
A whole series of tax referendums followed from the seventies onwards. The financial needs of the federal government had risen for various reasons. The boom was nearing its end and tax revenues declined. In 1972, more than 70 percent of the people approved the Free Trade Agreement between the EFTA States and the EC, which still applies today. This caused import tariffs to drop sharply, so that it became imperative to levy new taxes to compensate for these losses.
In 1974, the Federal Council requested higher rates for both the turnover tax (from 4.4 to 6 per cent) and the military tax. The maximum rates on income for natural persons were to be increased from 9.5% to 12% and the profit tax for legal persons from 8.8% to 10%. However, the Federal Council and Parliament largely refrained from compensating for the cold progression, as had been demanded by many parties. That was a mistake.
Cold progression may be explained as follows: At that time there was an inflation of about 10 percent. Many taxpayers were therefore given an annual cost-of-living-related salary increase by their employers. Their income therefore rose by 10 percent, without their having any more real purchasing power. Yet the tax authorities put them at a higher stage of progression, and they paid more taxes even though their financial situation had not actually improved. That was unfair. And because of this the sovereign said a clear Nay to the Parliament’s tax bill on 8 December 1974.
Federal Council and Parliament responded quickly, because additional revenue was urgently needed. They corrected the bill, offset the cold progression better and increased tax rates more moderately than before – and in 1975 the sovereign agreed.
of Switzerland)
Introduction of the VAT – a difficult struggle
Things became more difficult when it came to the introduction of the VAT. In 1968, the EC countries switched to a VAT, and standardised it in 1977. The EU has a minimum rate of 15 percent. Most countries have a rate around 20 percent today.
In 1977, the Federal Council and Parliament made a first attempt to convert to VAT at a standard rate of 10 percent – coupled with a list of essential goods that would be wholly or partially exempted from this tax. They expected additional revenue of several billions, because the new tax covered not only the consumption of goods, but also services and investments. – But the people said a clear Nay to the submitted bill. Especially the SMEs were afraid of the additional bureaucracy to be expected. In addition, the 10 percent demanded were clearly too much (today’s rate is 8 percent). The majority of those in favour were export-oriented companies, because they would have been allowed to deduct the VAT on investment as an input tax.
Just two years later, the second attempt followed – this time with a lower standard rate of 8 percent. In addition, Parliament proposed that the direct federal tax should no longer be limited to a certain time but instead be introduced permanently, and that its maximum rates, which were fixed in the constitution, should be increased. The ballot showed a very clear result with 65 percent of Nays, and also almost all cantons voted against. The goods turnover tax WUST was to remain in force for another 15 years.
In 1981, Parliament once again extended the federal financial regulations by 10 years, increased the standard rate of the goods turnover tax from 5.6% to 6.2% (the Federal Council had requested 6.4%) and lowered the direct federal tax slightly. The sovereign agreed significantly with 69 percent. All cantons were in favour. Here, everything was simply right.
The VAT is rejected a third time
In 1991, ten years later, Parliament renewed the federal financial regulations (which were to expire in 1994) and made a third attempt to introduce a value added tax, with a standard rate of 6.2 percent, as with the turnover tax. In connection with this, the time limit for both federal taxes was to be lifted, plus parliament was to have the competence to raise the VAT rate by 1.3 percent, if needed in order to secure the AHV. – The people’s Nay was no surprise. This happens time and again when too many different questions are put together in one referendum draft (as in the recent vote on the pension reform).
Three more votes lead to a Yes for today’s VAT
In 1993, the Federal Council and Parliament had obviously learned, and adopted a different course of action. They prepared a referendum with 4 separate proposals:
1. The VAT will be introduced at the standard rate of 6.2 percent, and the time limit for the VAT and the direct federal tax will be extended until 2006.
2. If the first bill is accepted, the standard rate will be increased by a maximum of 0.3 percent – as a contribution to the “recovery of federal finances”.
3. Parliament has the competence to increase the rate of VAT by 1 per cent if necessary to secure the old age and survivors’ insurance AHV, subject to the optional referendum.
