A subtle, yet liberal proposal for a Social Value-Added Tax
1.0 The initial position
In 2007, the Swiss Finance Minister proposed simplifying value-added tax (VAT) by setting a general limit of 6.5% (currently ranging between 15% and 25% in EU countries). The exceptions would be reduced from 29 to 5 points. Consequently, both Parliamentary chambers buried the proposal in 2011. It is my observation that a low level of VAT brings significant disadvantages for the economy as a whole. Since then, I have been committed to finding a more humane solution regarding the finance of state expenditure.
I understand that poverty is man-made – and was relieved to learn that the UN intend to eradicate extreme poverty and hunger by the year 2030.
In 1990, I read “Economic Justice for All” (in German translation). This was a Pastoral Letter chaired by Archbishop Rembert Weakland and published in 1986 by Catholic bishops in the USA.
The description of the fate of poor people living in prosperous societies was more than depressing, even more so as most of the case studies could very well fit into the European mold. What made things even worse is that the document provided very few useful proposals for relieving the misery of the poor. Apart from the brilliant “Negative Tax”, (in 1944 by Lady Juliet Rhys-Williams and taken up again in 1982 by Milton & Rose Friedman), which shows ways of alleviating bitter poverty by very simple means, yet fails to show ways towards building a sustainable domestic market, supportive of the middle class.
2.0 The situation
World-wide, confusion concerning the financing of public costs and public debt is considerable. A consumption tax in particular, varying from country to country with differing regulations, would profit by the standardization of a Social Value-Added Tax or S-VAT.
It is inhuman for the jobless to have no access to medical care and/or social security-retirement schemes as we see in the Balkans, Greece, Spain, and Latin America to name but a few.
It is not the responsibility of employers alone to bear the brunt of pension provision and medical insurance. This is a task for society as a whole.
3.0 Social value-added tax (S-VAT)
The principle of S-VAT is that the tax is regulated centrally by the government (Washington).
To a large extent, S-VAT funds:
- Health care costs 8 percent
- A general pension scheme 8 percent
- State budgets * 4 percent
* This share is only needed to facilitate the transformation of the system.
In return, wage contributions by employers and wage deductions by the employees, which represent a significant part of non-wage labor costs, will be eliminated altogether. Companies and employees will continue to contribute towards a pension plan and, in some circumstances, towards unemployment insurance in the event of accident or illness. Norbert Blüm, the charismatic German politician, called such measures a “switch yard”.
This repositioning of the financing of social institutions, brings convincing macroeconomic advantages for national, business, as well as private economies:
- Exported goods become cheaper while personal costs fall and – with them – overall costs and logically, so do prices before tax.
- Imported goods will finally contribute to the social institutions through a uniform, nationwide S-VAT. Instead of being disadvantaged, domestic production will be promoted free of charge.
- Götz W. Werner, the German founder of the “dm-drogerie” brand drugstore chain and author of “The Unconditional Basic Income”, noted that non-wage labor costs need to be paid on a quarterly basis, long before the money for a product or a service charge reaches the cash box. This fact places a huge burden on research and development. Furthermore, bankruptcies caused by a lack of liquidity are much more decisive for the general economy than a lack of active markets. (cf. the US real-estate crisis)
Note: In an initiative on June 5, 2016, the Swiss electorate in all 26 cantons (states) of the Swiss Confederation, voted against an “unconditional basic income” (the figure proposed being CHF 2,500 per person) by a ratio of 67.6% against a respectable 32.4%.
- The exclusive tax burden on employment has immense consequences for the national economy: exports are taxed, imports are encouraged, liquidity is weakened, leading to automation, production being relocated to low-wage countries, rising unemployment – and with that, higher social contributions – a dwindling domestic market, company closures and a loss of know-how.
- The advantages of a system-change are remarkable. The systemic error that only wages and social security contributions are taxed whereas cost-components such as material, machines, energy, space rental, finance, as well as capital investments are tax-exempted will thus be eliminated.
- The new financing system not only facilitates production, but is more liberal because wage earners not only have more money to spend but – while making a purchase – make their own decision as to how they wish to finance their social security. Even the Republicans might appreciate this.
