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Happy Fourth, Switzerland! : Considering the “Great Inversion”

July 2, 2010
This post by Max Borders is part of Secession Week 2010: Federalism and Secession
“Man is small, and, therefore, small is beautiful.” – E. F. Shumacher
I realize size matters. But no one knows how big ‘ideal’ is. Switzerland’s success makes a solid case for smaller nations. And it’s not just that they’re geographically small. With their subsidiary canton system (a form of federalism) and their size with respect to their European neighbors, one can’t help but wonder at all the Swiss have been able to achieve.

Swiss Cantons

Indeed, not so long ago Switzerland was just another feudal European backwater. People were mostly poor. It is still a cluster of rather distinct cultures and languages — French, German and Italian. But they are unified in many respects–not only by the law, but the linqua franca that is Swiss entrepreneurism. It’s an entrepreneurism in which one respects tradition, but makes room for innovation. This approach was employed when the very rules of modern Switzerland were crafted. Legal genius Eugen Huber, almost single-handedly, wove disparate legal codes into a single system that could retain the evolved rules of the past while sustaining Swiss unity into the future. Huber’s achievement demands high acclaim and serious scrutiny.

What about Switzerland today? Richard Rahn recently wrote a great piece for the Washington Times:

[Switzerland] has almost no corruption and has the rule of law with honest, competent judges and government administrators. The question should be, “What can we learn from the Switzerlands of the world about how to do things right” rather than, “What is wrong with the Haitis of the world?” Switzerland manages to run a smaller government as a share of gross domestic product than the United States and most other countries while providing a higher level of service, security, prosperity and freedom.

That’s right, Switzerland’s government as share of GDP is smaller than that of the U.S. So how do they do it? Small government, small country, solid institutions and local empowerment. Here’s more from Rahn:

Long ago, the Swiss understood that most things government needs to do and constructively does are at the local level. So, unlike in most modern nation-states, local government has the bulk of the resources and activities, while the central government remains relatively small and less important in the daily lives of the people. In the U.S., roughly two-thirds of government is at the federal level, and one third is at the state and local level. Switzerland is just the opposite, with roughly two-thirds of government being at the state (canton) and local level. Both the United States and Switzerland are federal republics. If one reads the Federalist Papers and the other works of the American Founding Fathers, it is clear they envisioned a nation that operates much more like Switzerland than one with the large central government the U.S. now has. (Emphasis mine.)

If there is any such thing as perfect, Switzerland ain’t it. But the world has a lot to learn from the Swiss–especially the United States these days. Indeed, the U.S. as a beacon is dwindling.

Conservatives and libertarians are often accused of sounding like broken records when it comes to taxes and spending. People know what they’re going to say: cut taxes and reduce government spending and we’re more likely to create jobs and be more prosperous. And, by in large, that is true.

The maximum marginal tax rate at the federal level in Switzerland is about 11.5 percent, while in the U.S., it will be more than 40 percent as a result of Obamacare and the planned expiration of the George W. Bush tax-rate cuts at the end of this year. In Switzerland, maximum income tax rates in the cantons range from 10.9 percent in Zug to about 30 percent in places like Geneva. In the U.S., state and local income tax rates range from zero in places like Texas and Florida to roughly 12 percent in New York City and California. Thus, the overall maximum income tax rate in Switzerland ranges from roughly 20 percent to 40 percent, depending on location, while in the U.S., the maximum rate ranges from 40 percent to 51 percent.
Staggering comparisons. Indeed, it is upon reading this last paragraph that I was inspired to consider the following thought experiment. (This is one, by the way, that even people on the left might be able to chew on without spitting out.) Let’s call it the “Great Inversion.”

The Great Inversion

The idea is simple. Suppose that our collective tax bill wouldn’t change from what it is today. I know, I know. There are all sorts of reasons to reduce taxes. But let’s suppose that, on average, 35-40 percent of the nation’s income went to governments–federal, state and local. And, on average, let’s say that about 20 percent of all tax income goes to the federal government, 10 percent goes to state governments (where the remaining 5 percent goes to local governments). I don’t really know if this is true; it’s an educated guess.