4. The mineral oil duties are converted into excise duties (taxes on fuel and heating oil).
This time the questions were clear and well founded. The people would be able to accept or reject any of the individual parts. It clearly agreed with all four proposals – with three of them even by over sixty percent. (Kölz 2004, Quellenbuch)
Recent tax referendums
In 2006 the people once again confirmed the Swiss financial legislation in its entirety and prolonged its validity until 2020. As a new amendment the competence to use value-added tax (VAT) money to reduce insurance rates of health care providers was included. In 2009 the people approved an initiative which allowed to increase the VAT by 0,3% to 8% for up to 7 years for the specific reason to consolidate the insurance of the handicapped (“Invalidenversicherung”) called IV. The most recent referendum concerning the VAT took place on 24 September 2017. The people rejected the proposed reformation of the pension scheme which would have meant to divert the 0,3% from the IV to the AHV. Another 0,3% increase would have brought the VAT to 8,3%. The proposed initiative also entailed an increase in the retirement age from 64 to 65 years for women, an increase of new pensions by 70 Swiss francs, an increase of AHV insurance rates and a change regarding pension schemes. In this situation the negative result should not come as a surprise. There is always a risk that people vote No against complicated initiatives like that if they don’t endorse just one of the proposed changes.
Tax federalism versus “one-size-fits-all”
Swiss tax legislation is highly heterogenous, reflecting federalism. Both autonomous municipalities and the 26 cantons compete with each other in a tax rate contest. This competition reflects heterogeneity in a federalist system but has also been challenged in many discussions over the years. Unequal preconditions are alleviated by a financial redistribution mechanism between the cantons and within each one of them. In the 1970ies several proposals were made with the aim to standardize the system.
In 1973 the political party LdU (“Landesring der Unabhängigen”, founded by Gottlieb Duttweiler, the Patron of Migros) launched the people’s initiative “For a just taxation and abolition of tax privileges” as a so-called common suggestion. The aim was to introduce a standardized taxation system throughout Switzerland. The cantonal tax was to be replaced by a federal tax on income and fortune of natural persons as well as a tax on profit and capital of enterprises, thereby reforming the entire Swiss taxation system. Cantons and municipalities would have received their shares from this federal tax. The initiative had proposed a financial compensation mechanism which would have been easy to incorporate into this system. The initiators wanted to standardise the inheritance tax as well. However, numerous opponents of the initiative accused the proponents to ignore the federalist structure of the Swiss state and plot to introduce a centralistic system. A strong majority of the electorate and almost all cantons rejected the initiative. (Kölz 2004, Quellenbuch, p. 423)
Preserving the federal character of taxes had been more important for the citizens than “more justice”. This didn’t solve the question of tax harmonisation for good, though. Parliament came forward with a proposal to render taxation formally more compatible (by introducing a standardised tax period of one year in all cantons, for-instance) in 1977 – one year later. That way the cantons became more similar in their taxation systems without abolishing all differences, which would have been the end of tax competition. This proposal convinced the people, and the sovereign approved it with a clear margin of 60%.
Freedom beats “Justice”
For more than 100 years the question of tax equality has come under scrutiny time and again. Progressive taxation, affecting big fortunes of the wealthy with a higher percentage, is an important tool for social justice. However, in 1977 the electorate rejected a peoples’ initiative put forward by the social democrats under the title “Tax the Rich (Für eine Reichtumssteuer)”, which had proposed interference with cantonal tax sovereignty. It contained the following crucial sentence: “The federal government provides for all incomes above 100,000 francs to be subject to a standardized minimal tax throughout Switzerland.” (Kölz 2004, Quellenbuch, p. 462) This was neither the first nor the last time that a tax against the wealthy was rejected. Almost 40 years later, in 2014, the peoples’ initiative of the SP “Stop tax privileges for millionaires (Abolition of tax without progression throughout Switzerland)” was rejected by 59%. (Shortly prior to that the people of the canton Zurich had abolished this tax which leaves income and wealth of wealthy foreigners, who move to a Swiss municipality to spend their old age there, without a normal taxation.)
