Oct 08 2012

Is Switzerland becoming a feudal state?

Switzerland “could become a feudal state” claims an economist. – swissinfo

One Zurich economist thinks so:

In Switzerland 71 per cent of the wealth is concentrated in the hands of just ten per cent of the population – a figure that economist Hans Kissling finds alarming.

Kissling tells swissinfo that the gap between the rich and everyone else is growing and that this could threaten traditional Swiss democracy and the economy. He makes a call for an inheritance tax for the wealthy.

Statistics show that the 300 richest people have become 40 per cent wealthier in the past eight years, whereas most of the population has a lower income than at the beginning of the 1990s

Kissling has nothing against wealth, he just thinks that if someone did not earn their wealth but inherited it instead, they should have to share a bit with the rest of society.

I call for a tax on very high inheritances, from SFr1 million ($900.000) upwards, and only on the excess value of that. I certainly don’t want people to think that they can’t pass on their family home to the next generation.

I’m only interested in trying to stop any creeping feudalisation, to avoid having huge clans like in South America, which threaten the economy and the political world

He’s most concerned that if the gap between rich and middle class continues to widen and the middle class of Switzerland don’t start benefiting from the country’s growing wealth, there could be a dangerous backlash against the free market system.

…the richest one tenth of a percent in Zurich – there are no full Swiss statistics – had 677 times more wealth than an average citizen in 1991. By 2003, 12 years later, the richest one tenth of a percent had 1,027 times more wealth. So the gap has really grown.

The middle classes, unlike the lower classes, have not benefited from any concessions, such as health insurance or childcare allowances. Here they have to use up all their assets before they receive any support. The lower classes have help from the beginning. This is why the middle classes are threatened

Discussion Questions:

  1. Why does a growing gap between rich and middle class threaten social stability in Switzerland?
  2. What threats do growing inequality pose to Economic growth?
  3. What are the benefits of an inheritance tax as a means to reduce wealth and income inequality? What are the arguments against such a tax?
  4. What other types of government policies could reduce the wealth and income inequality that exists in Switzerland?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

13 responses so far

13 Responses to “Is Switzerland becoming a feudal state?”

  1. Lisa Gon 08 Sep 2008 at 7:13 am

    What this article states is true, the rich get rich, the gap is growing between the rich and the poor and rich have most of the wealth. However it is not true that top 10 percent have most of the wealth, but is the top 20 percent that have 70% of the all the money in Switzerland. The statistic makes this appear to be a bad thing; however, one must see that these 20 percent pay 70 percent of all the taxes in Switzerland. Thereby it not a loss to the average citizen if a small group of people have most of the wealth. What must be said to this is that Switzerland does attract a lot of very rich and wealth people. Switzerland is safe, has infrastructure, good system of education, is politically stable, is not under a threat of any kind and has a very low tax for firms and companies and has a low tax on income in relation to rest of Europe (the highest tax on income that one receive is 35-45% on income). Since Switzerland has all these benefits, it attracts a lot of very rich people. A lot of headquarters for multinational cooperation’s are set up in Switzerland, there by attracting the rich people that come with them. Currently, a lot of very rich Russians, South Americans are moving to Switzerland, to avoid taxes and to move to a better place with a higher standard of living. These are some of the reasons to why Switzerland has the top 20 of its population having most of the money. What is wrong with this statistics is that it takes into account all the very rich people living in Switzerland, this distorts the data, all in relation to the rich, the poor and middle class are earning less. The statistic states in 1990’s the middle and lower class, earn less, but this does not state the exchange rate of the CHF then and the CHF now. Or how much 1 SFr can buy as oppose to in the 1990’s (in German the term is called: Kaufkraft).

    With today’s market and possibilities, it is true that the rich get richer, but that is due to the fact that these people have the chance and possibility to increase their wealth. These people have the money and the ‘power’ to invest in the stock market, in which they can then from make large amounts of profit. For example, take a lower class citizen who has a low paying job. This person cannot invest in the stock market as they do not knowledge of how to use or invest in it. Also this person has not ‘extra’ money to invest and not enough money to be able to lose, as this person is dependent all of his/her money. And take a rich person; they people have ‘spare’ money to invest and ‘to take a chance on’. They have enough money so that they can live even though they lost some. The rich have the possibility to make more out of their wealth, they can invest and thereby gain and multiply their wealth, hereby making richer. When one has money one is usually in a job that requires knowledge, by having this, they usually know how to use a stock market effectively and make more of their money.

