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Switzerland: The Drawbacks of Wealth Taxation

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Researchers studying the effects of wealth taxation in Switzerland have found that, rather than quelling inequality, the taxes are costly to the economy and generate little revenue with respect to their negative impacts. The Tax Foundation’s Alex Durante writes:

Many countries in the OECD impose estate or inheritance taxes, two kinds of wealth taxes, on their citizens. Estate and inheritance taxes are levied on the money and property of the deceased and paid by the beneficiaries. However, only a few of these countries tax personal wealth holdings on a yearly basis. Switzerland imposes the largest of these taxes, which generates 3.3% of its total revenues. The country’s wealth taxes are all raised at the canton and municipality level. Exemption levels are fairly low, exposing many upper-middle class households to the tax.

The variation of the wealth tax by canton, and the large number of households that pay the tax, make Switzerland an ideal candidate for this study. The authors find that a one percentage point increase in the wealth tax rate would reduce declared wealth holdings by a staggering 34.5%.  While some of this decline could simply be attributed to a reduction in the reporting of wealth, rather than a real change in wealth accumulation, the authors argue that Switzerland’s 35% withholding tax limits this possibility. All financial assets are subject to this withholding tax, and these payments are returned to the taxpayer in full after taxes have been filed. The purpose of this tax is to ensure that all interest and dividends received by the taxpayer are included in taxable income. For filers whose wealth tax bills amount to less than 35% of their asset returns, this withholding tax provides an incentive to accurately report financial assets, otherwise they would not be eligible for a refund.

Some cantons structure their tax schedules differently, which alters the taxpayer response to wealth taxation. In the canton of Bern, taxpayers with wealth above a certain threshold must pay the tax on their entire wealth holdings. This creates a kink in the tax schedule, and provides an incentive for taxpayers to reduce wealth holdings to just below this threshold. This is in fact precisely what the authors found. For each percentage point increase in the wealth tax, 40% of wealth holders report assets below the threshold.

Surprisingly, the study did not find any significant impacts of wealth taxation on mobility. That is, there was no indication that taxpayers would relocate to another municipality in response to a change in the wealth tax rate. The authors hypothesized that higher rates of social welfare spending in high tax municipalities might motivate taxpayers to stay instead of relocating. However, they were unable to find any evidence that supported this conclusion.

Overall, this study provides compelling evidence that wealth taxes reduce wealth accumulation. For some proponents of wealth taxes, this is a feature, not a bug. However,capital accumulation is an essential ingredient for economic growth. Moreover, to the extent that wealth is earned through entrepreneurial risk-taking, rather than through cronyism, wealth inequality does not harm the economy. Policymakers should therefore be wary of adopting wealth taxation to combat inequality.

Read the details of the study here.

[gview file=”http://www.richardcyoung.com/wp-content/uploads/2016/07/brulhart-etal_taxingwealth_2016.pdf” width=”100%” save=”0″]

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com