Tax reform: ‘There’s not much left to squeeze from this lemon’

Andri Silberschmidt describes the proposal as “extremely demanding and very difficult to implement” Keystone / Peter Klaunzer

In an interview with SWI swissinfo.ch, Swiss parliamentarian Andri Silberschmidt from the centre-right Radical-Liberal Party explains why he is against the “99% Initiative”. He says a yes vote could damage Switzerland’s position as financial centre and have serious consequences on small and medium-sized companies.

On September 26, the “99% Initiative” will come to a nationwide vote. It was launched by the Young Socialists, who propose a tax increase on any capital revenue of more than CHF100,000 ($110,000) by a factor of 1.5 compared with regular income tax. The group says the current tax system is not fair and encourages disparities in the distribution of wealth and income.

Andri Silberschmidt is a member of the committee opposing the initiative who describes the proposal as “extremely demanding and very difficult to implement”. He was recently nominated as candidate for one of the four vice presidencies of the Swiss Radical party.

SWI swissinfo.ch: Let’s start with a quote by Kristalina Georgieva, head of the International Monetary Fund (IMF): “Raising income tax on the wealthy will help close the growing gap between rich and poor and can be done without harming growth.” How does this sound to you?

Andri Silberschmidt: We have to look at the situation in Switzerland. Our income tax system is already very progressive, and we are the only country in the world that charges an additional wealth tax. Remember, the capital gains of the last few years are only on paper as most of the shares are not sold yet. This is money printed by the National Bank and traded on the stock market, but it means that shareholders who have only increased their wealth on paper would be taxed on it.

Entrepreneurs cover 40% of all taxes in Switzerland. If the Swiss accept the initiative, this tax burden will increase to over 50%. Every Swiss franc of a company is taxed: they pay value added tax, their profits are taxed, their dividends are subject to income tax and on top of it all, they have to pay a wealth tax. The tax burden is already high and introducing another progressive tax would not be compatible with the system.

Please bear in mind that one tenth of the Swiss who are eligible to vote pay about 80% of the direct federal tax, while some people don’t pay taxes at all. This shows how much the state relies on the taxes of those 10%.

SWI: Even though middle and low-income earners have suffered financially due to the Covid-19 pandemic, the initiative committee says that assets have increased. Has the pandemic played in favour of the vote?

A.S: If the initiative is accepted, we will see an exodus of companies. Some entrepreneurs will sell their companies to avoid the additional tax burden while others will simply refuse to pay the exorbitant amount of taxes. This would lead to a drop in tax revenues and to a higher tax burden on middle and low-income earners. If accepted, the initiative will damage those it is trying to protect.

We need an economic upswing after the Covid-19 pandemic. The last few years have seen a rise in innovation performance and in the number of start-ups. The initiative would throw a spanner in the works and put jobs at risk.

SWI: Parliament rejected a counter proposal to the initiative which called for a tax rate of 100% rather than 150% which would have put capital gains tax on par with income tax. Would this not have been a good compromise?

A.S: The counter proposal came from the political left and would have never gained a majority. The main problem of the initiative is that it calls for the introduction of a capital gains tax.

The proposed tax system would also have huge implications for succession planning in family businesses. Shares that have not changed hands for 40 years have usually gained in value which would be taxed exorbitantly at the time of succession. This would force some entrepreneurs to find a buyer abroad as they could no longer afford handing it over to the younger generation or sell part of the company to be able to pay the taxes.

SWI: The Young Socialists claim that it would only affect the superrich. However, opponents say that it would hit many small and medium-sized companies. Why is there such a rift in opinions?

A.S: The Young Socialists have worked out how much additional tax revenue could be expected. This figure alone shows that many more taxpayers would be affected than the Young Socialists admit. The proposed limit of CHF100,000 seems high, but it cannot be compared with the average salary of a Swiss as the limit is not set per annum. Let’s say a company owner pays themselves a low income and sells the company with a profit of CHF300,000 after ten years. Instead of being compensated for the entrepreneurial risk they were prepared to take and the low salary they paid themselves for many years, they would have to pay an enormous amount of tax on the sale of their company.

This means everyone who is prepared to take an entrepreneurial risk would pay a high price and not just the “richest 1%” the Young Socialists are aiming for. This is fatal and would send the wrong message: “Switzerland is no longer a place for entrepreneurs to take a risk. It has become a distribution desert.” We have to make sure our framework conditions are not deteriorating.

SWI: Taxes are only one part of good framework conditions. Legal certainty, a highly qualified labour force, good infrastructure etc. are also important factors. The supporters of the initiative aim to improve the above points indirectly by redistributing wealth and strengthening the welfare state. This wouldn’t be so bad, wouldn’t it?

A.S: The expenses for our welfare state have increased massively in the last few years. It is mainly funded by financially strong companies: 3% of all companies pay 90% of the profit tax in our country.  There is not much left to squeeze out of this lemon. I don’t expect more tax revenue to be available if the initiative is accepted as it would be a hard hit on the economy.

SWI: The OECD wants to introduce an international corporate tax which has triggered debates on fair taxation in many countries. Is deregulation a thing of the past, and are states becoming stronger and more demanding again?

A.S: The state is relevant, and this has become obvious during the Covid-19 pandemic. However, there have been some loopholes such as the digitalisation of the health system, the procurement of materials, the lack of flexibility etc. Covid-19 has made it clear that we do not need a bigger state but a better state.

Our state must be more flexible and more digitalised to be fit for the 21^st century. But most innovations come from the private sector. Just look at the Covid-19 vaccine. It was remarkable how quickly the pharmaceutical industry developed it. The fact that the economy only slowed down slightly despite the myriad of imposed measures shows that the private economy is extremely adaptable. It is also a sign for how valuable the economy is. At the end of the day we have to work together, not against each other.

SWI: You have a good insight into the financial sector and have an advisory mandate in a family-run business. Are clients and providers nervous ahead of the vote?

A.S: I haven’t really discussed this, but I feel some tension in the start-up ecosystem and family-run businesses. The new tax system would be a breaking point for both and would turn everything upside down.

Just think about all the start-ups and spin-offs of the federal institutes of technology in Zurich (ETH Zurich) and Lausanne (EPFL). They are all deeply rooted in Switzerland and conduct their research there. If their entrepreneurship were suddenly punished by a new additional tax, many would wonder why they should stay in Switzerland.

Read why Ronja Jansen is campaigning for the “99% initiative”.

(Translated from German by Billi Bierling)