Tax reform will ‘hurt middle class and slash public revenue’

Switzerland’s proposed corporate tax reform reinforces harmful competition between cantons and states, while reducing public revenues, says Regula Rytz, president of the leftwing Green Party. She urges Swiss voters to reject a proposal to overhaul corporate taxes and pension funding in a May 19 referendum.

Switzerland’s 30 largest companies will be paying out CHF40 billion ($39 billion) in dividends this spring. At the same time, we are being urged to vote in favour of a spiral of decline in the taxation of corporate profits. The  proposed federal legislation on tax reform and pension funding, to be put to a referendum on May 19, is an unconvincing effort. We in the Green Party are calling for more harmonisation and less inequality.

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Due to international pressure, Switzerland has to abolish the privileges granted by cantons to so-called “special-status” (international) companies. No quarrel with that. Nevertheless, the first attempt at legislation on the matter was clearly defeated in a referendum in February 2017. The thumbs-down from the nation’s voters signalled their disapproval of the policy of empty coffers. 

Yet anyone who was hoping for a balanced tax reform proposal in the second round will be disappointed. The new proposal would actually involve the loss of CHF2 billion in tax revenue, especially at the local government level. And it would encourage tax dumping between cantons and national states even more. It is not a way out of the dilemma, but rather “old wine in new wineskins” – which is how a politician from one of the conservative parties summed up this taxation reform package.

+ Corporate tax and pension reform: a complex two-headed vote

Cannibalism among the cantons

In fact, the forecast losses of revenue to cantons and municipalities are just about as high as they were with the federal government’s previous proposal. The corrective measures will not suffice to stop the race to ever lower corporate taxes. 

Competition among cantons will be intensified, in fact, by this latest proposal. Cantons with many “special-status” companies (like Basel City) will profit by an increase in revenue following the abolition of tax privileges. Cantons with few “special-status” companies, on the other hand, will want to bring down their tax rates, fearing companies will leave, and they will have no additional sources of revenue. This will lead to shortfalls in local [cantonal] government budgets and a heavier tax burden on the middle class. The voters said no to that last time.

A double break for companies

Switzerland is currently the engine of worldwide tax competition. With the government’s new proposal, tax on profits will be lower than ever. To accommodate companies that have enjoyed privileges until now, the federal government and the cantons are planning to give them a double break.

First, the basis for calculating the profits to be taxed will be reduced by new taxation tools like the “patent box“. And that’s not just for the “special-status” companies, but all companies in Switzerland.

Second, the taxing of the remaining profit will be slashed in many cantons by an overall lowering of tax rates on capital and profits. Here too there will be a “free-ride effect” for large companies taxed normally so far, like UBS Switzerland. They will be given a break of  CHF4.5 billion. Annually.

The bottom line is that the new proposal wipes out CHF2 billion in tax revenue and will continue to attract international capital into Switzerland. The evaluation of this proposal by the development organisation “Alliance Sud“ is pretty devastating: “Transfer of profits by multinational corporations into low-tax jurisdictions like Switzerland deprives communities of hundreds of billions of dollars in potential tax revenue annually. That is money urgently needed for fighting poverty in the countries of the South.“

Balanced reform is possible 

Since the federal cabinet and parliament are aware of how weak the new proposal is, they are linking it to a financial shot in the arm for the nation’s pension system. This strategy to curry favour with the voters has been justly criticised. 

Even though stabilising the funding mechanisms for old age security is an important goal, it should not be paid for with a corporate tax deal. Not only the pension system is currently strapped for cash. Cantons and local governments too need to invest more in supporting their ageing population. In the next ten years alone 30,000 new healthcare positions will be needed. They can only be funded with a balanced tax reform package. It can be done – if the voters say no to this spiral of decline in corporate tax on May 19.

The views expressed in this article are solely those of the author, and do not necessarily reflect the views of swissinfo.ch.

(Translated from French by Dominique Soguel)