Direct democracy keeps Swiss VAT below European rates

Switzerland’s value-added tax rates are markedly lower than those in other European countries, in part because voters must approve every increase, SRF reports. Hans Gersbach, a professor of macroeconomics at ETH Zurich, says the rates are less than half those in the country’s European neighbours.

Voters and federalism restrain spending

Requiring a public vote on each VAT increase gives voters a check on the government and parliament, Gersbach says. Federalism and competition among cantons and municipalities also help limit spending: decisions on expenditure and how to fund it are made at lower levels than in many other countries, and citizens can intervene through referendums.

Together, these mechanisms also encourage tighter control of federal spending, Gersbach says. They require politicians to make a stronger case for raising VAT, a tax that is attractive to governments because it spreads the cost among many people, each paying relatively little.

Different sources fund social spending

Swiss healthcare and retirement provision rely more on private financing than systems such as Germany’s, the article says. Per-person health insurance premiums and individual saving through occupational pensions mean less spending is covered collectively. In Germany, VAT revenue also helps fund subsidies for statutory health insurance.

Switzerland also tends to fund public expenditure more through direct taxes, including income, wealth and corporate taxes, than through indirect taxes such as VAT. Some social spending is privately financed, while general public spending relies more on direct taxation.

Gersbach says the system remains important

Swiss VAT has been raised several times over the decades. Gersbach considers warnings that the country is steadily moving towards European rates exaggerated, but says Switzerland would be wise to retain its current system. Where governments and parliaments can approve spending and its funding more easily, he says, public finances can more readily get out of control.