Plea for the responsible citizen

Plea for the responsible citizen

Federal referendum from 19 May

Federal Act on Tax Reform and OASI* Funding

by Dr rer. publ. Werner Wüthrich

“Will you adopt the Federal Act from 28 September 2018 on Tax Reform and OASI Funding (Steuerreform und AHV-Finanzierung STAF])?” This is the question presented to the voters on 19 May. It combines two controversial and completely unrelated agenda items in a single package. The tax part intends to make corporate taxation internationally compatible, while the OASI part intends to provide fresh funds for old-age provision through wage deductions and employer contributions.
Those who support one part of the bill but do not support the other cannot freely express their will. At the same time, the voter is be urged to accept both agenda items – which the proponents call a compromise.
This entails a peculiar view of the responsible citizen. However, such an approach is not entirely new. It is particularly common to see in votes on taxes.

“Since the Second World War, a large number of votes on taxes and finance have been taken place at federal level. Very often, they ended up people saying “no” – not because the citizens reject tax increases in principle, but because the bills did not fit and often violated the principle of cohesion of subject matter. Did this lead to ruined federal finances or a heavy debt burden of the federal government? No – quite the opposite. Today the budget is by and large sound, and Switzerland is one of the few countries to have achieved surpluses in recent years and to have further reduced its already moderate debt.”

Tax votes are sensitive – in a number of ways. On the one hand, it is about one’s own wallet, which is why a certain reluctance to grant new or more taxes to the authorities, is often noticeable. Too much “state” is undesirable, but that does not mean that the electorate wants to starve the political authorities financially and only looks for its own financial advantage. Rather, it is predominately a matter of state political responsibility, the common good and concern for the community, which needs the necessary means for its tasks.

Today’s tax and financial regulations in the Confederation, cantons and communes – strong position of voters

As far as I know, Switzerland is the only country in which citizens can decide on the introduction of new taxes and their increase at the ballot box – at federal, cantonal and communal level. The tax sovereignty of the cantons and communes is the basis. The Confederation only has a supplementary right to levy taxes. At federal level, large numbers of tax and financial voting have been carried out for about a hundred years – in the cantons and communes much earlier (cf. the special supplement on finance questions in direct democracy in Current Concerns No. 27/28 from 14 November 2017: “Taxes and finances in Switzerland – determined by the people. State political background and its history”.
Briefly, the current federal financial order is to be outlined here. In 1958 the electorate said yes to the new federal finance regulation, the main features of which are still valid today (cf. Kölz, Quellenbuch, 2004, pp. 352–356). After the Second World War it was a matter of transferring the new taxes (military tax [Wehrsteuer] and sales tax [Wa­renumsatzsteuer]), which had been introduced provisionally and temporarily during the war, into valid law. In the period from 1950 to 1958, a total of twelve referenda were held. It was not only about money, but above all about questions of federalism, tax justice, financial equalisation, subsidiarity and much more. Should income and wealth tax be reserved to the communes and cantons, and should the Confederation finance itself primarily through the sales tax? To what extent should the progression be extended? Should a financial referendum or even a spending referendum be introduced? Should expenditure on the military – as planned – really be increased substantially? To what extent should the federal government harmonise or even centralise the tax system? – The state political interest in the topic was enormous – nine popular initiatives on tax and financial issues were submitted in these years, some of which were withdrawn when their concerns were heard in parliament (Hofer 2012).
The federal financial regulations of 1958 contained numerous compromises. The Confederation introduced a strongly progressive income tax (today direct federal tax) – but not a wealth tax. It was noteworthy that the bill contained two hurdles to prevent parliament from raising taxes without a mandatory referendum.
Thus the upper limits for the military tax (today direct federal tax) and for the profit tax (today VAT, value added tax) are directly in the constitution. On the military tax: “[…] the tax on the income of natural persons is calculated according to a progressive scale and may not exceed 8 per cent of the total taxable income”, on the sales tax: “[…] the tax may not amount to more than 3.6 per cent of the remuneration for retail trade, or more than 5.4 per cent for wholesale trade.” (Kölz, Quellenbuch, 2004, p. 352).
The naming of the numbers in the constitution gives the people a strong position. If the Federal Council and Parliament want to increase taxes, they must change the Federal Constitution, and a vote is mandatory, whereby not only the majority of votes, but also the majority of states is required. Federalism is protected because the majority of today’s 26 cantons must vote in favour, so that densely populated cantons cannot outvote the small ones. Furthermore, the federal financial regulation from 1958 was limited to five years. The preconditions for federal taxes would change constantly, thought those responsible at the time. For this reason, these taxes must be reviewed periodically after a few years and confirmed by the people. This is still valid today. Though the deadlines were extended. They were initially five years, then ten, later twelve and today fourteen years. – In this regulation, federalism, as it has grown in Switzerland, is beautifully expressed.
These obstacles remain, but are inconvenient to Parliament. It tried several times to abolish the maximum rates or the time limit – in 1970, 1977, 1979 and 1991 (Linder 2010). The people kept saying “no”. For example, it would have been possible to enshrine the maximum rates not in the constitution, but in a federal law. In this case, Parliament could have increased the taxes, and a vote would not have taken place automatically, but only if 50,000 voters had asked for this, and rule of the majority of the cantons would not have applied.
Against this backdrop, it becomes clear why Switzerland repeatedly gives foreign powers cause for annoyance – especially in the tax area: We simply do not get an order from the top without asking our citizens whether they want the change. Our own authorities often try to push us to a certain voting behaviour – but even today, there are surprises now and again because the voters resist the pressure and vote differently than the authorities expect.

