Learning The Wrong Lessons—Could Repubs Learn The Right Ones?

Wow.  Emma Farge and Caroline Copley authored an article for Reuters, carried by Townhall, that I thought important and relevant to many of the issues facing the US and the EU, today.  It’s focused on a little country every communist and socialist loves to hate, Switzerland. 

It carries several points, so hang on for just a bit.  I’ll try to keep my commentary to a minimum to allow for greater discussion.  The title doesn’t do it justice.

Insight: Swiss, facing EU tax pressure, ponder how to attract firms

We’ve already discussed France’s demand that other nations stop allowing other nationals to move there and escape oppressive and onerous taxes.  But, the EU has actually been at this for a while.  Switzerland has been the recipient of the EU’s ire.

GENEVA (Reuters) – “Happy Taxation” is a 2011 book by Pascal Broulis, finance minister of the Swiss canton of Vaud and celebrant of the low taxes that distinguish Switzerland. But as times get tougher, discontent about Swiss tax breaks is mounting. ……..

Swiss official company tax rates of around 21 percent compare with 33 percent in France and 29 percent in Germany, according to a 2011 survey by accountants KPMG; often companies in Switzerland actually pay much less. Denknetz, a left-wing Swiss think tank, estimates Switzerland’s special tax regimes deprives other countries of up to 36.5 billion francs ($39 billion) in tax revenue each year -…….

Brussels has demanded that the country, which is home to nearly 24,000 “tax privileged” companies from online retailer eBay to Japanese automaker Nissan, scrap special tax breaks on some company profits.

This is probably lessons one and two.  This is typical of the left and their statist views.  They don’t believe in competition.  They believe one person’s gain is another’s loss.  What is it to the EU what Switzerland charges on their tax rates?  Who is the EU to demand anything? 

In particular, the EU is angry that Switzerland’s cantons, or states, compete with each other to attract multinationals’ business, and charge less tax on foreign-earned income than they do on income earned in Switzerland. Brussels has said the practice, known as “ring-fencing”, is the equivalent of providing unauthorized state aid to companies.

Last week the European Commission unveiled a plan to counter inventive tactics increasingly used by big companies to reduce their tax bills, and attacked countries like Switzerland whose policies it says encourage aggressive tax avoidance.

Here, we see the EU utterly failing to learn the lessons Switzerland is providing.  Economically, Switzerland has been one of the most successful nations for centuries.  Instead of emulating their success, they attack the success.  Unauthorized state aid?  Who set the EU to dictate to other nations?  All nations, whether they realize it or not, compete with each other for businesses.  Just like the income taxes which causes the exodus of people from France, the lower rates cause businesses to move to Switzerland.  The problem here is that the EU is unwilling to offer the same deals to businesses that Switzerland is.  Switzerland understands two very basic principles.  One is math, and the other basic economics. 

The math.  A company not within the confines of the tax area pays 0%.  Regardless of how low the tax rate is, the total amount of taxes paid is always greater than if the company isn’t there.   X * 0% =0,   X * Y% > X * 0%

The other thing the Swiss know is that it isn’t necessary to tax a company to gain revenue from the company’s existence.  As mentioned above, if the company isn’t within the tax area, the net tax revenue gain from that company is zero.  But, let’s say, the company says it will move within the area, but only if there are no taxes on the company.  The area still gains tax revenue because the company hires people who in turn pay taxes.  Here, the math looks like this….. (X * 0%) + (Y * Z%) > 0 Where X is the amount of profits the company makes, Y is the amount the company pays its employees, and Z is the income tax rate for the individual.  This is always greater than zero, assuming the individual tax rate is greater than zero.  Realistically, the tax area can still gain revenue even if the individual tax rate is zero if the area has a sales tax or a VAT.  The Swiss understand this, the rest of Europe either understands it and hates it, or they’re too simple to understand basic math principles.  Statists are a collection of both groups.  Stupid and hateful.  Back to the article…..

Swiss officials point out that EU countries such as Ireland, which offers a headline corporate tax rate of just 12.5 percent, provide similar tax breaks. Google uses Ireland and the Netherlands to reduce its tax bills.

“We are called a ‘tax haven’ by some of our European neighbors but Switzerland is far from having the exclusivity on legal devices that allow companies to avoid taxes,” Broulis writes in his book.

So, what’s the difference between Switzerland and Ireland?  Why does the EU care about Switzerland and not Ireland?  Because Ireland is a poor nation.  More than anything statists hate economic success.  If Ireland ever gains the economic success of Switzerland, the ire of the EU will turn against Ireland. 

JOY OF TAX

The 47-year-old [Broulis] represents the Swiss Liberals party. It’s the third largest in Switzerland’s parliament and stands for a slender state, low taxes and tax competition among cantons. He has distributed copies of the book, which is written in French, to every 20-year-old in Switzerland’s sleepy lakeside state of Vaud. He says he wants to reach people who “have never paid taxes but are about to pay them for the rest of their lives.”

Are you reading this Republicans and Libertarians?  How long must it be?  Nearly everyone in the US who is not a leftist is in universal agreement that our young people are indoctrinated by the leftist dominated educational system in the US.  We’ve known and understood this for decades.  But, we wait until life teaches them hard lessons before they are receptive to fiscally conservative principles.  Now, I know we’ve dumbed down our children, but the formulas and ideas I’ve expressed are not that hard to communicate!  Learn from Broulis and the Swiss!    —— back to the article…

In Broulis’ canton Vaud, the official rate of corporate tax is nearly 24 percent, but firms often negotiate a better deal. For more than a decade, Broulis has had the final say on whether a foreign company qualifies for special tax regimes, including offers such as up to 10 years tax-free, subject to conditions such as job creation.

What???!!!!???  Why tax free?  Do the Swiss hate the little people???!!!??! 

No, of course not.  The Swiss do this for selfish reasons.  If the condition is jobs creation, then they get more from the jobs than not having anything at all.  Refer back to the zero percent.  Switzerland benefits from not taxing some corporations!  How weird is that?

“If taxes are too high and confiscatory they become intolerable,” Broulis writes. Companies including Yahoo and Brazilian miner Vale have settled in the canton. Vale confirmed tax optimization played a role in its decision, Yahoo declined comment.

Other firms attracted by Switzerland’s “ring-fence” include some of the world’s biggest commodity firms. Oil traders Vitol and Trafigura, for instance, are based in land-locked Switzerland. Much of their income is generated abroad, so the tax breaks can be ample – usually less than a quarter of earnings they make abroad is taxed. Their headline tax rate can fall to just 11-12 percent of profits, or even less, says a tax official.

There is much more to the article, and there is much more to say.  However, time and beer limit this post.  So, there is only one thing left to do…… plug in the numbers.

Let’s say there is a company being strangled by corporate taxes.  They could make it big, if only the taxes didn’t prohibit their reinvestment.  Let’s say this generic company makes $100 million/yr in profit after all expenses.  Let us say there is a poor canton, state, or country in desperate need of tax revenue to balance their budget. 

If you invite these people in for only 5% tax on their profits, the poor state, canton, or nation will have an additional $20 million.  But, that’s only one side!  They employ people!  Typically, the payroll of a company, depending upon what they do, is about 20%-30% of the profits.  If the income tax is 15%, then the government institution gains another $5million.  Then there’s the churn, VAT or sales tax, additional jobs, etc….

The point is, from a $100 million company, there is nearly half that much to be made in tax revenue only be letting people and companies keep most of what they earn!  If one demands more than one is willing to sacrifice, then the people realize 100% of zero.  This isn’t hard math.  This isn’t radical political thinking.  This is reality.  There’s so much more to say, but, I’m tired.