In a Dispatch earlier this week, David drew attention to a movement (literally as well as figuratively) where corporations and individuals, having been squeezed by the tax man, are fighting back. As we have said for years, at some point the productive members of a society will reach their limits of tolerance for being taxed and regulated and will vote with their feet, choosing instead to seek a tax jurisdiction that treats them as a valued asset and not a milk cow.
The example he cited was the tiny Swiss canton of Schwyz, and its allure of low corporate and personal tax rates, even within a country that is known for imposing a light tax burden. And it is just this form of tax competition that has kept the size of Swiss government small and the taxes required to fund the government reasonable.
To fully understand what drives the policies of Schwyz, and the attitudes of Switzerland’s citizens in general, it is essential to note the country’s history. Schwyz is one of four cantons that formed an alliance against the Habsburgs in 1291, fighting to maintain self-governance as independent jurisdictions. Together they are the germ of today's Confederation Helvetia, the federal state adopted in 1848 via national referendum and known as Switzerland.
But to win the required unanimous support for the referendum, six cantons demanded that they maintain a high degree of sovereignty from a federal power. And so it was that these radicals were granted constitutional status as “half-cantons” and enjoy the right to opt out of federal programs if they so choose. Although Canton Schwyz is not a half-canton, it has joined these cantons in a sort of informal philosophical association based on a staunch belief in “state's rights.”
The result is that tax competition amongst cantons has kept the size and cost of government lean; in a country as small as this you don’t have to pack up and move far to find a more agreeable place to call home.
It was this very issue – state’s rights – that was diluted at the genesis of America. The Federalist Papers of 1787 are the seminal documents written to garner the support of many skeptical states in ratifying the Constitution and its proposed system of government. Long story short, the support of all the states was won, and checks and balances were instituted that limited the autonomy of the states.
Fast forward to today, and U.S. states are straining to carry the heavy funding load of myriad mandates required of them by an out of control federal government. This has given rise to a movement known as “nullification,” a legal theory that a U.S. state has the right to nullify, or invalidate, any federal law which any state deems unconstitutional.
Look for this movement to be fought at every turn by the federal government. If this theory is ever used successfully and becomes reality it will be the end of a federal monopoly and a renewed emphasis on tax competition between states. No state will accept a Washington D.C. imposed tax burden that places it at a disadvantage to its neighbor that refuses to go along.
Much of the justification for states funding federal mandates is the notion of “tax harmonization” where everyone shares a similar burden in the name of the greater good. And, indeed, even the name itself, “harmonization,” conjures feel-good images. But make no mistake, tax harmonization is nothing more than a feather taped to the end of the tax hammer – it is going to hurt just the same. And the result is always higher taxes for all.
Look no further than the EU for proof. Before the European, experimental treaty of unity could be ratified, harmony among the various existing tax schemes had to be achieved. And that never means that high-tax states will be brought in line with their lower-tax neighbors. Quite the opposite.
Governments despise competition simply because they can’t compete in a free market. But that is exactly what is needed. As the greater depression wears on, businesses and individuals will be seeking jurisdictions, both states and nations, that will treat them and their capital well. Keep your eye on nullification and other signs that tax competition is catching on. We think that governments that adopt this strategy will be the places to put your money to work.
