Shutting the Swiss Safety Valve

When you think of a rich person, you may think of Learjets, caviar, and Rolls-Royces, but for centuries, there has been one single defining asset of the truly well off: a Swiss bank account.

There are many reasons for this.  Living in a highly mountainous, landlocked, not particularly fertile little country with few natural resources, the Swiss nation had to develop their intellectual capital instead; and, as more or less of a democracy, they were able early on to avoid some of the business restrictions of other countries.  Over the years, the core competency of the Swiss has been reliable banking - safe, secure, and above all, private.

Switzerland has some of the strictest bank-privacy laws on earth.  It is flagrantly illegal for any Swiss banker to give out information about his clients to unauthorized personnel, most particularly if they hail from other lands.

A Place of Refuge

Now why might someone want a bank account that others might not know about?  The last few centuries of European history give enough reasons to fill a book.

The aristocrats of France might have lost their chateaux and estates in 1789, but if they were wise enough to have an account in Switzerland, they could carry on elsewhere; likewise the nobility of Czarist Russia or anywhere else encountering a revolution or Communist takeover.  With less abrupt transitions, one often finds the situation where a new regime does not - yet - have sufficient power to shut down international money transfers, but the wise can see the handwriting on the wall and make preparations.

Today, we think we aren't so prone to violent revolutions, and perhaps that's true.  As anyone who has watched TV for the last couple of months can attest, though, it is every bit as easy to whip up public anger and indignation at the wealthy who have supposedly looted the poor.

Sometimes these accusations are true, as with Bernie Madoff - and in such a case, Switzerland is no refuge, since the law allows money to be reclaimed from a criminal convicted of a crime that would also be illegal in Switzerland, as financial fraud surely is.

International tax evasion, however, is not illegal in Switzerland.  For all these centuries, when some other country wanted the Swiss to cough up money belonging to someone accused of not paying taxes, the Swiss told the other country to pound sand.

This may seem unfair; indeed, this policy has been used as a stick to beat Switzerland with by populists and demagogues for many years.  How can it be right for anyone to aid and abet tax evaders?

Easily - because you are making the false assumption that the taxes are just.  Only last month, we saw an example of grossly unjust taxes: Congress's recent attempt to confiscate AIG bonuses by means of a special 90% tax.

We've already explored how the bonus recipients, far from being thieves, earned their money and deserved it by right of their hard work according to valid contracts.  Indeed, some of AIG's foreign employees flatly refused to return their bonus money on just those grounds.

If you were an AIG executive who had worked hard, done what you were contracted to do, and earned a bonus under the terms specified in your contract, wouldn't you feel better having a Swiss bank account to stash it in?  How much more so in overtly socialist nations like most of Europe!

The Swiss system provides an immensely valuable service, not just to the wealthy with Swiss accounts but to everyone who pays any taxes anywhere.  By virtue of its very existence, Swiss secret banking provides a safety valve and a warning signal to governments which are getting too greedy, pushing them to lower tax rates on everyone.

The Cost of Flight and the Cost of Greed

Consider: As cool as it might be to have a Swiss bank account, it isn't convenient.  If you want to get money out of your local bank, you visit the ATM.  If you want to get at your Swiss money, though, you have to spend hours and hundreds of dollars on a plane trip over there; or even if you're European, several hours driving.  In a perfect world, you wouldn't bother.

Your time is worth a certain amount; the taxes your government wants to take out of your money are worth a certain amount.  Eventually the taxes will be worth more than your time, and it becomes worthwhile for you to have a yearly vacation in Zurich.

Here's where the brilliance of the famous Laffer curve comes into play.  As governments raise taxes too far, they get less money because people start hiding it in places where it can't be found.  Sooner or later, most governments figure this out and realize that tax cuts are what's needed to raise more revenue.

Italy has moved around this cycle for many years; first raising taxes to punitive levels causing flight to Switzerland; then lowering tax rates and declaring a tax amnesty to bring the money back; then raising rates causing the money to leave again.

