swiss experiment

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Nn-Centrls

Te Swss Eperent Bsedn Lcl Gernent, DrectDecrc nd T Cpettn

Robert Ne

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Non-Centralism

The Swiss Experiment Based on LocalGovernment, Direct Democracy andTax Competition

Robert Nef

Paper presented at the international colloquium Liberalism and Communal Sel-

Administration, organized by the Liberal Institute o the Friedrich NaumannFoundation or Freedom, Potsdam, 18 September 2009.


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Rbert Neis the president o the oundation board o the Liberal Institute inZurich, Switzerland and member o seeral other liberal institutions in Europe.As a trained lawyer, his research topics include the principal questions o libera-lism, ederalism and institutional competition. From 1979 to 2006 he was Editor-

in-chie o the quarterly magazine "Refeion and, rom 1994 to 2008, o themonthly "Schweizer Monatshete. In addition to numerous essays and articles onquestions pertaining to classical liberal principles, history o ideas and especiallycriticism on welare state, he is author o the book In Praise o Non-Centralism(in German Lob des Non-Zentralismus).


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Contents

Introduction 5

1. Competition as a Procedure o Discoery 5

2. Conederation, Federal State and Centralized State 7

3. The Principle o Subsidiarity 8

4. Federalism and Subsidiarity 8

5. Redistribution, Subsidiarity and the Majority Rule 9

6. The Future o Subsidiarity 10

7. Non-Centralism and the Ta System 10

8. Reducing the Ta Burden 11

9. Ta Competition and Ta Limitation by Direct Representation 12

10. Competition as a Procedure o Discoery and Learning 13


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ThePrivateProvisionofPublicGoods:TheHistoryandFutureofCommunalLiberalism

Introduction

Let me start with a little story that shows how and why cantonal and municipal

autonomy really works in Switzerland. I know a mayor o an aerage municipalityin the eastern part o Switzerland with about 5000 inhabitants.

With this mayor I recently had a discussion, i Switzerland should join the EU ornot, and we also discussed the costs and benets o membership a ery Swissapproach. We agreed that there are good reasons or scepticism and he conclu-ded, that i we will join one day, it would not cost him more than about 15 SwissFrancs, which means about 10 USD. I asked him why, and he eplained to me: Youknow, in my oce I hae already two big waste-paper baskets or all the ocialmail I get eery day. I hae better uses o my time than reading it, and I mostlythrow it directly into the waste-paper basket. I hae one or all the orms, regula-tions and other papers I get rom the Cantonal Goernment, another one or eerything they send me rom the Federal Goernment in Berne. And when we becomea member o the EU I will need another waste-paper basket, or all the orms andregulations coming rom Brussels. This will cost me about 15 Sr, because I willneed a ery nice and big one... O course he may hae eaggerated, but his muni-cipal autonomy is based on nancial and scal autonomy, which is ery important

and which eplains why he can take the risk o ignoring the mail rom the cen-tral authorities. Our Swiss ta system is based on a three-leel taation, and themunicipal leel gets one third o the income taes directly rom the tapayers.So municipal authorities hae their own money. They can spend it or the localpublic serices, but they are controlled by the tapayers, which are more or lessidentical with the users and the oters.

1. Competition as a Procedure of Discovery

There is no such thing as "the best solution o structural, nancial and scal or-ganisation o a state. The less state interention the better. All we hae at hand isthe echange o eperiences based on diering historical contets. Days o simpleblind copying o "miraculous solutions rom the USA are denitiely oer and all

countries, including those o Western Europe, look also elsewhere or ideas. Withgreat interest we obsere how problems are soled in other parts o the world,


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or instance in the New Europe and in Asia. Switzerland is a successul country,we hae been ery lucky to stay outside the two world wars o the 20th centuryand we are amongst the top ten in almost eery type o rankings, e. g. economicreedom, per capita income, lie epectancy and een happiness i there is any

rational method o measuring it, which I doubt.

Here are in short the most important acts and gures. Switzerland has a populationo 7 Million people, 20 percent o them hae immigrated in the last 20 years.

As a whole we hae more than 2000 municipalities in Switzerland and 25 Cantonso ery dierent sizes. The smallest municipality counts less than 100 inhabitantsand the biggest, the City o Zurich, more than 300 000.

We are not a member o the EU, which in my opinion is good or Switzerland andgood or the EU. We cooperate on the basis o bilateral agreements and pay theprice o not being on the table when the decisions are taken. But as a small andrich country you hae always the risk o being in the wrong camp; you are outotedwhen it comes to pay and you are outoted when it comes to rule.