In 2015 the initiative for a new federal tax, proposed to tax “millionaire inheritances” both uniformly and retrospectively was rejected by more than 70%. Over recent years most cantons have abolished inheritance taxes for direct successors and spouses because the inherited income and wealth had already been taxed before within the family.
Today the SP collects signatures for a people’s initiative proposing to tax incomes from work and capital differently. Interest and dividends above a certain exemption amount would be subject to a tax increase by 50%. This tax would apply to the “super rich” (1 percent) only. This initiative is problematic, since again it would interfere with cantonal tax sovereignty. A majority of the electorate regard progression as it exists now in municipal and cantonal taxes as sufficient for social equalization, therefore this initiative will presumably end in the same way as similar ones in previous years.
Financially autonomous municipalities – a jewel of direct democracy
Tax burdens do differ a lot between some of the numerous communities and between the cantons, too. The manifold debates have shown, however, that the people don’t perceive this fact as a grave problem but rather accept it as part and parcel of federalism, even more so since it is alleviated by the financial transfer. In particular the autonomy of municipalities is something special: autonomy means that citizens decide about what kind of tax they need to pay and with which tax rate, then pay the tax, decide on how to spend the money and benefit from the investments all in one person. They themselves are also responsible for debts since nobody would be there to bail them out - not even the canton. Leukerbad, for example, was one of the few communities who had spent more than they could have afforded, and their debts amounted to about 300 million which they had used to transform themselves into a more mundane spa. Soon enough they could no longer pay their bills. The canton Wallis did not bail them out and the banks lost a big proportion of their loans. This made them a bit more cautious in their lending policies. (The EU could learn a thing or two from this case.) People’s initiatives demanding material tax harmonization and questioning the traditional principle of autonomy and self-responsibility for the sake of “more justice” have always been rejected to this day.
How the debt brake came into being
Looking at the numerous people’s referendums concerning federal taxes and the fact that many of them were rejected by the sovereign in the second half of the 20th century one might be drawn to the conclusion that direct democracy cannot work that way and the federal government inevitably will amount debts in order to keep functioning. This was not the case. On the contrary – towards the end of the 1980ies the federation was basically free of debt. While the federal debt had been about 100% of gross domestic product (GDP) after the war it had fallen to 30% by 1990. The federation had surplus incomes often enough to repay their debts.
It didn’t stay like that. The last decade of the 20th century saw a massive increase of federal spending, deficits in unheard-of figures accumulated – up to 10 billion francs per year. Older citizens may have regretfully looked back at the year 1956 when they had rejected the financial referendum on the federal level which would have secured them direct control of federal spending. Federal debt had been 30 billion in 1990, in just 10 years this had grown to more than 100 billion. While that was still relatively low by international standards, the population was not used to it and found it disturbing.
There were several reasons for this explosion in spending. The economy was in stagnation. More importantly, however, spending discipline of the parliamentarians had deteriorated over these years. Again there were several reasons for that: the atmosphere in Berne, the federal capital, may be described as a EU euphoria in those times – in both parliament and government. The federal government had applied in Brussels to join the EU and confirmed their long-term ambition to lead Switzerland into the EU even after the people had voted No regarding the European economic area on 6 December 1992. Brussles had been upgraded massively as the European power center in these years. Debts of most EU member states were considerably higher than those of Switzerland, with rising tendency. Presumably federal Bern was infected by this mindset to a certain extent. Moreover, administrative bubbles were groomed – in the cantons, too – and the parliaments did too little to stop it. Since 1990 the number of state employees has actually doubled. This new trend was bound to contribute to financial problems.
