Tuesday, August 30, 2011


Yesterday's Wall Street Journal highlights the economic difficulties faced by the Swiss canton of Zug. Their biggest problem? They're too prosperous. Unemployment is so low that companies have difficulty finding qualified administrative staff and accountants. There is so much wealth that one PR executive says that an income of over $500,000 is necessary to attempt to find housing. The 92 square mile canton is also home to a dealer in Maseratis and Ferraris.

The canton's secret? Low taxation:
If Switzerland is the world's most famous tax haven, Zug amounts to a haven within a haven. It has the highest concentration of U.S.-dollar millionaires in Switzerland, a country where nearly 10% of households meet that standard, according to Boston Consulting Group. The highest personal income tax anyone in Zug has to pay is 22.9%, and companies pay an average of just 15.4%—rates lower than Switzerland's average and far below top rates in the U.S. 
...Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland,, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get. 
Zug's tax policies didn't bear much fruit until the 1960s, but then its fortunes began to soar as businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000. 
The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies' efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn't belong) is 9.4%, Zug's is 1.9%.
Those crazy Tea Partiers Swiss don't appear likely to end their approach of low taxation anytime soon either:
Last November, in a national referendum, they overwhelmingly rejected a proposal that would have established a minimum 22% tax rate on incomes over 250,000 francs, or about $315,000.
Almost by definition not every country can become a tax haven and attract the type of investment Zug has received, but there is also no reason the US shouldn't (at a minimum) cut its corporate tax rate and stop actively driving US-based companies into the arms of the Swiss. The left can gnash their teeth and cry foul over the existence of Zug and other such locales all they want, but that does nothing to change the reality of tax competition. The US must either embrace this or resign itself to more multinationals leaving its shores.

And while we're on the topic, here is one other interesting tidbit:
Apple has made money so quickly and so prodigiously that it holds an outrageous $76 billion in cash and investments—an awesome sum thought to be parked in an obscure subsidiary, Braeburn Capital, located across the California border in Reno because the state of Nevada doesn’t have corporate or capital-gains taxes.
Taxes matter.

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