For countries where the debate has turned to the benefits of engaging in a race to the bottom on company tax rates, the fate of a Swiss attempt to cut taxes has more than a little political interest.
Switzerland, of course, is the home of up to 24,000 multinationals that headquarter in many of the country’s 26 cantons (Switzerland is a federation, remember) to benefit from special low-tax deals struck with cantonal governments — deals local companies were unable to enjoy. Some of the world’s biggest companies pay virtually no tax above an effective federal tax of 7.8%. The Swiss have been under pressure for years from the European Union and OECD to do something about these deals, and in 2014, the country agreed to abolish them by 2019.
Under a proposal put to voters on the weekend by the Swiss government, the cantons would have continued to compete to offer companies the most favourable tax rates, but multinationals would have paid the same rates as other businesses by cutting rates for non-multinationals. For example, multinationals with “auxiliary status” in Geneva (there are around a thousand of them) pay an average corporate tax rate of 11.6%, compared with the 24.16% for ordinary businesses, one of the highest rates in Switzerland. Geneva’s main corporate tax rate would have halved to 13.49%.
Plainly this would have big revenue implications for the cantonal governments — Geneva would have lost revenue estimated at more 440 million euros a year from the tax cut. The national government pledged to give cantons an extra 1.1 billion Swiss francs (US$1.1 billion) to help cover expected the ensuing revenue shortfalls. The government and business argued — just like the Business Council and the Liberals here — that without reform, foreign companies would quit the country for tax havens like Luxembourg.
But voters didn’t believe it: on current reports from the weekend vote, 59.1% of voters said no. Supporters of the proposal claimed the vote meant that the anti-globalisation, anti-establishment mood seen in the rest of Europe, Britain and the US had hit Switzerland. But local media reports suggest it was nothing of the sort: polls suggest voters did not believe the government assurances about funding and feared the corporate tax cuts would end up seeing services cut or income and other taxes raised on individuals. And the no camp — led by the Social Democrats — claimed the tax breaks would create a 3 billion franc hole in budgets, much larger than that claimed by the government.
The changes also included an array of tax write-offs that further upset voters: these would have allowed multinationals tax relief for research and development or income from patents and on shareholders’ equity. Critics argued they would have simply boosted the income of tax advisers, lawyers and shareholders and cost local residents even more as the budget shortfalls rose for the cantons, leading to higher local taxes.
What’s interesting from an Australian point of view is that the Swiss focused on an issue almost entirely ignored here by tax cut advocates: if you cut taxes, it has to be paid for either by increasing other taxes or cutting government services. Advocates here, when pressed, resort to Laffer Curve nonsense about faster growth generating more revenue, but they generally prefer to avoid the question of who — especially at a time when the budget is in deep deficit — will make up for the lost revenue.