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® Analysts does not claim copyright in any public domain or third party content. Tax All rights reserved. Analysts. Tax © 2020 taxnotes international Volume 97, Number 6 ■ February 10, 2020 Is Switzerland a Role Model for Wealth Taxes? by Peter Hongler and Fabian Mauchle Reprinted from Tax Notes Internaonal, February 10, 2020, p. 645 For more Tax Notes® International content, please visit www.taxnotes.com. © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. COMMENTARY & ANALYSIS tax notes international® Is Switzerland a Role Model for Wealth Taxes? by Peter Hongler and Fabian Mauchle I. Introduction A. Historical Development After the French Revolution, France started to tax object-related income instead of wealth because of injustices — that is, arbitrary tax exemptions and collections — of the “ancien régime” tax system.3 Most European countries introduced similar taxes, which were the predecessors of the modern income tax, in the 19th century.4 That process did not occur in Switzerland for several reasons: The different treatment of various income streams that was inherent in income tax Peter Hongler is a professor of tax law at the University of St. Gallen and counsel at Walder systems at that time probably contradicted the Wyss Ltd. in Zurich. Fabian Mauchle is a country’s democratic concept of equality before 5 research assistant and PhD candidate at the the law, and the financial needs of Swiss cantons University of St. Gallen. were limited because of the lack of a royal household, expensive public servants, or a regular In this article, the authors outline the main army. Therefore, a simple wealth tax was elements of the Swiss wealth tax system, 6 examine the rationale behind the tax and its sufficient back then. interaction with the overall tax system, and Until the start of World War I, the wealth tax consider key elements that may apply to the was the main tax in Switzerland.7 Even when labor debate over a wealth tax in the United States. income grew in the context of economic development around the turn of the century, the Switzerland is one of the few countries that cantons often introduced a wage tax instead of a still uses a comprehensive wealth tax and might comprehensive income tax.8 In 1915 the federation therefore be of particular interest for the U.S. — that is, the central government — was given the wealth tax debate.1 This article describes how the competence by the people to levy a one-time war Swiss wealth tax works and provides some empirical data; however, it does not take any policy position in the U.S. debate.2 3 Konrad Littmann, Überblick über die Ertragsteuern 572 (1980). 4 Ernst Raths, Bedeutung und Rechtfertigung der Vermögensteuer in Historischer und Heutiger Sicht 108 (1977). 5 Eugen Grossmann, Die Vermögenssteuer 526 (1956). 1 6 See, e.g., Tax Foundation, “Tracking the 2020 Presidential Tax Plans,” Wilhelm Bickel, “Die Vermögenssteuern in der Schweiz,” 15 Public (Nov. 20, 2019). Fin. 246, 247 (1960). 2 7 For an overview of arguments for and against individual net wealth Raths, supra note 4, at 116-117. taxes, see OECD, “The Role and Design of Net Wealth Taxes in the 8 OECD,” OECD Tax Policy Studies No. 26, at 47-74 (2018). Bickel, supra note 6, at 247-248. TAX NOTES INTERNATIONAL, FEBRUARY 10, 2020 645 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. 9 tax triggered by World War I. It was a wealth tax achieved by the Federal Act on the 10 accompanied by a wage tax, and it was the first Harmonization of Direct Cantonal and 11 time the federation had levied a direct tax. Communal Taxes of December 14, 1990 (FHTA), The system changed when the canton of SR 642.14. Zurich introduced as major tax reform a Interestingly, there is no dispute about comprehensive income tax with only a whether the wealth tax is a direct tax, at least for 12 supplementary wealth tax in 1917. All other tax harmonization purposes. In Switzerland, cantons followed (the last was Glarus in 1970), as there is a consensus that the federation has the well as the federation with the—in the meantime, right to harmonize direct taxes, which includes 13 17 permanent—war tax in 1940. wealth taxes. According to FHTA article 2[1][a], 18 However, the reorganization of the federal all cantons are obliged to levy a wealth tax. financial constitution, which came into force January 1, 1959, abolished the federal C. Further Important Swiss Legislative Elements supplementary wealth tax as a result of criticism To better understand the Swiss wealth tax, 14 of the overtaxation of investment income assets. some general aspects of the country’s tax system Since then, only the cantons, and not the should be considered: federation, levy a wealth tax in addition to a • Capital gains are income tax