Though inconvenient and somewhat risky, it is possible to hide your money in Switzerland.  This reality puts an essential cap on government greed.

As long as a government is not excessively greedy, people would prefer to keep their money in their local bank where they can get at it conveniently, even if there's some cost in taxes.  When tax rates rise, however, sooner or later there comes a time when it makes sense to hide money offshore and government revenues fall.

As long as there are tax havens, it's impossible for a government to be greedy past a certain point without resorting to obvious totalitarianism like the Iron Curtain.

In reality, the Swiss provide a safety valve to the frustrations of overtaxed citizens.  Anyone with money can do something to avoid a crushing tax burden without resorting to violent revolution.

International Threats and Demands

Alas, the greed of government knows no bounds.  The Swiss are under tremendous pressure to eliminate their bank secrecy and cooperate with tax evasion investigations in other countries.  The legendary United Bank of Switzerland (UBS) now finds its executives arrested in American courts on charges of abetting tax evasion - which, in the absolute sense, is perfectly true.

In fact, that's the whole point of Swiss banking.  Unfortunately, UBS got greedy, and figured they could more conveniently serve their wealthy American clients by establishing offices in the United States.  True enough - but that also meant UBS had American assets and employees the IRS could put to the question, and we see the result.

The IRS isn't really after the Swiss bankers, much as its inquisitors may enjoy a chance to break out the thumbscrews and the rack.  What it wants is the names of their American clients so as to squeeze the money out of them.  The Germans and, indeed, all major countries feel the same way.

Standing alone against a united Rest of the World, it looks like the Swiss will knuckle under, according to the Straits Times:

The Swiss government said Friday it would cooperate on cases of international tax evasion, breaking with a long-standing tradition of protecting wealthy foreigners accused of hiding billions of dollars in the Alpine nation.

The government insisted it would hold onto its cherished banking secrecy rules, but said other countries could now expect Swiss cooperation in cases where they provide compelling evidence of tax evasion.

"We want assistance to be restricted to individual cases to prevent fishing expeditions," President Hans-Rudolf Merz told a news conference, referring to the practice of seeking information about many individuals in the hope of discovering a few tax evaders.

At least Switzerland will not freely allow other countries to simply trawl through the names of their depositors; but let your local IRS agent get the slightest whiff that you might have a secret account such that he can ask for information by name, and you're toast.

The Swiss say their privacy isn't compromised, but anybody with the brains God gave geese knows that's a lie.  How hard is it for your government to suspect that you, personally, might have a Swiss bank account?  Unless you hoof it over the Mexican border, they already know where you're going from your passport records.

No, the days of the tax haven are at an end.  Nothing now stands in the way of governments taking as much of anyone's income as they please.  Tax-and-spend liberals are surely celebrating - but should they be?

Tying Down the Safety Valve

For the first hundred years of railroading, trains were hauled by classic steam locomotives.  These work by heating water in a pressurized boiler to make steam which pushes the pistons to turn the wheels and pull the train.

Pressurized steam is very dangerous stuff.  If the fire gets too hot, the pressure becomes more than the iron boiler can handle; it explodes, blowing the engine and anybody nearby to bits.  To avoid such a disaster, steam locomotives were equipped with a "safety valve" - a vent that automatically opened when the pressure got too great, to lower it and avoid explosion.

The very first boiler explosion and railway death in the United States happened in 1831 when a train fireman got sick of listening to the safety valve's loud whistle and blocked it.  This stopped the awful noise and he was happy for a while.

Problem solved, right?  No - the pressure built invisibly until the boiler exploded, shredding him.

Unless politicians develop an absolutely new and unprecendented restraint in their taxing and spending, the only thing their victory over the Swiss banks has accomplished is allowing them to increase popular anger and resentment over high taxes without the warning signal of money moving offshore.

What will be the end result?  Will it be a crack in the boiler's seam, with the wealthiest and most talented permanently decamping to more welcoming climes?

Or will it be a catastrophic explosion blowing everything away?  The American Revolution came from many grievances, but the spark that lit the fuse was excessive and unavoidable taxes.