Is Switzerland a utopia of wealth distribution?

Wollerau, in canton Schwyz, which is often seen as a tax paradise. Keystone / Martin Ruetschi

While discussions about the increasing rift between the rich and the poor are ongoing in many countries, an opinion piece in the New York Times has hailed Switzerland for its high levels of wealth distribution. Switzerland is a less socialist but more successful utopia than Scandinavia, it wrote. Is there any truth in this?

Series: Social inequality in Switzerland

In recent years, social inequality has been a popular topic in research, media, politics and even everyday conversation.

It is also a hot issue in Switzerland. One notable sign of this has been the Young Socialist party’s “99% Initiative”, which demands that capital income like interest or dividend payments be taxed at a higher rate than earned income. The initiative aims to “achieve justice and trim the privileges of the superrich once and for all”, the youth group says.

Is Switzerland a paradise of equality?

However, in an opinion piece headlined The Happy, Healthy Capitalists of SwitzerlandExternal link, published in the New York Times in November, author and investor Ruchir Sharma reckons that Switzerland is the paradise of equality. “Forget Scandinavia,” he writes. “Switzerland is richer and yet has a surprisingly equal wealth distribution.”

Could the dispute about social inequality be an ‘imported debate’ from countries such as France or the US? Is Switzerland really the paradise of equality?

Depending who you ask, opinions are very different:

“Switzerland is doing pretty well,” says Reto Föllmi, Professor of International Economics at St Gallen University. “Statements like ‘the middle class is falling behind’ is a debate imported from the US.” “Conditions are stable in Switzerland,” says Marco Salvi of Avenir Suisse, a liberal think tank. “Taking pension assets into account, wealth distribution is more or less equal.” “In Switzerland, the distribution of wealth is the least equal in the world,” says Professor Robert Fluder from the University of Bern. “And when it comes to income inequality, it ranks in the middle.”

These contradictory statements indicate how political and controversial this question is. And so, for the first part of an in-depth series (see box) looking at the issue, we have gathered together a few facts and figures about Switzerland.

Distribution of wealth and income

The Distribution of Wealth and Income in SwitzerlandExternal link, a research paper by Reto Föllmi and Isabel Martinez, finds that inequality between rich and poor is not overly pronounced in Switzerland and that the income gap has not widened a great deal over the past 100 years. However, there is one exception: “Income and wealth of the superrich have recently increased,” says Föllmi.

In a studyExternal link published earlier this year, meanwhile, Avenir Suisse concludes that Switzerland exhibits a remarkably stable and equal income distribution.

An evaluation by the Swiss Federal Tax Administration shows, however, that the distribution of wealth became increasingly unequal in Switzerland between 2003 and 2015. During this period, the richest 1% of the population saw its wealth increase by almost 43 percent. The weakest three-quarters saw assets increase by 18.6 percent. (Occupational pension assets are not included in this calculation.)

Fluder, from the University of Bern, says that the results of these studies are contradictory.

“It depends to a large degree on which data and definitions you look at,” he says. For this reason, he and a colleague have launched a research project to establish a new database and create a poverty monitoring tool.

Fluder does say that there is a tendency towards increasing inequality in Switzerland, though it is not as significant as in Germany or the US. “Health insurance premiums and rents are on the rise, while wages are only increasing moderately. This is why times are getting tough for the Swiss lower middle-class,” he says.

Decisive factors

The tax system and the welfare state greatly influence the redistribution of wealth and therefore social equality. Compared to other European countries, wealth redistribution in liberal Switzerland is relatively low, tax rates are moderate, and neither health insurers nor pension funds redistribute from rich to poor.

Other Swiss peculiarities also contribute to social inequality:

During both World Wars, rich people living in one of the warring countries lost a considerable part of their assets, which paradoxically led to greater equality, even though it did not necessarily mean the poor were better off. This was not the case in Switzerland, where the war actually widened the gap between rich and poor.

With a home ownership rate of almost 40 percent, Switzerland has the lowest rate in the whole of Europe. And with continuously rising property prices, homeowners are becoming increasingly rich. The majority of people in Switzerland don’t benefit from this.

With its low taxation rates, Switzerland intentionally attracts rich foreigners. These celebrities and superrich make a difference in the balance sheets.

Inheritance tax rates have been reduced in Switzerland and are lower than in most other countries, which preserves wealth.

Capital gains are not taxed in Switzerland. Any private person who sells shares and makes a profit does not have to pay tax on their profit, and it’s usually the rich who hold the shares.

Looking at it more closely, there is actually only one tax that serves equality. “Switzerland is one of the few countries with a significant wealth tax,” Föllmi says.

Magic formula

After reading this, you may wonder how it can possibly be that Switzerland fares so well when it comes to social equality. What’s the secret?

In its study, Avenir Suisse identified the following elements that could inspire other countries in their quest to fight inequality: a highly flexible labour market; a dual education system; a (semi) direct democracy and decentralised taxation.

According to Fluder, there is another secret: “In Switzerland, low wages have not dropped as sharply as in other countries. This is partially due to the minimum wage policies of the trade unions.”

Salvi believes that Switzerland’s strong labour market is the reason why inequality is less pronounced here than in other countries: “Our high employment rate is certainly a decisive factor for this,” he says. Moreover, Switzerland’s income level is pretty high by international standards, even when adjusted for living costs. “Those who earn little in our country are still considered well-off internationally,” says Salvi.

Föllmi agrees: “In Switzerland, over 90 percent of 25-year-olds have completed some sort of education – either by finishing their vocational training or graduating from college or university. Internationally, this is a record-high level.”

Those having completed their vocational training earn between CHF4,500 and 5,500 in Switzerland, depending on the sector they work in. “These are solid wages,” Föllmi says. If a country has many people without vocational training who earn a low income, the wage distribution will be completely different.

The bottom line is this: even if Switzerland is not the paradise of equality as stated in the New York Times, it could certainly be worse compared with other countries.

Translated from German by Billi Bierling, swissinfo.ch