The Swiss iew on the EU can be characterized as ollows: The institution is based onour ideas; two o them are good, two o them are bad or at least old ashioned:

1) Peace, 2) ree market inside and outside, 3) harmonisation o comple systemsor the centralized EU technocratic bureaucracy and 4) equalisation by subsidies,interentions and redistribution or the EU-welare state.

The market is a school without teachers and the most important market is the mar-ket o ideas. On this international market it is important to echange ideas and toshare the eperiences o what works and what doesnt work. It is more importantthan any type o public relation.

What is the secret o a successul country? I am quite oten inited as a speakeron topics like The secrets o the Swiss Success? I think that one o the secrets isthe discoery that there is no such a thing as one constructiist ormula leadingto success. The most important thing is to get more and more open-minded andready to learn rom other people and nations, and to communicate on the basis opeace, enlightened sel-interest, contract and riendship. "The right way is to beound in the competition o ideas, models, suggestions and eperiments. So I amhere as a student and not as a proessor.


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2. Confederation, federal state and centralized state

Germany is a quite centralized country and eery ederation, I dont eclude Swit-

zerland and the US, moes rom non-centralisation to centralisation. The dierencebetween conederal, ederal and centralised political systems is one o degree, butthere is a principal dierence too.

The principal one is that a conederation oers the right to peaceul secession,which means that you hae much more autonomy and feibility to dene andredene the basic rules o partnership. From this point o iew it oers more ad-antages or the stronger and richer partner to be in a conederation than to bein a ederation.

But i the richer regions hae the ambition to be the leader o a unied country,its money, its ta- and social security system, its capital and the power o thecentral goernment, they can aour the more centralist model. But the price othis model o predominance o one part o the country may be much too high. Apotential dominator takes the risk o losing the spirit o cooperation, o riendlycompetition and een o peace.

Switzerland has an eperience o transormation rom a ree community based ona comple network o political treaties and contracts, rst to a conederation andat least to a ederation. We hae successully aoided the model o leadership orpredominance o one part o the country. The rst period o nation building lastedabout 500 years, the second 50 years between 1800 and 1848.

The Swiss ederal constitution is more or less a copy o the Constitution o the US.

But there are at least three important dierences.

We hae no powerul president, because this institution is based on the rotation-principal like in the EU. It changes eery year one o the 7 Ministers is president- as the primus inter pares.

We hae no powerul constitutional court like the Supreme Court in the US andthe Bundeserassungsgericht in Germany.

We hae no ederal ocials on the cantonal and local leel the same principleas in the EU, e. g. no ederal police.


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3. The Principle of subsidiarity

The principle o subsidiarity means: Common problems must be resoled at the

lowest possible leel. The higher leel is to interene only i social and politicalsupport is required.

The principle o subsidiarity has become topical since it was used as a corners-tone o the EU Treaty o Maastricht and Amsterdam. Eerybody speaks about it,but nobody actually knows eactly what it should mean. The Swiss subsidiarity israther sceptical o the centre and, as this is ery close to my heart, I would liketo put orward some arguments or this kind o subsidiarity that asks or takingaway power rom the central state. The principle as such is based on a undamen-tal diision o the indiidual, the state and the society. It is the opposite o thesocialist and the national-socialist approach (which is in act ery ideologicallyery close o each other) that the community is always more important than theindiidual. Subsidiarity means that we hae to try to nd the solution o political,social and economical problems in the most priate and the most local rameworkthat is possible.

4. Federalism and Subsidiarity

Both principles are open to interpretation and thereore oten misused to justiya transer o powers upwards.

Howeer, all phrases like "being able to, "the smallest possible or "ecientlyull need urther elaboration. The principle can be endangered by "dierent in-terpretations o conditions and eciency denitions under which the higher-uprank is, ater all, justied in taking oer some powers. There are always so calledgood reasons or centralising.

Numerous constitutions and written sets o rules oten lead to a highly "homoge-nised equal distribution o wealth and to large subsidies to problematic or mar-ginal areas.


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One o the weakest points in the German Constitution, the Grundgesetz, is the aimo oering equal conditions o lie in the whole territory o the nation state. Maybethis is the true reason or Germany eperiencing its current structural problemsater 50 years o successul deelopment. Interentionist and protectionist support,

redistribution through regional, structural unds and massie subsidies are someo the aourite roles o the central goernment, and I include the EU Comission.Politics then degenerates into a general ght o all against all or more and moresubsidies and interentions. It is the worst case scenario o the uture o the EU.This is why I am sceptical o all orms o redistribution by the central goernmentand especially o redistribution that takes place on the interregional leel. Rela-tiely poor tapayers o rich regions transer tamoney to relatiely rich people inpoor regions, which inest it again in rich regions.

So it can be shown that a substantial part o the money rom general taationthat subsidises the marginal regions ends up back in the centre. The only eect ointerregional redistribution is to strengthen the dependency o the periphery onthe centre and to stife any benecial competition between jurisdictions. But thiswould proide enough material or a separate paper, I merely wanted to allude tothese problems here.

