Wednesday, December 01, 2010

Geneva's alleged growth problem

Today's New York Times features that rarest of commodities -- a story acknowledging the virtues of low taxes:
The financial crisis may have crimped corporate investment across the West, but companies still appear willing to spend in one corner of Europe — the Lake Geneva region — for a simple reason: It saves them money on taxes.

Companies from Europe and the United States, and more recently, Asia, are being drawn to the area by low taxes, generous write-offs and labor laws that are more flexible than much of the rest of Continental Europe. Then there’s the central location and, of course, all that fresh air.

...Andrio Orler, a partner at the law firm Tavernier Tschanz, said the fiscal structure remained crucial. Outwardly, the tax structure appears complex, given the need to pay communal, cantonal and federal taxes. But companies end up saving money.

Geneva’s corporate tax rate has edged up to about 24 percent, Mr. Orler said, but that is a “starting rate.” Companies can negotiate with the canton to be excused from paying all or part of their tax bills for up to 10 years if they fulfill certain conditions, including creating jobs. That can reduce the applicable tax rate to as low as 7.8 percent.

The effective corporate tax rate, incorporating allowances, last year was 9.7 percent in Hong Kong, 27.7 percent in London and 34.1 percent in nearby Lyon, according to BAK Basel, a consulting firm.
This being the Times, however, the narrative presented is that all of this growth has come at a steep cost, pushing up housing prices and contributing to a surging cost of living:
The influx has brought this placid region revenue, jobs and other benefits. But the growth has not come without a price, pushing up the cost of living and, some say, detracting from the quality of life for local residents and expatriates alike.

In October, a leading Geneva politician broke a taboo by suggesting the city had reached its limits in its ability to absorb large foreign companies.

“We would hesitate to welcome a company with more than 5,000 employees because we would not know where to house the employees and their families,” Pierre-Fran├žois Unger, the city’s economy and health minister, said during a news conference.

A senior official at an international organization, who spoke on the condition of anonymity out of fear of offending the authorities in Geneva, used to work in the United States for a nongovernmental organization. In Geneva, she said, she earns twice as much, “but now I’m clearing much less.”

“Most other cities have a range of price points,” she added. “Here, it’s all expensive.”
Basic economic theory teaches us to be suspicious of such explanations. After all, if prices go up, this serves as a signal for more housing to be built, thus increasing supply and bringing prices back down. Furthermore, a quick look at Geneva reveals that the storyline advanced by a "leading Geneva politician" of a city has simply reached its physical limits to be false:

Plainly there is plenty of green space, including farmland (which makes little sense given the country's topography and is best explained by lavish farm subsidies), which can be developed. This suggests one obvious culprit: government policy. Indeed, a bit of research indicates that this appears to be the case:
As [Philippe Brun, who teaches city planning at the University of Geneva] sees it, “There is no will to extend and develop. There is a fear to extend.”

He says this mentality penetrates circles of politicians, so even as everyone is saying ‘there is a problem, we must develop,’ that underlying fear keeps them from having the courage and force to impose the changes needed to actually get enough housing built.

“The building zones are full today, and Geneva is so built that we have the center and around the center we have the agriculture zone,” Brun illustrates, “like a greenbelt, and after you have the border. And so you have to change the use of the agriculture zones to make building zones but this attitude makes it very, very difficult to change even small plots.”
Low taxes aren't the problem, it's government meddling. Meanwhile, it's worth pondering that Switzerland's low corporate tax rate has produced an abundance of jobs while the unemployment rates hovers near 10 percent in the US, which has one of the highest corporate income taxes in the developed world.

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