    I do not believe that a tax on inheritance is correct to even out the gap between rich and poor. A tax would first of all discourage people from working and earning money. As if they were to pass it on to their children they would receive nothing. It is in most parents interest to provide for their children and give them the best they can, and if the possibility to do this is taken away, they will be discouraged to work and provide for their children. Also the inheritance tax will only tax the wealth that is passed on for one generation to the next. It does not stop people from acquiring wealth or getting richer during their life. It used to be so that wealth was passed on from generation to the next; therefore the amount of rich people stayed relatively the same of time. But now with globalization, and with so many possibilities to become rich, a lot new rich people have arisen. A good example of this is Bill Gates. This man did not start out rich, but a middle class citizen. Through good ideas, management, innovation and a bit of luck this man became the riches many in the world. The difference is that Bill Gates had to work hard for his money and did not have it handed to him. He is a good example of the people become rich by their own means. Most of the rich people that my family knows did not inherited their money, but got it through intelligence, hard work and dedication. They were all very smart and graduated as top of their class and with this benefit they worked them self to the top and are now people that belong to the top 20 of the population in terms of wealth. This sudden ability to become rich has lead to large increase in the number of rich people. However it must be said that not everyone can reach to top, even with hard work, one is not guaranteed to reach the top. Therefore a tax on inheritance will not lead to decrease number of rich people, as they will continue to appear. However and inheritance tax could be used to decrease the taxes on the middle and lower class so that they gain more real income. Even if this many happen, the rich will continue to become richer.

    (Sorry that this is really really long…)

  2. Bjorn Borgerson 09 Sep 2008 at 7:29 pm

    Wow! Interesting statistics. But maybe they were taken in a very rich region…

    Isn't what makes Switzerland so attractive the low taxes. O.K., these taxes don't directly affect everybody, but i certainly don't think that it would help Switzerland's economic growth. Yes, do those rich people need all that money? Not really… but if we were to follow that mind set, we should be living in a socialist state who distributes everything equally. Many of these people probably made their money in the market economy, and have therefore made this in the most fair way possible. I think that these taxes should not be introduced, and if they were, that Switzerland could suffer some negative consequences.

  3. Younes Huberon 10 Sep 2008 at 1:19 am

    If we were to give credibility to the article, which I assume we are, then those facts are in a way threatening. One may think there could be strikes as the rich get richer and the poor dont profit or get poorer, just like the French Revolution. Yet I believe it is very unlikely to happen in a peaceful country such as Switzerland. Yes, there may be small protests but nothing more harmful. Also the fact that somebody is proposing the idea of taxing heritage is, in my opinion, totally outrageous. This heritage is money your parents/relatives worked hard for, it would be unfair to just cut a slice from it and distribute it. Often times the heritage is considered an emotional memory of that person, rather than the actual cash/value itself. Would it not be unfair to just let the government/people have their share of something personal? I am not denying that there may be people who see heritage differently, yet I am convinced there are some who agree with my argument and it would truly be a tragedy to take a piece out of their heritage. We should rather be trying to build a bridge over the gap between the rich and poor as oppose to slightly narrowing it.

  4. Maren Rackebrandton 10 Sep 2008 at 5:24 am

    I agree with what Younes said about the tax inheritance. I think the heritage is something that belongs and should stay in the family. I can understand the other side, too though, or at least their arguments. They might say that all of that money is not fully used anyway, is not earned by the people who inherit and for that reason doesn't belong to them or something else just to be able to get to that money and give it to people who really need it. But I really don't think it's right to take the heritage or parts of it away from a family. This heritage could not only be money, it could be tradition, because some families have been rich for generations and it's some kind of symbol and a reputation for them to live in prosperity.

  5. Fabienne Bergaminon 14 Sep 2008 at 5:02 am

    The statistic doesn’t say if the purchasing power of the middle-class really gets lower. Only in the first paragraph there is a statement which is based on some different statistic.

    Middle-class people have to spend most of their money to cover the life expenses. Their ability to save money is quite limited. Rich people on the other hand can safe most of their income. So the middle-class is like the engine of an economy.

    When the purchasing power of the middle-class decreases the main power of the economy is leaking. So the vicious circle starts. The economy is getting worse, the middle-class is earning less income, less goods can be bought, ect. Basically the economy goes down faster and faster which can result in social instability especially against the rich who appear to be the origin of this negative development.