While all state debts amounted to 30,9% GDP in 1990, this number had risen to 53,8 % already in 2002. This was driven mainly by federal debt which had increased by 153% in this period. Debts of the cantons had risen by 92% and those of the communities by only 11%. This put the federation into the focus of scrutiny (Kirchgässner 2004, data of federal administration and the Swiss statistical annual report)
Alliance with the people
Bundesrat Kaspar Villiger, who was in charge of the department of finance then, didn’t like this development at all, but in the first half of the 1990ies his position was challenged in parliament. He blew the whistle and turned to the people for support. In Villiger’s view the main problem was the discrepancy between federal spending being issued by parliament while the people decided on how much tax money would be there to be spent. That way situations could arise, Villiger argued, when the electorate cut down on the tax money flowing to federal Bern but parliament kept spending as happily as before. For the national exhibition Expo.02, for-instance, 100 million francs of tax money had been planned and agreed upon in the budget, but the government ended up spending 1,6 billion for it. Therefore, Kaspar Villiger emphasised, institutional “crash barriers” and automatic saving mechanisms were required to solve this problem. Villiger acted as follows:
In a first step he drafted a saving program, rooted in the provisional amendments of the constitution: government (“Bundesrat”) and parliament (“Nationalrat”) were to reduce annual new debt to 4 billion francs by 1999 and achieve a debt free budget by 2001. He succeeded in convincing a majority of the MP’s so that parliament not only approved his draft but even issued it as urgent legislation. That meant that a peoples’ referendum had to follow, because whenever parliament issues an emergency amendment to the constitution, this becomes law immediately, but has to be confirmed by the electorate within 12 months. Especially the Left opposed this move and referred to it as “saving hysteria”. They accused Villiger of plans to starve the state to death. A majority of the people as well as all cantons had a different view and approved the saving plans with 71% in 1998.
Federal budget within firm crash barriers
In his second move Kaspar Villiger planned to have rules for a balanced federal budget not only written into provisional legislation but to make them constitutional for good. The so-called “debt brake” would make it legally binding for the federal government to have their budget in balance between spending and tax money – a mechanism similar to what was already practiced in most cantons. This time the approval rate in the peoples’ referendum was 85 percent.
Thanks to the debt brake Switzerland has successfully stabilized her federal debt at the same level to this day, and in some years even reduced it. The debt rate decreased again from 50 to about 40 percent GDP. EU legislation requires membership candidates to have 60% in their Maastricht criteria, a figure which only very few countries actually achieve. We don’t have lower debts because we are a wealthy country, more likely it is the other way around.
Retrospective and outlook
It has been analyzed very well on all levels of the state how direct democracy influences tax and financial issues and the experiences are doubtlessly positive – including economic growth (Kirchgässner 1999 and 2004, a. o.).
Critics of direct democracy like to claim that especially financial and economic decisions were far too sophisticated and complicated for lay persons to understand, let alone decide upon them. Sure enough, they are quite often complicated. However, even in the area of federal finances this direct-democratic or half-direct-democratic system has been working quite well for more than 100 years now, and the federal government has never run out of money. The claim that this principle will function only in small entities like villages or small cantons has been proven wrong. Time and again peoples’ referendums have produced surprisingly sustainable results – perhaps this is the case precisely because the citizens are no experts in economy.
Just to mention the tax burden in Switzerland in comparison to other countries: throughout the second half of the 20th century the so-called fiscal rate, a denominator of the overall tax burden of the population, has been consistently below OECD average by 5–10%. It is also noteworthy that maximal rates of income and wealth taxes, if fixed in a direct-democratic process, are much lower than those of neighbouring countries such as France, which leads to tax evasion in some instances.
In a freedom-loving democracy which deserves the name financial debates are not just about money but most of all about definition of the state. This becomes apparent in the recent debates about secrecy for bank customers. After a lot of political pressure from the USA, the OECD and the EU it has been abolished in Switzerland for foreign customers. A peoples’ referendum currently in preparation wants to strengthen this right for Swiss citizens and make it constitutional. There had been an initiative forwarded by the social democrats who wanted to get rid of this very bank secrecy in 1984 but failed in the referendum. Somebody not accustomed to Switzerland might conclude that the Swiss prefer to hide their money in the banks to avoid taxes. Again, this is obviously not true. Bank secrecy, which is limited by the relatively high tax of 35% for interest and dividends at present, is just one aspect of the relationship between the Swiss tax payer and his or her community, canton and country. The Swiss are no subjects of their state, who require surveillance, but citizens sharing responsibility on equal footing, who decide on tax rates, pay the taxes and benefit from public services such as schools, hospitals, health insurance and pension schemes all in personal union.