exempt for comprehensive income tax. individuals holding an asset as a private asset.19 For instance, a person selling 10 B. Constitutional Framework Nestlé shares with a gain is not taxed unless Switzerland has a clear allocation of tax he is considered a professional securities competences in its current constitution: The dealer. Therefore, there is an incentive to default is that tax competences that are not achieve capital gains instead of dividends or explicitly reserved for the federation are left to the other income from movable assets in 26 cantons.15 The cantons can allocate tax Switzerland.20 However, it is crucial that an competences between themselves and their asset belongs to the private sphere of a (roughly 2,300) municipalities. taxpayer and not to the business sphere, The federation has no right to levy a wealth which would be the case with self- tax, so it is a competence of the cantons. However, employment — that is, if the individual the Swiss Federal Constitution contains a were a professional securities dealer. harmonization provision for direct taxes in the • Donations and inheritances are exempt sense that the federation shall set out principles from income tax in Switzerland.21 Even on harmonization that can extend only to tax though nearly all cantons have special gift liability, the object of the tax and the tax period, and inheritance taxes, gifts and inheritances procedural law, and laws regarding tax offenses16 are tax exempt in most cantons if in direct (the cantons are sovereign to determine the tax line (from the parents to the children). scales, rates, and allowances). Harmonization is • The effective Swiss income tax rates differ depending on individuals’ places of residence. The top marginal tax rates are 9 See Bundesbeschluss betreffend Erlass eines Artikels der between 22.3 percent (Baar, canton of Zug) Bundesverfassung zur Erhebung einer einmaligen Kriegssteuer (Apr. 15, 1915). 10 Id. 11 17 See Botschaft des Bundesrates an die Bundesversammlung From a U.S. perspective, see Ari Glogower, “A Constitutional betreffend Aufnahme eines Art. 42-bis in die Bundesverfassung, 165 Wealth Tax,” 118 Mich. L. Rev. (forthcoming 2020). 18 (Feb. 12, 1915). See Federal Supreme Court, BGE 128 I 240, consid. 3.1.1 (July 10, 12 Bickel, supra note 6, at 248. 2002). 19 13 Raths, supra note 4, at 117. See Federal Act on the Direct Federal Tax of Dec. 14, 1990 (FDTA), 14 SR 642.11 article 16[3]; and FHTA article 7[4][b]. Bickel, supra note 6, at 250-251. 20 15 However, gains from selling real estate are subject to a special real See Federal Constitution of the Swiss Confederation of Apr. 18, estate capital gains tax at the cantonal level if the real estate is held as a 1999, SR 101 articles 47[2] and article 3. private asset. 16 21 Id. at article 129. See FDTA article 24[a] and FHTA article 7[4][c]. 646 TAX NOTES INTERNATIONAL, FEBRUARY 10, 2020 For more Tax Notes® International content, please visit www.taxnotes.com. COMMENTARY & ANALYSIS © 2020 Tax Analysts. All rights reserved. Analysts does not claim copyright in any public domain or third party content. and 46 percent (Avully and Chancy, canton Switzerland has a broad base for wealth tax 22 26 of Geneva). purposes. • About half the municipalities levy a Further, only a taxpayer’s net assets are 27 recurrent tax on real estate in addition to the considered taxable wealth. That means the wealth tax. The tax base is the gross value of taxpayer’s debt is deductible. Most importantly, the property — that is, without mortgages the taxpayer may deduct mortgages and other — and the statutory rates go up to 3 per loans from his taxable wealth. mille. B. Taxable Wealth II. Personal Scope The FHTA provides only minimal Subject to wealth taxation are both persons harmonization guidelines. For instance, it states resident in Switzerland with an unlimited tax that household assets, such as a kitchen table or a liability and persons resident abroad with a bed, are not subject to wealth taxation, so limited tax liability in Switzerland through real everything that is commonly part of a household estate, business operations, or a permanent is exempt. However, items such as a painting by a 23 establishment in Switzerland. A married couple famous artist hanging in the living room are not is assessed together — that is, they are treated as considered part of an ordinary household.28 24 one taxpayer and their wealth will be added up. Assets for personal use for everyday life, such However, corporate taxpayers are not subject as clothes and watches, are also not subject to to the Swiss wealth tax but instead to a capital tax wealth taxation, although very valuable assets a that is in simplified terms a wealth tax for person might use daily, such as an expensive corporations, levied on net equity.