. Redistribution, Subsidiarity and the majority rule

Local autorities, nanced rom aboe or by the centre are usually dependent andcorruptible. Time and time again there appear situations in political lie where allactie steps and policies achiee the ery opposite o what they were hoping to

bring about. The subsidiarity principle is thus oten misused to "justiy a transero powers upwards to reach an allegedly better solution.

Things get een more dicult when the increased centralisation is "justied by in-ability o the lower jurisdictions to proide sucient nancial backing or the task.A centralised system o taation will obiously deprie the lower leel o cantonaland municipal taation, and it is obious that such impoerished communities andregions will nd themseles unable to raise their own taation towards their owntasks. A route to centralisation o tasks is thus opened i we start by centralising

the taation system. It is obiously a strange system which collects the moneycentrally and decentralises only the tasks.


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10 ThePrivateProvisionofPublicGoods:TheHistoryandFutureofCommunalLiberalism

Perhaps the worst solution in this case would be an articial decision rom thecentre about the distribution o money among the lower leels in a ederal sy-stem or the completion o tasks. The best solution, then, is not to centralise thetaation system at all and leae the lower jurisdictions in care o both the epen-

diture side and the taation side. A ailure on this account has oten discreditedthe principle o subsidiarity.

6. The Future of Subsidiarity

Subsidiarity means priority or smaller or priate units. It calls or decentralisati-on, priatisation and deregulation. In the 21st century the concept o subsidiaritymust be made more precise and radical to suit the current enironment. These daysthe principle should be that any higher jurisdiction should gie up its competence,powers, responsibility and nancial backing to a smaller jurisdiction closer to theroot o the problem as soon as there appears a rst problem on the higher jurisdic-tion in eectie ullment o the tasks or nancial aordability. I am ully awarethat this is a bit o a utopia, or who has eer seen a layer o central goernment

prepared or an "orderly demise?!

We should all stay optimists, but I try to be honest about the weak points in the socalled Swiss model. We hae not yet been able to stop the trend o welarizationand redistributionism, neither on the interpersonal nor o the interregional type.Both are ery popular, more popular than all the rhetorics on decentralisation.

. Non-Centralism and the tax system

There are our principles o a sound ta system: No taation without representa-tion; the more concerned, the more inoled; no representation without taationand no ta spending without ta paying. The ta system, the monetary system andthe social security system are the realistic base o any political system, and the

legislation on these matters is more important than the Constitution.


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ThePrivateProvisionofPublicGoods:TheHistoryandFutureofCommunalLiberalism 11

In the historically crucial role that systems o taation hae played in the past andcontinue to play in the present, it is shocking how ery little is written about themin a way understandable by the man on the street. There are whole libraries ullo technical epositions o the most ecient or most yielding ways o taing the

population, as well as detailed guides o the best ways o legal and semi-legal andnon-legal ways o ta-easion rom the other side o the barricade. What usuallygoes unnoticed is that the whole o political history is at least 50 percent also thehistory o the systems o taation, and that most historical reolts and reolutionsoriginally started as reolts against the system o taation. A peaceul ciil societycan be characterised by a relatie absence o eplicit rules and technical prescrip-tions about social inrastructure, where conficts are soled priately under therule o law between the aectors and the aected.

8. Reducing the tax burden

Three ways lead to a reduction o the ta burden: The reduction o interpersonal re-distribution, the reduction o interregional redistribution and scal competition.

The nancial system is an all-important part o the political and economical sy-stem whose undamental role is oten underrated. The aim o the ta-system as awhole eercise is not to create some patchwork rom year to year to proide, witha lot o improisation, sucient unds or the gien year.

The classical liberal objectie is to limit clearly the access to the scal reenueand thus arrie at the best possible method o reducing the scope o the state and

o improing the health o the economy as a whole. The bulk o the ta burdencould be drastically reduced by a reduction o inter-personal and inter-regionalredistribution and by a scal competition o municipalities, cantons, states andederations.


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12 ThePrivateProvisionofPublicGoods:TheHistoryandFutureofCommunalLiberalism

. Tax competition and tax limitationby direct representation

The Swiss Ta system is competitie, diided among the leels o ederation, can-ton and municipality, and dependent on the majority decisions o the tapayers.In Switzerland it is the citizens and tapayers who decide in a direct democracyby a majority rule about the ta rate. Such a model cannot be directly applied toother systems and local conditions. Time and time again it is doubted that the go-ernment can and should leae the power to ta in the competence o the citi-zens themseles. The act that the majority decides on the leels o taation in allleels o the institutional hierarchy proides good grounds or not making the tasystem oerly progressie and inducing the richer end o the spectrum to leae ithey cannot achiee lowering o their burden. In a competitie system there aregood reasons to hae only a ery mild orm o progression. One-member-one-oterule can only be unctional in a one-member-one-tarate system.