What is the Tax and OASI package about on 19 May?

1. Tax reform

“Corporate taxation must be adjusted to ensure that Switzerland meets new international requirements and remains competitive.” So the Federal Council (Voting booklet, p. 9). To put it bluntly: The OECD and the EU do not like the fact that Switzerland is doing better economically than many other countries. Many international corporations have their headquarters in Switzerland because, as is well known, stable political and economic conditions prevail here and also because Switzerland has its own currency, which is so sought-after that wealthy companies and individuals are willing to pay negative interest rates for their money. In addition, the cantons can also make use of their federalist freedom in the tax field and offer foreign companies attractive tax regulations.
According to the Federal Council and Parliament, these cantonal tax privileges are to be abolished under pressure from foreign powers (Voting booklet, p. 13). That is why we Swiss – after the vote on USR III (Corporate Tax Reform III), which was rejected two years ago with almost 60 per cent of the votes against - must again take a stand on the question of corporate taxation. Switzerland might be pressurised by foreign powers, but ultimately we voters decide.
This tax reform would force the cantons to introduce the same rules for profit taxes for all companies. To prevent foreign companies from migrating, the cantons cannot increase their taxes. Some cantons are therefore planning to reduce corporate taxes in general so that domestic and foreign companies pay the same level of taxes.
The cantons’ expected tax shortfalls are to be partially compensated by the Confederation. For example, additional deductions for research and development are to be granted for direct federal taxes (Voting booklet, p. 13). The cantons are to receive more money from the federal budget as a lure and as compensation for tax losses: “The cantons’ share of revenues from the direct federal tax will be increased from 17.0 per cent to 21.2 per cent. According to the current revenue situation, the cantons received an additional CHF 1 billion annually” (Voting booklet, p. 14). However, we must not forget that these “gifts” will be paid out of our taxpayers’ money.

2. Financing OASI

A second lure, so that citizens are more likely to agree to the loss of taxpayers’ money in their canton, is “around CHF 2 billion per year”, which is to be added to the OASI from 2020. About 800 million of these will come from the federal treasury (i.e. payed also by us as taxpayers!). The remaining 1.2 billion are paid by employees and employers themselves in the form of increased wage deductions, i.e. 0.15 per cent of wages each. (Voting booklet, p. 15).
A great gift! The money from the federal treasury would have to be saved by the federal government elsewhere, and higher wage deductions will probably not meet with much cheering ...
And what does this have to do with corporate taxes? Nothing whatsoever!