    Question 2 and 3 can be answered simultaneously by describing what the advocates of the socialists request in terms of a „social tax-system“.

    A redistribution of income has to happen. This can be done in different ways. All of them are based on a sort of tax which is the major tool for a redistribution.

    • The maximum tax rate of the income tax has to be increased

    • Capital taxes have to be increased tremendously

    • Dividends have to be taxed a lot higher because only the rich people owncompanies.

    • Inheritance-tax for large amounts of money is an option to redistribute

    • Another action could be to repeal the flat rate taxation for foreign citizens.

    In general in can be said that in order to make a redistribution more effective, taxes for rich people have to be increased whereas mid and low incomes should benefit.

  6. Theresa Mehlon 14 Sep 2008 at 7:57 pm

    Wow, I have never thought about Switzerland that way.

    First of all I think this article is a bit exaggerated since for example Zuerich is the city with the highest quality of life worldwide. Therefor I cannot imagine 10% of the population having 71% of the wealth. It doesen't seem possible, even If these facts count for overal Switzerland.

    Also Switzerland is known for the low taxation system and therefor favoured by wealthy people. I am Maren's oppinion, I do not think that a taxation on inheritage would bring faar changes. It would rather upset the people.

    To improve the situation described I would increase the investment on education. A better education system would bring Switzerland more people finishing university and high educational degrees. A higher better quantity of human resources would increase the living standarts and Switzerland's production.

  7. Yael Burlaon 14 Sep 2008 at 10:41 pm

    The first sentance of this article really surprised me when I

    first read it that I needed to reread it a couple of times to understand what the swiss economist was saying. To a certain extent, this article can be credible, but I think that my reaction to having to read it several times justifies that Switzerland, a country in which i've been living my whole life, is not only one of the safest and cleanest countries in the world, but also one of the richest. Perhaps these statistics were taken from one specific part of Zurich or another rich city? Switzerland is also known to have one of the most stable and capitalist economies in the world.. The majority of the population work in this country, and therefore can afford goods and services to their utility. However, if this statistic is in every way correct, then the growing gap between rich and middle class threatens social stability in Switzerland because eventhough the past has shown Switzerland to be a neutral and relatively equal nation, the future for the country could be quite unsteady due to the large amount of changes in the economy. This applies for any country actually; if there is an imbalance or large difference among the social statuses in a nation, especially one that has been so traditional and cooperative for centuries, then a rupture to the democratic economy and government could occur.

  8. Rohan Rajivon 16 Sep 2008 at 4:08 am

    I defenitely do not agree that 10% of switzerlands population holds 70% wealth. If Kisslin said 20% then i would have somewhat agreed. Its true that many rich people live in switzerland and to some extent they live here because they can avoid paying vast taxes. If people were taxed to the amount of income they earned then that statement would not have been said. Taxation on inheritance would have its have more downs than ups. The families earnings are due to their own hardwork and it is their choice to hand it down to future generations. I agree with Theresa when she said more money should be pumped into education systems so that a higher percentage of people would get better jobs and earn more money. Education is the foundation of life. There can be a dangerous backlash to the free market system if the middle class do not benefit from countrys growing wealth . This goes back to the 1st statement, it shows the vast difference between the rich and the middle class.

  9. Justus Poeschlon 17 Sep 2008 at 3:37 am

    You should not believe everything you hear and read, because they don't have to be neccessarlily true. However, I do actually believe that Zurich, having the highest life quality in the world holds 70% of the wealth. Hear is the reason why. Think about it, Zurich has the highest life quality on earth, but it is also a very expensive city and so most of the people, who live in Zurich city (I'm not talking about the whole area) must be really rich. Zurich is afterall also the biggest city in Switzerland (380,000). So actually it might be possible that a gap is spreading between the rich and middle class. This I believe will have consequences in the future on the Swiss economy, which will be negative I have to say. In Zurich there is most of the Industry, while the rest of the country is pretty rural.

    I'm German and in Germany we have the problem that in the west most of the Industry is located, for instance in the Ruhr, Bayern, Frankfurt and Hamburg. The east part of the country still suffers from the GDR slightly, where after reunification only the rich "ex-socialists" remained wealthy. So in all the West is Rich and the East poor.