Here’s the idea: what if, through some process, we were able to invert the revenue breakdown between federal and state? In other words, what if only 10 percent of all taxes went to the federal government and 20 percent went to the states? Ideally, we might push the thinking further and have 20 percent go to local governments, but inverting state and federal allows for a compromise, of sorts, which I’ll discuss momentarily.

First, the benefits–with more tax collection and distribution happening at the state level, we give a lot more power to the states. It would be a form of fiscal federalism. After the Great Inversion, you might have some states willing to spend a whole lot to create new welfare states or attempt, at least, to recreate the “services” currently offered by the federal government. The big cost hogs of the federal government – entitlements – might be the first things to be devolved. In such a case, we’d get 50 separate experiments on how to fund and administer entitlement programs. When a program fails, it fails for one state rather than the whole country. When a program looks successful, other states can adopt best practices. In addition, states that have some sense about tax competition (e.g. Texas as opposed to California) might opt not to keep rates that high.

Now, why not invert federal and local? One problem with this version of the idea – from the perspective of those who believe in some sort of geographic social equity – is that you’d have very rich people clustering in certain areas who can afford to lavish themselves with lots of government goodies. But poorer municipalities wouldn’t get as many tax receipts so wouldn’t get as many goodies–including basic things like roads and schools. So, when you invert state and federal percentage, you at least expand states’ ability to distribute government goodies to poor municipalities. This is wise, too, as states probably understand the needs of their state better than bureaucrats in Washington–despite the inherent problem of planning. Of course, that doesn’t mean you wouldn’t have all the corruption and pork-barreling you get at the federal level. You would. But at least this process becomes considerably more localized and, therefore, more transparent. It also increases the incentives for people to care. It is after all, closer by.

People wanted to live in states with more general welfare states could do so. Those who wanted to find places with lower taxes could seek those places out. With more revenue collection at the state level you can get a lot more voting with your feet. The federal government would still have responsibility for things that need national funding and oversight–like national security and the Supreme Court. Otherwise, we could devolve with the money.

In any case, I think Switzerland illustrates how this kind of Great Inversion might be successful. In a world where idealisms tend to hang out in coffeeshops, this might be a realistic goal for the future of the United States–one that even the Founders might grudgingly support if they could see what has happened to the rules of the Republic they so painstakingly devised.

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5 Comments
  1. July 5, 2010 1:00 pm

    The wealthy states export leftism and money to The poorer states. This redistribution is hidden by the ‘money laundering’ that occurs when taxes are pooled then redistributed.

    The majority of the federal budget gies to redistributive programs. Effectively an over extended intergenerational insurance company relying upon external uncompetitiveness, internal growth, and internal population

    The problem with turning programs over to the states is the lack of competence in state and local government. Especially the higher incidence of corruption in local government.

    What troubles the poorer states despite their receipt of cash benefits is priority given to urban density, urban political gains from immigration, debt expansion., bias against lower productive but self supporting non urban groups, and cultural tyranny.

    The soution is to limit the federal government to non social programns, to return money to the states as you suggest, and to privatize all possible government services, while increasing audits of the private sector companies.

    People do not hate government. They hate the necessary corruption that comes with human behavior in a bureaucracy whenever the limits of the bureaucrat’s knowledge are exceeded, and the necessary contrivances of bureaucrats who are intentionally isolated from the market and the pricing system, become a predatory liability to the freedoms of the citizens under the rubric of efficiency and practicality – a failure of bureaucracies but not private sector business that is entirely at the service if the pricing system.

  2. Matt permalink
    July 14, 2010 7:56 pm

    “Ideally, we might push the thinking further and have 20 percent go to local governments, but inverting state and federal allows for a compromise”

    Actually, I don’t think specifying that _would_ be ideal. Part of the problem with the present state of American government is its uniformity. Specifying what portion of non-federal taxes should go to “state” and what portion should go to “local” presupposes a specific sort of organization of the state government. Perhaps this organization is not optimal. Perhaps it is optimal in some states and not others (due to differences in the distribution of population and resources, for example).

  3. Sanjay Misra permalink
    July 19, 2010 3:11 pm

    Here is a link to a video created by Dr. Dan Mitchell, a senior fellow at the Cato Institute, to inform viewers about tax competition. Please consider posting and discussing this video.
    http://www.youtube.com/afq2007#p/u/40/nJWLemN29Wc

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