A Page from the Book of Zug


Monday August 29th, 2011   •   Posted by Emily Skarbek at 11:51am PDT   •  

Imagine a place called Zug where luxury shops abound, government pays its bills, and there are so many jobs that employers sometimes have a hard time finding people to fill them. Imaginary, you say?

Zug is not a figment of my imagination. Zug exists. And it is just as prosperous as you can imagine! The small Swiss canton boasts a history of low tax rates for individuals and multinational corporations. The highest personal income tax anyone in Zug pays is 22.9%, and companies pay an average of just 15.4%—rates lower than Switzerland’s average and far below top rates in the U.S.

Zug has been growing at rapid speed while the other economies of Europe and the United States stagnate. As the Wall Street Journal reports, “the number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies’ efforts to minimize their taxes.” Unemployment in the United States remains at 9.2%. In the EU it’s 9.4%. In Zug it is 1.9%.

What about the housing market in Zug? Since the financial crisis in 2000, Zug’s housing prices have continued to rise 72% – building equity for residents and homeowners. The market is tight for those seeking to live in Zug – prices, not politics are primarily determining supply. With housing in high demand and with prices rising in response, market incentives encourage a steady supply response.

With all that economic growth, Zug must be an ugly place to live, right? Well, actually no. “Nearly 90% of the canton’s 92 square miles consist of forest, farmland and lakes. Much of the rest is packed with commodity traders, private-equity firms and divisions of big multinationals, occupying mostly low-rise, modern buildings.”

Oh, but all that economic growth must bring income inequality. True. “Zug has the widest wealth disparity in Switzerland” – but those who self-describe as “struggling” earn $350,000+ annually.

The United States is currrently facing four major policy problems: (1) high unemployment, (2) a destroyed housing market, (3) low economic growth, and (4) a fiscal crisis. As Peter Boettke points out, political economy is not rocket science. Bad ideas produce bad policies which lead to bad outcomes. So what pages can America pull from the book of Zug?

Simple. A low-tax environment with little interventionism will encourage businesses to make capital investment. Firms and businesses will hire workers when they can be certain of a stable, favorable policy climate over time and the economy will experience economic growth. Incomes of all groups – even the least advantaged in society – rise with economic growth.

Moreover, the Zug case shows that intense Tiebout tax competition among the cantons in Switzerland is how decentralized governance operates, creating the conditions for better fiscal policy and budget management.

I think Americans would much rather live in a world where the problems are such that businesses “struggle to find qualified professionals such as accountants and administrative staff” and “companies seeking commercial space learn they may have to wait for it to be built”. In Zug, these are the problems facing residents because overall there have been good policies of low taxes, fiscal control, and non-interventionism. These policies flow from good ideas: local government is subject to better control than central government, attracting private investment is a long-term, growth oriented policy, and Keynesian management of the economy doesn’t work (at best) or is harmful (much more likely).

Want high growth, robust housing markets, and low unemployment? If so, these outcomes will only emerge if there is a shift what people think will produce those outcomes. Zug is a case where good ideas led to good policy which caused good outcomes. Adam Smith said all that is needed to bring a country to the highest form of opulence is peace, easy taxes, and a tolerable administration of justice. I say its high time we gave those policy prescriptions a try.

(Image by Bloomberg News)




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