  10. Venla Ahoon 22 Sep 2008 at 7:12 am

    Whether these statistics are true or not, even if the gap between the middle class and upper class is growing, i do not believe this will be a problem because overall, to live in Switzerland one must have a reasonable amount of money, in comparison to other European countries of course. I think the true problem that we will face, if the gap keeps growing, is that since services like health services are private, the middle class will not be able to afford these services due to the prices that would go higher. This problem would occur, however, only until the gap is big enough to call the previous middle class the new lower class.

    I agree on Theresa's point about better education. If Switzerland would get over some of the traditional educating systems and improve their standards for teacher beginning from primary school, there would be a larger number graduating from high schools and universities. However, Switzerland has enough money to have a lot of people not go to high school and do apprenticeships and pay them a decent salary because these jobs are valued evenly to those done by high school and university graduates. This gets rid of unemployment, which in contrast, is a bigger problem in a country like Finland, were university education is highly valued, but at this moment a lot of university graduates are unemployed and their friends who became plumbers have jobs and are getting payed better than they thought. Education is valued differently in different places, but a lot of the time people do not seem to use common sense: if you will get a job as a plumber and not get a job as a business school graduate, which took you 5 years to get, it would make more sense to become a plumber.

    In other words, I will be very interested to see how this situation develops.

  11. moritzreithmayron 23 Oct 2008 at 4:08 am

    I can still remember how shocked I was when I read the article in the newspaper for the first time. Nobody would have thought that possible until Kissling published his book.

    I believe the threat that the widening of the gap between the upper and the middle class brings is that rich people pass on their money to their children and they will then pass on their money to their children. This leads to the transformation into a more traditional society where the wealth that is passed on from generation to generation allows less social mobility and, foremost, less innovation. The economy gets, therefore, weaker and people from the middle class will be upset about the inequality in Switzerland.

    Supporters of socialism would propose higher income taxes, whereby the rich people would have to pay a greater percentage than they currently have to, while the percentage for the poor would be simultaneously decreased. Additionally, as Kissling suggests, they would recommend a higher tax on inheritances. This would help redistributing wealth in the unjust, inequitable Swiss system.

  12. Dutch girlon 14 Jan 2009 at 6:20 pm

    Why compare a stable country like Switzerland with South America? Besides the gap we are talking about, why would one think that that would become a problem, because there are issues in South America? Wouldn't you think that those issues arised from bad democracy? And I certainly would not like to compare poor South Americans to poor Swiss people.

    I would expect that if Switzerland was to change its current tax system drastically, it will have a huge influence on the amount of rich people and companies moving (their money) to Switzerland. Even though the tax amount they have to pay is relatively low, they pay a large amount of the annual tax bill. Also, it is obligated that foreign companies based in Switzerland, have Swiss management. This is labour and a huge business in f.e. Zug. Without these people, Switzerland will become just another European country, of which all of them has issues with poor people.

    About inheritance tax: this is money where people already paid taxes on, sometimes even twice. And: all the money that is left to spent gives 7.6% VAT to the State's treasury.

    About rich Zürich: as I can see, Kanton Zürich (and Zürich city especially) has one of the highest tax rate in the country already. Especially if you compare it to nabour Kanton Schwyz.

    Lastly: I would like to see some new statistics, now we have a financial crisis. As rich people earned so much money in the stock market, well I guess they lost a lot now. So the gap must be much smaller now…

  13. Andrew Fischeron 09 Oct 2012 at 7:46 am

    1. The growing gap between the rich and the middle class represents a problem for social stability, according to Mr. Kissling, because if "the middle class of Switzerland don’t start benefiting from the country’s growing wealth, there could be a dangerous backlash against the free market system".

    2. Inequality poses a obstacle to economic growth in that money becomes increasingly concentrated in the hands of the wealthy and is not spent on consumption and investment nearly as much than if it were more equally distributed.

    3. The benefits of an inheritance tax are that it ensures that the wealth gap is not perpetuated from generation to generation. It forces people who might have received large inheritances from their parents or relatives to work and contribute to society if they wish to be become wealthy. A disadvantage could be that a person's fortune is a touchy thing to tax.

    4. A "luxury tax" could be imposed on items that wealthy people often purchase in excess – watches, boats, etc. There is, however, some debate as to the success of such policies. Luxury goods are often manufactured by middle and lower class workers, and a fall in demand for them due to their higher prices might have negative consequences for those workers.