The principle of cohesion of subject matter

“The conflation of two extraneous issues is an affront to democracy and makes it impossible for citizens to give genuine expression to their will.” This was the key reason why the second referendum committee (called “Bürgerliches Komitee NEIN zum AHV-Steuer-Deal” and “Generationenkomitee”) launched a referendum (Voting booklet, p. 17). Indeed, because of this unconstitutional conflation several referendum committees have emerged. On both issues there are various kinds of arguments for and against, and it is simply objectionable that voters are expected to adopt or reject both of them as an integrated package.
The Federal Constitution is providing clear guidelines for such cases: Article 34(2) guarantees as a political right “the freedom of the citizen to form an opinion and to give genuine expression to his or her will”. Article 139 requires that popular initiatives have to comply with the principle of cohesion of subject matter and that there must be no conflation of extraneous or conflicting concerns. This should also be the guideline for parliament. Especially in the domain of taxation and finance this principle has been infringed time and again. This is also the case with the proposal to be voted on 19 May. Here are two earlier examples:
In 1955 a popular initiative was declared to be invalid by the parliamentary councils because it violated the principle of cohesion of subject matter. At that time the Cold War was the order of the day and a worldwide armament effort took place – also in Switzerland. The parliamentary councils decided to double military expenditure and, consequently, to raise taxes. The pacifists around Leonhard Ragaz fought back by launching a popular initiative that called for an “armament break” and required that initially for a one-year period equal shares of the previously-resolved surplus should be spent on youth welfare organisations and cheap housing and for the reconstruction of war-ravaged areas in neighbouring countries. A number of MP’s (member of parliaments) countered: how are voters supposed to be voting who want to support cheap housing with their taxpayer’s money, but not reconstruction aid abroad or vice versa? The National Council invalidated the initiative. This was a rare occurrence, though. The initiators were not discouraged by the negative decision. They instantly launched two new initiatives that were more clearly formulated. The first one required that annual military expenditures of more than CHF 500 million had to be subject to a referendum. The second required that each year an amount corresponding to a tenth of military spending had to be used for social security and international solidarity. The referendum did not take place, since both initiatives were withdrawn when a popular uprising broke out in Hungary and, therefore, a general consensus emerged among the Swiss population that military expenditure had to be raised (Hofer 2012, Nos. 72, 75 and 76). Politics can be truly vibrant and fascinating!
Let me add another significant example from the fiscal area: the introduction of a value added tax (VAT) in the years beyond 1977. Because of GATT and the 1972 Free Trade Agreement with the European Community customs revenue had declined and money was scarce in the federal treasury. In addition, there was a massive economic slump in 1974 melting away tax revenue. And in 1977 the European Community had unified the VAT for all member countries with a minimum rate of 15 per cent. The Federal Council and Parliament wanted to follow suit by likewise making the transition to a valued added tax – even though at a lower rate of 10 per cent. The population clearly said “no” to the proposal because compared to the federal sales tax existing at the time the VAT rate was much too high. However, there was also another reason for the “no” vote. Parliament had combined the VAT with an attempt to reduce the citizen’s rights in the tax domain. It wanted to eliminate the maximum tax rates allowed under the Federal Constitution, so that mandatory referenda on tax increases would no longer have been necessary.
The second attempt to introduce a VAT followed already two years later – this time with a lower standard rate of 8 per cent. Parliament was insistent again: The maximum tax rates and their limitation in time should be removed from the constitution. With a majority of 65 per cent the population once more clearly rejected the proposal, and almost all the cantons voted against it. On the other hand, the population voted in favour of a reasonably justified increase of the existing sales tax in order to relieve the federal budget.
In 1991 – ten years later – parliament made a third attempt to introduce value-added tax (VAT) – with a standard rate of 6.2 per cent as for the turnover tax. As in the past, the National Council and the Council of States demanded time limit of the two federal taxes to be eliminated from constitution. Furthermore, parliament should be given the authority to increase VAT rate by 1.3 per cent in order to safeguard OASI. Once again, very different tasks were packed into one bill. – However, the obstinate people rejected any linking of the different issues.
In 1993, federal politics experienced a great moment: After sixteen years, parliament presented a draft bill to the people which once again demanded the introduction of VAT. However, this time the people was presented four separate questions that could be answered clearly and unequivocally with yes or no:

  1. VAT will be introduced at a standard rate of 6.2 per cent and time limit for VAT and direct federal tax will be extended until 2006.
  2. “In order to improve federal budget, the Federal Council will levy a surcharge on the value-added tax […] not exceeding 0.3 per centage points”. (if the 1st bill is adopted)
  3. Parliament will be given the power to increase VAT rate by 1 per cent if this is necessary to safeguard OASI and Disability Insurance (DI) – subject to the optional referendum.
  4. Duties on mineral oil will be converted into excise duties (taxes on fuel and heating oil). (Kölz, Quellenbuch, 2004, pp. 539–541)

The people rewarded this exemplary approach of the authorities and clearly approved all four draft versions – three of them with more than 60 per cent. (Linder 2010, p. 512)
In 2006 the people once again confirmed the federal taxes and extended their validity until 2020. Next year, once again we will be asked whether we agree with the current federal tax system. This vote will be important – above all because it is symbolic. Given the envisaged Framework Agreement with the EU, we might no longer be asked so frequently.

Concluding remarks

Since the Second World War, a large number of votes on taxes and finance have been taken place at federal level. Very often, they ended up people saying “no” – not because the citizens reject tax increases in principle, but because the bills did not fit and often violated the principle of cohesion of subject matter. Did this lead to ruined federal finances or a heavy debt burden of the federal government? No – quite the opposite. Today the budget is by and large sound, and Switzerland is one of the few countries to have achieved surpluses in recent years and to have further reduced its already moderate debt.
Apart from agriculture, it was on taxation that most votes took place in the recent decades. Both issues are emotionally important for many people – they deal with food security and care of the country, with preservation of the community and the common good. The saying of the Swiss poet Gottfried Keller fits very well: the citizens should step outside the front door to make sure that everything is in order.
At the end of my plea, I would like to return to the current vote. On 19 May we will have to vote on a package that links taxes and old-age provision in an unconstitutional way. The citizens will not be able to take a clear position. The Federal Council announced that in autumn, together with Parliament, he will be preparing a major project to reform old-age provision. It may be possible that the reform will be put to vote as early as next year. Consequence of my remarks: Responsible citizens appreciate clear questions to vote on, which can be answered with “yes” or “no”. There is enough material to illustrate this in a large number of previous votes that ended up in a “no” vote. The questions of the planned reform of old-age provision should be separated. They might for instance be:  Should the age of retirement for women be aligned to that of men? Should the age of retirement generally be increased by 1 year? Should wage deductions and employer contributions for OASI be increased by x per cent? Should the VAT be increased by x per cent for the sake of old-age provision? – The responsible voters will thank the politicians.
Direct democracy is demanding – especially when it comes to taxes. However, in one hundred and fifty years, a culture has been developed that has to be cultivated. •

*    OASI =Old Age and Survivors’ Insurance which is the 1st pillar of the Swiss pension system, 2nd pillar is the occupational pension system, 3rd pillar are private pension and saving schemes (Source: https:

Kölz, Alfred. Neuere Schweizerische Verfassungsgeschichte mit Quellenbuch (Recent Swiss constitutional history with source book). Berne 2004
Linder, Wolf and others. Handbuch der eidgenössischen Volksabstimmungen 1848–2007 (Handbook of Federal Referendums 1848–2007). Berne 2010
Hofer, Bruno. Volksinitiativen der Schweiz (Popular initiatives of Switzerland). 2012

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