One concluding remark on the EU: were Switzerland to join them the VAT would have to almost be doubled in order to fulfil the criterion of 15% minimum. Apart from all other disadvantages this would screw up the finely adjusted financial and tax system completely, toppling the achievements of countless referendums on all political levels. – This would certainly be negligent. •
Sources:
admin.ch. Chronologie der Volksabstimmungen
Feld, L.P. Ein Finanzreferendum auf Bundesebene – Chancen, Risiken und Ausgestaltung, Jahresbericht der Kommission für Konjunkturfragen, 2004
Guggenbühl, G. 100 Jahre Landbote, 1936
Halbeisen, P.; Müller M.; Veyrassat B. Wirtschaftsgeschichte der Schweiz im 20. Jahrhundert. Basel 2012
Kirchgässner, G.; Feld, L.P; Savioz, M. R. Die direkte Demokratie – Modern, erfolgreich, entwicklungs- und exportfähig, Munich 1999
Kirchgässner, G; Feld, L.P. Föderalismus und Staatsquote (Jahrbuch für Föderalismus), 2004
Kölz, A. Neuere schweizerische Verfassungsgeschichte (mit Quellenbuch). Berne 2004
Linder, W.; Bolliger, C.; Rielle, Y. Handbuch der eidgenössischen Volksabstimmungen 1848–2007. Berne 2010
Hofer, Bruno. Volksinitiativen der Schweiz, 2012
Rhinow, R.; Schmid, G.; Biaggini, G.; Uhlmann, F. Öffentliches Wirtschaftsrecht, Basel 2011
Sozialdemokratische Partei der Schweiz. Solidarität, Widerspruch, Bewegung – 100 Jahre sozialdemokratische Partei der Schweiz. Zurich 1988
Proven financial referendum in the cantons
ww. Although this topic is discussed time and again in the two chambers of parliament, and there are even motions submitted, the federal government has until today known no actual general financial referendum. In 1987, the sovereign rejected a referendum aimed at putting arms expenditure under the optional referendum in general. Nevertheless, there were individual federal votes – as was the case twice when it was about the purchase of combat aircraft (FA 18 and Gripen). This was not just about national defense issues but also about money. If parliament agrees, there will soon be another financial vote, because the Federal Council wants to spend nearly a billion francs on the “Sion 2026” (Winter Olympics) project. Today, the debt brake commits parliament to make sure that federal spending does not get out of hand. By contrast, all cantons and many communities have known the direct control of expenditure by the people for a long time and have been practising it – combined with a debt brake provision – successfully till this day. The large canton of Zurich, for example, introduced the compulsory financial referendum into its constitution as early as 1869. One-off expenses of more than 250,000 francs and recurrent payments of more than 20,000 francs were automatically voted on. (Kölz 2004, Quellenbuch, p. 68) This procedure proved itself in practice. A large number of financial votes followed. Sixty years later – in 1929 – the amounts (which trigger a vote) were increased because expenditure had risen sharply: Now it was 500,000 francs for one-off and 50,000 francs for recurring expenditure. During this long period the canton was largely debt-free, except for the time of the World War. (Guggenbühl 1936) Today, the canton of Zurich has 1.4 million inhabitants, and only the optional financial referendum is left. One-off expenses of more than 6 million and recurrent payments of more than 600,000 francs will be voted on, if 3,000 voters demand that this be done. (Cantonal constitution of 2005) The city of Zurich with its 400,000 inhabitants still has the obligatory financial referendum: one-off expenditure of over 20 million and recurring expenditure over 1 million is voted on automatically.