Lessons from Switzerland: Taxing capital is the only sensible way to increase growth and reduce inequality

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September 20, 2021 6:30 AM

The home of global private banking and a country with the second-highest net financial assets per capita recognises that taxing capital is the only sensible way to increase growth and reduce inequality

Switzerland is a small country in the scheme of things, but the idea of taxing capital is being very loudly bruited about globally—perhaps, this will be the thin end of the wedge that opens the issue up more widely. (Representative image/ Reuters file photo)Switzerland is a small country in the scheme of things, but the idea of taxing capital is being very loudly bruited about globally—perhaps, this will be the thin end of the wedge that opens the issue up more widely. (Representative image/ Reuters file photo)

We have just returned from a glorious week visiting family in Switzerland—it was wonderful; meeting people you love after so long is more than joy. Our family has, amongst other businesses, a high-tech pig farm and it was fantastic “meeting” the pigs and learning from them. One of the most dramatic lessons was that, contrary to the popular aphorism that “[something apparently impossible] can only happen when pigs fly”, the farm has at least one flying pig. Ergo, anything is possible!

And, indeed, one of the surprising things I learned, over champagne and apero (pre-dinner dinner) at a friend’s house one evening, is that at the next national referendum [on September 26], citizens are asked to vote on an initiative that will reduce taxes on income and increase tax on capital. I knew that Switzerland actively uses referendums to make laws—they have had more than 500 referendums, hugely more than any other country that uses referendums from time to time (e.g., Brexit). But I was amazed that the home of global private banking and a country with the second-highest net financial assets per capita, should recognise that taxing capital, at this point in time, is the only sensible way to increase growth and reduce inequality. If the Swiss are anything, they are sensible, and while I (and many others) have been braying about this for some time, I guess years of negative interest rates have a way of opening minds.

Switzerland is a small country in the scheme of things, but the idea of taxing capital is being very loudly bruited about globally—perhaps, this will be the thin end of the wedge that opens the issue up more widely. While this would also be sensible in India—we need to pump in a huge amount of cash to the lower income segments, perhaps with an attached incentive for spending to pump up growth, and significant investment in social infrastructure—to me, the bigger lesson for India is from the structure of Swiss politics. Like most countries in Europe, Swiss democracy follows proportional representation—political parties are allotted Parliament seats in proportion to their vote-share—as opposed to the first-past-the-post system that prevails in India (and, incidentally, the US, another faltering democracy).

If India had proportional representation with, say, a 2% total vote cutoff [meaning only parties with more than 2% of the popular vote were eligible], it would mean that in the 2019 election, the BJP with 37.36% vote share would have 274 seats (as compared to 305), less than a simple majority; the Congress with 19.49% of the vote would have 143 seats as opposed to the 52 they have under the current system; the DMK with 4.07% of the vote would have 29 seats as opposed to the 22 they currently have; the BSP, Samajwadi Party, TMC, YSR Congress and the Shiv Sena would also be represented in Parliament. Of course, if we had proportional representation, the vote shares would have been dramatically different, with the BJP and Congress losing votes and the smaller parties increasing their vote shares. Indeed, under this system, there would be no jockeying for alliances before the election, dramatically reducing corruption and criminality, and increasing the number of alternative views offered to citizens. Partnerships would have to be forged after the elections and coalition governments would be the norm, as they are in most countries in Europe.

Critically, this approach would also dramatically reduce the amount of money in politics—the most expensive elections in the world on a per capita basis are in the US and India, both countries that have the first-past-the post system. While proportional representation does have drawbacks—for instance, you may vote for a particular candidate that you really like but, even as her party gets a certain number of seats based on vote share (including yours), your candidate may not be selected as a party representative in Parliament. To my mind, however, that is a minor issue as compared to the revolutionary change the new process would make in how India is governed.

To make any constitutional change requires a two-thirds majority in both houses of Parliament and while this may look like a fool’s errand, it is significant that our constitution has been amended around twice a year since it was formed. To be sure, the BJP, who would be the biggest loser, would fight this tooth and nail; however, every other political party would benefit as would every Indian citizen (including people who vote for the BJP). To move this, the first step is to push the BJP below one-third of the number of seats—i.e., below 181 seats—in the next election. It’s a huge job, but remember—anything is possible.

The author is CEO, Mecklai Financial
www.mecklai.com

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