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Swiss come to senses in Europe’s soak-the-rich mood

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Bloomberg

In March, a Swiss referendum fired a first shot against executive pay, as it was decided that shareholders would get to determine chief executive compensation. Photo: Bloomberg.

Some of my best friends are very rich – people with condos on Central Park West and tastefully refurbished palazzi in Italy. The puzzle: Why do so many of them vote Democratic or praise the high-taxing European welfare state?

How rich? When one of them had an art lover on the phone, who was offering to pay $30 million (R306m) for a famous painting, he refused. Frustrated, the would-be buyer groaned: “Look, man, I just more than doubled the going price for this piece, and you still won’t take it. Why not?”

My friend’s riposte: “Right now, I am the only man in the world who owns this unique painting. If I sold it to you, I would just be another guy with 30 million bucks.”

This art-hoarding friend belongs to what we might call the Compassionate Croesus Crowd, the American version of la gauche caviar, the sturgeon-roe-gobbling left in France.

In Paris, such people live in the 16th arrondissement. In New York, they dwell along the edges of Central Park – with extra homes in East Hampton, New York, and Vail, Colorado – or on Russian Hill in San Francisco.

Karl Marx would stick them with “false consciousness”. They go against their own class interest, which is to amass and to stash. Some rich people, such as Bill Gates, put their money where their heart is, and give away billions. But some of my American friends also donate to the Democratic Party and dream of a European tax-and-redistribute state.

Friendly souls will say: They want to give back. Cynics will argue: Their own riches are nicely sheltered from the taxman. Or because they feel guilty when they compare themselves with the toiling masses. Or because they fear the revolt of the underclass, recalling the burning US cities of the 1960s and 1970s.

A sharp divide separates the two sides of the Atlantic. In the US, such benevolent conversations remain restricted to silver-laden dinner tables. It is a lot easier to become super-rich in short order in the US – and to keep the hoard from a grasping state. So, there is a bit of make-believe in these earnest disquisitions on part-and-share.

In Europe, the debate is for real. The postwar welfare state takes about half of gross domestic product (GDP) – 5 points less in Germany, 5 points more in France.

After the Crash of 2008, “soak the rich” has become the shibboleth of the land. There is nary a political party that doesn’t call for a special tax on the wealthy. These levies will undoubtedly be blessed in parliament, even in Germany, which, after France, has the second-best Gini co-efficient (the index measuring equality of income distribution after taxes and transfers) among Europe’s large countries, according to Organisation for Economic Co-operation and Development statistics.

The most striking test has been in Switzerland, whose Gini co-efficient is just a little worse than Germany’s. What? This shiny tax haven – at least until the US Internal Revenue Service broke down the doors? This low-tax paradise harbouring some of the largest multinationals in the world?

In March, a national referendum fired a first shot against executive pay. Shareholders will get to determine chief executive compensation. Another initiative is on the table. It would grant a basic, unconditional income of Sf2 500 (R28 153.60) for each adult. A third, the so-called 1:12 Initiative, sought to cap executive remuneration at 12 times the wage of the lowest-paid worker in the company.

On Sunday, the sensible Swiss – by almost two-thirds – voted to stop this foray. Multinationals such as Nestlé and Novartis can now happily stay at home rather than having to relocate to the US or UK.

How else would they compete for the most promising in the global market for talent?

As Marx famously lectured: “Capital knows no fatherland.”

If the initiative had passed, the companies might have remained in Switzerland, but their head honchos would have departed in short order.

One can’t fail to be sympathetic to such populist revolts; after all, pay and bonuses, certainly outside Switzerland, have climbed to obscene levels. But distributive justice and economic efficiency make for an uneasy couple. Leaving pay in place and taxing it away won’t help, either, as long as brains can move across borders. Alas, the poor don’t get richer by making the rich poorer.

The French have tried this, by imposing exorbitant payroll taxes on business and towering top rates on high earners, while letting wages rise above the growth in productivity. This has stuck them with some of the highest unit-labour costs in Europe. This munificence hasn’t made the country as such any richer. Italy comes in second; after France, it must bear the highest social charges as a fraction of pretax labour costs.

Both are the sick men of Europe – with low or no growth, and with double-digit unemployment rates that are twice as high as in Germany, which has held wages and taxes in check. So far.

 

Josef Joffe is the editor of Die Zeit in Hamburg and a fellow at the Institute for International Studies and at the Hoover Institution, both at Stanford University. He is the author, most recently, of The Myth of America’s Decline.


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