Competing systems o Swiss taation and the diision o direct ta reenue amongall three ederal leels (municipal, cantonal and ederal) allow or a good eld oreperiments. It may not be completely and in eery aspect optimal, but it worksand we are able to combine a relatiely low leel o taation with a good quali-

ty o public serices and inrastructure. There is such a thing as oting by oot inSwitzerland, especially in iew o the small size o jurisdictions in the ederationas a whole. Een then, a departure o an important rich tapayer rom an areausually leads to a substantial populist campaign in the media against the richand in aour o a new more centralist system, where there is no possibility o o-ting by eit. The system o competing jurisdictions and competing ta rates maybe one o the best systems, but it is not one o the most popular and under thepressure o democratic decisions not the most sustainable. Democracy has al-

ways a centralist tendency.

The Swiss taation leels are proiding many wealth-creators with a welcomereuge, and this country can make a prot out o the European oertaation othe rich. Rich people are welcome in Switzerland. In no way do I eel any sense oguilt or this.

The more direct the democracy, the stronger will be the discussion about taesand the uses made o them and the role o public ocials in both these aspects.

A mature tapayer is then identical with the mature citizen who superises at alltimes the alue-or-money he gets rom the public serices, demands eciency,


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ThePrivateProvisionofPublicGoods:TheHistoryandFutureofCommunalLiberalism 13

no wasting and transparency, and is prepared to react to any deciencies in thesystem.

10. Competition as a procedure of discovery and learning

Admittedly, non-centrality can also hae its disadantages. The least ecient pla-yer is worse o in a competitie eld than he would hae been under a centralistaeraging system o "harmonisation o well-being.

Yet rom the liberal point o iew, there may be indeed some painul decienciesin so called underdeeloped areas and the price o inequality may be quite high.Diersity is always connected with inequality. History keeps telling us, howeer,that these backward underdeeloped structures hae turned into the modern andmore eectie ones in the end, bringing a ery welcome spur o the general well-being in their wake. Centralisation contains, howeer, the danger o "uniying all

jurisdictions, all parts o a ederal system, to the latest trend in scientic and poli-tical errors and mistakes. The classical liberals, the ree marketers, do not assume

a monopoly on the truth and on the correct practical solutions.

What they do adocate, howeer, is a system with small competing units thatcommit a lot o dierent smaller errors and mistakes. In this kind o systems, the-re is a chance or learning by comparing. This may be less o a risk than a highlycentralised system, where big errors and mistakes are more dangerous. Learningby doing, learning by comparing, learning by taking risks and committing and ad-mitting errors should be our common aim. The smaller the units are, which start

in this adenture, the better the chances are to be successul and to aoid the bigcentral mistakes!


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Occasional PaperLiberal Institute o the Friedrich Naumann Foundation or FreedomOther publications under www.libinst.de

[86] Fred E. FoldaryThE PRivaTE PRoviSioN of PuBLiC GooDS:THE HISTORY AND FUTURE OF COMMUNAL LIBERALISM

[84] Thomas CieslikThE amERiCaN DREam JoB miGRaTioN iNTo ThE uNiTED STaTES[82] Philippe Legrain

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[55] Julie SimmonsTREaTy fEDERaLiSm: ThE CaNaDiaN ExPERiENCE

[54] George HerbertThE TREaTy of LiSBoN a ThREaT To fEDERaLiSm?

[51] Lincoln AllisonSPoRT aS viRTuE ... aS LovE ... aS CommERCE

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[44] Parth J. ShahCSR: CaPiTaLiSm aT iTS BEST oR aN aNTi-CaPiTaLiST mENTaLiTy?

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[41] Dr. Wol-Dieter ZumportThE CRiSiS of ThE WTo

[40] Juan Carlos Leal Sosaa maRkET DRivEN CRiTiquE oN ThE RoLE of ThE iNTERNaTioNaLfiNaNCiaL iNSTiTuTioNS iN ThE DEvELoPmENT PRoCESS iN LaTiN amERiCa

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oter ppers te cllLberls nd Cnl Sel-adnstrtn,18 Septeber 2009

[86] Fred E. Foldary (2009)ThE PRivaTE PRoviSioN of PuBLiC GooDS:

THE HISTORY AND FUTURE OF COMMUNAL LIBERALISM

[87] Robert Ne (2009)NoN-CENTRaLiSmTHE SWISS ExPERIMENT BASED ON LOCAL GOvERNMENT, DIRECT DEMOCRACYAND TAx COMPETITION

swiss experiment

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