Baumgartner: That’s a pretty hypothetical question in light of political realities. It would have to meet the needs of our federalist structure in Switzerland, there I wouldn’t change a thing. Like today, fiscal sovereignty should be divided between the federal government and the cantons whereby consumption taxes should go to the federal government and both income and corporation taxes should go to the cantons. There should not be any capital or wealth taxes since these tax capital rather than income. Moreover, tax competition within Switzerland – particularly between the cantons – would have to remain in force. Like today, this would need to be supplemented by an equalization of financial resources and burdens.
Baumgartner: Actually, we aren’t that far away from what I consider ideal. What a new system needs is a higher value added tax. Ideally it would be neutral for businesses or, in other words, not unfavorable with regard to their location. The direct federal taxes on income currently levied have an extremely sharp progression when it comes to private individuals, thus making them a wealth tax when all is said and done. Stamp duties on equity and debt have been obsolete for some time already. These make it more expensive for businesses to raise capital.
Baumgartner: Not at the moment. However that mainly has to do with the fact that peak tax rates for both VAT as well as direct federal taxes are defined in the constitution. But there’s a clear international trend in that direction. Indirect taxes are more difficult for private individuals or companies to avoid than income or corporation taxes. Additionally, demographic trends give rise to the fear that in Switzerland, too, social insurance requirements will probably make it necessary to increase consumption taxes by another few percent.
Baumgartner: That would definitely be finding a solution to the tax dispute between Switzerland and the EU with regard to the cantonal tax regimes. Even if the issue is no longer front and center on the public stage, the conflict – which has been smoldering since 2007 – remains a threat to Switzerland. Pressure on the three cantonal tax regimes is likely to grow even further. The EU demands that we bow to EU rules which is something that we, as non-members, certainly are not going to do lightly. In view of increasing national debt in surrounding countries, however, I don’t foresee any easing in the tax dispute. On the contrary, certain tax advantages boasted by Switzerland as a location by virtue of the cantonal regimes are so striking that companies are relocating their headquarters or key activities to Switzerland. And that arouses political emotions in the other countries.
Baumgartner: The statistics speak for themselves. When we look at the global competition between business locations and see how many international companies have chosen Switzerland over the past few years it becomes apparent just how important taxes remain. Of course we also offer political stability and legal certainty as well as other advantages. Yet the tax aspect shouldn’t be underestimated.
Baumgartner: Cantonal tax competition is essentially a good thing. It’s kept both the tax burden and public expenditures low. The framework familiar to us is the Harmonization Law which defines what cantons can do and what they can’t. Cantons are free to choose their tax rates. The cantonal regimes, however, ensure that cantons with high corporation taxes still remain attractive for companies with mobile revenues. If the regimes were to be eliminated, competition would have to increasingly shift its focus toward corporation tax rates. From the corporate perspective, reducing corporation taxes to a level comparable to that currently achieved through the regimes would be ideal. Several cantons have taken this approach. However as we know, this is more difficult for others to do. That’s why we need other internationally-accepted solutions for mobile revenues.
Baumgartner: That’s a question of which way you look at it. Understanding why the tax burden is supposed to be considerably lower in one canton than in another really isn’t very easy. We also have the same phenomenon within the cantons. On the other hand, we have to keep in mind that low tax rates can balance out structural disadvantages such as geographic position or the distance to an airport. The political demand for increased material harmonization of tax rates will continue to be on the agenda of left wing parties. Yet the voting population’s clear response last year to the tax initiative of the socialist party showed that the vast majority of our population favors healthy tax competition.
Baumgartner: That’s a controversial question. On the one hand, this has prompted many wealthy taxpayers to move to Switzerland and, on the other, I understand how people’s sense of justice might trigger reservations about unequal treatment. One way or another, the trend is likely to be toward a reduction in the differences between lump-sum and regularly-taxed individuals.
Baumgartner: Inheritance tax isn’t popular but it doesn’t hurt companies, either. I don’t want to categorically exclude the possibility of an inheritance tax as a source of revenue for the federal government if that means that other taxes which are clearly detrimental to the business location Switzerland might be dispensed with. We also have to find solutions to the problem surrounding company succession. Anyway, as the abolition of inheritance taxes has demonstrated in numerous cantons, a federal inheritance tax between parents and children isn’t likely to have any chance.