May 15, 2009 -- Most Americans know peaceful and prosperous Switzerland—America’s “sister republic”—for its beautiful mountains, tangy cheese, decentralized political system, and banks that pride themselves on protecting the absolute security of their depositors. Indeed, it’s illegal in Switzerland for banks to violate that privacy.
But the U.S. government recently forced the Swiss government to make an exception to law, under threat of criminal prosecution in the U.S. against UBS, Switzerland’s largest bank. That bank must reveal information about as many as 300 of its American depositors, who the U.S. government claims are guilty of tax evasion. Further, UBS must pay $780 million in fines.
This is not some minor, soon-to-be forgotten dispute. Rather, it is part of a broad attack against productive individuals that is the logical consequence of big-government economic policies and mixed economies in the West. That’s why President Obama has now declared war on all so-called “tax havens.” In the end, the victims will be the citizens of the United States and other countries, as well as those of Switzerland.
One might think of “wealth security” as the business of Switzerland. It is estimated that some $7 trillion worldwide is deposited “off-shore,” meaning in the banks outside the countries of which the depositors are citizens. Swiss banks hold an estimated one-third of those deposits.
Many foreigners, including Europeans of modest and substantial means, hold Swiss francs in Swiss banks as a hedge against inflation of their own currencies. Entrepreneurs keep money in those banks to facilitate international transactions. Others deposit funds to avoid confiscatory taxes or even outright expropriation by their home governments.
Some have criticized the Swiss banks as too secure; as in the movies, they’re seen as places for criminals to hide their ill-gotten gains. But the Swiss banks and government do cooperate with other governments in serious cases of money laundering, fraud, and Bernard Madoff-type scams. Yet they generally don’t consider foreign governments’ charges of tax evasion to warrant violation of bank secrecy.
Not Legal Laws
Tax laws vary from country to country; the United States is the only major country to tax income that its own citizens earn abroad. In any case, it’s not illegal for Americans to hold Swiss bank accounts. And it is appropriate that Swiss banks refuse to be deputized by the U.S. government to sort out and enforce American tax laws that don’t apply in Switzerland, not least because the United States will not allow other governments to deputize American private enterprises to enforce foreign laws that don’t apply in America.
More fundamentally, the fact is that no American can figure out America’s tax laws, and the U.S. government cannot apply them fairly. U.S. Treasury Secretary Geithner didn’t pay taxes because he couldn’t figure them out, nor could other would-be Obama administration appointees. These laws are an arbitrary patchwork of weapons that politicians use to extort as much wealth as possible from citizens, combined with tax breaks that various citizens managed to get into the law to defend themselves. Of course, the Swiss won’t get in the middle of this mess.
So why is America leading an assault on Swiss banks at this time?
Governments Gone Wild
Over past decades, the industrialized countries have swung back and forth from outright government ownership and control of industries to privatization, from high taxes to low, from heavy-handed regulation to more Reagan-Thatcher type laissez-faire regimes.
Today, all major economically powerful countries have politicians in office who want maximum power to redistribute wealth and engineer their societies in light of their ideologies rather than allowing their own citizens economic freedom. Yet they must take care not to be so punitive that Atlas shrugs. They don’t want to destroy any entrepreneurial drive their citizens might have left, or cause their citizens to hide their wealth or take it out of the country.
Globalization has complicated this balancing act. The reduction or elimination of barriers to the flow of goods and capital in past decades means production can take place where it makes the most economic sense—for example, with labor-intensive, low-skilled production going to places like China or India. Leaders in advanced countries want to preserve the higher-skilled, higher-valued industries and jobs for their own countries. But high taxes and heavy-handed regulations chase out those industries and jobs to freer countries, along with capital.
Thus the big-government leaders of these countries want to “harmonize” their taxes and regulations, not downward to allow for more individual liberty, but upward to allow more government control.
And that’s why they attack Switzerland. That’s why French President Nicolas Sarkozy said, “We want to put a stop to tax havens.” That’s why British Prime Minister Gordon Brown and German Chancellor Angela Merkel joined him in vowing action against such sanctuaries. And that’s why the Obama administration is leading the assault.
An Affront and a Sanctuary
During the Cold War, West Berlin, the free and prosperous city in the midst of Communist East Germany, was an affront to the enemies of freedom, a reminder of how the world could and should be, and a sanctuary for the impoverished subjects of Red tyranny who could escape through barbed wire, bullets, and an infamous wall to its safety. Today, Switzerland is an affront to the pro-big-government leaders who want to tighten the government vice on their own citizens and a sanctuary for those who want to keep the wealth they’ve earned.
Friends of freedom throughout the world should appreciate and defend the Swiss banking system. If it and other such sanctuaries are eliminated, freedom may have no home in these troubled times.
Edward Hudgins is research director at the Heartland Institute and former director of advocacy and senior scholar at The Atlas Society.