- In order to finance health insurance and retirement provisions as non-wage labor costs, we often hear that the retirement age and/or the birth rate should be raised to higher levels. Taking the worldwide high rate of youth unemployment into consideration, increasing the age of retirement to an age above 65 is a NO-GO. The idea that more children would finance pensioners is an unproven assumption.
- With the change towards S-VAT, voluntary labor (an enormous economic factor) will be automatically insured against illness, accident and in old age. This again, financed by the purchase of products that buyers choose to consume.
4.0 Supporting measures
4.1 General thoughts
As one begins to reorganize the financing of State expenditure, it is important to visualize the effects of a tax-burden on particular income groups:
|Duties:||Poor||Working poor||Average earner||The rich|
|Income tax, Progressive||not a burden||extreme||tolerable||trifling|
|Income tax, Progressive
Based on assets
|not a burden||tolerable||tolerable||tolerable|
|VAT, in relation to Earnings (flat-rate tax)||extreme||considerable||tolerable||trifling|
4.2 Progressive income tax based on capital (assets)
The previous comparison shows that a progressive, asset-dependent income tax is the fairest way of financing public expenditure. For example: a soft progression for assets of up to USD 2 million, a middle progression for up to USD 5 million, beyond that a steep progression towards a high, marginal flat-tax rate.
It is astounding with what lack of concern national economies can afford to keep the working poor by excluding them from the domestic market. This diligent workforce, often holding down two jobs, should be turned into a prosperous consumer group that spurs a sustainable economy (as was once realized by Henry Ford).
4.3 Pre-inheritance for all 30-year-olds
30-year-olds in Switzerland generally have no capital. Pensioners, on the other hand, benefit from a clever three-pillared system (Federal Social Security, company pension and private provision). This situation encouraged me to petition the Federal Authorities with a proposal for a “general pre-inheritance” law.
The proposal recommends that the Federal Government should establish an inheritance tax of 0.1% per CHF 10,000, increasing the inheritance tax on capital beyond CHF 100,000, thereby reaching 10% at CHF 1 million. This tax will go into a pre-inheritance tax fund and will thus benefit all 30-year-olds. The proposal is a minimum of CHF 30,000 and a maximum of CHF 100,000.
I can imagine that a proposal of this nature would also appeal to most US citizens.
4.4 Fees only to marginal cost
Fees without management tasks (trash-collecting/sugar) which cover fee-based services (parking meters, water, passports, driver’s licenses, copies of documents, clerical services, etc.) should be considered marginal costs, as they pose an extremely unfair burden on lower income groups.
4.5 Smoothing of population growth
The implementation of S-VAT has a major advantage because the financing of the social welfare system is not dependent on population growth (this includes the naive wish that employment remains guaranteed), but rather by spending power and consumption. Therefore, it makes sense to use accompanying measures to smooth the population growth. Even the most pious know that exponential growth of the world population can only lead to a catastrophe. I have respect for the Chinese one-child policy especially because it was calculated using a pencil and an eraser in all probability.
In order to support the family, the basis of any state or nation, it is advisable to reduce financial constraints during increasing fixed costs. I envisage a “Parent- Allowance system”. Each parent would receive a monthly allowance of around USD 400 after the birth of the first child until it reaches its 30th birthday. This father/mother allowance, should primarily contribute to more liquidity for low-income families and enhance their purchasing power. In contrast, child benefits should be held at a moderate level (USD 100 per child and month) as a means of population control.
|1 child||parents 2 x 400 = 800 |
for the child |
1 x 100 = 900
|per child 900|
|2 children||parents 2 x 400 = 800 | for the children | 2 x 100 = 1,000||per child 500|
|3 children||parents 2 x 400 = 800 |for the children | 3 x 100 = 1,100||per child 367|
The objective of parent-allowances is to provide families with a modest amount of financial leverage, amongst other things in the hope of reducing the divorce rate and thus avoiding the financial calamities that divorce usually brings.
* * *
Dear Mr. President, I hope I have stirred your curiosity with these thoughts and impulses towards a fairer model of a more just financing system of state expenditure.
Meggen, October 2016
©Meinrad Flüeler – 2016 – CH-6045 Meggen
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