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OECD's Swiss Report Recommends Minor Tax Tweaks

by Ulrika Lomas,, Brussels

22 November 2013

In its 2013 economic report, the OECD highlighted the healthy state of Switzerland's public finances, while at the same time underlining the need for the Confederation to urgently end the tax "penalization" of married couples to encourage more women into full time work, and to impose a carbon dioxide tax on motor fuels, to achieve its climate objectives.

The OECD reported that as a result of robust domestic demand and an expansionary monetary policy, the Swiss economy has "performed well" in recent years. At the same time, the OECD pointed out that Switzerland has faced "an extremely strong currency, in large part resulting from safe-haven capital inflows." The OECD noted that this precipitated two years of mild deflation and posed a threat to activity in the Swiss economy.

The OECD maintained that the "minimum exchange rate" (a cap on the value of the Swiss franc against the euro), adopted two years ago, has resulted in a very large expansion of the central bank's balance sheet. It explained that the minimum exchange rate remains in place as inflation is still zero, there are still risks of renewed safe-haven flows, and there is still some slack in the economy.

Emphasizing that the fiscal balance remains "sound" both at federal level and in most cantons, the OECD made clear that this is due notably to healthy economic growth and to the debt-brake rule, which has restrained expenditure growth through the cycle.

According to the OECD, the long-term preservation of high per-capita income in Switzerland requires a strengthening of labor productivity. To this end, it is necessary to facilitate the creation of enterprises, to progress agricultural reforms, and to improve the integration of disadvantaged groups into the labor market, the body argued.

Furthermore, the OECD advocated that Switzerland's 2050 Energy Strategy should make greater use of market mechanisms to achieve its goals. Moreover, the OECD claimed that is vital to extend energy research, as well as to strengthen international cooperation on energy research. Given that realizing its 2020 climate objective is currently seen as a challenge, the OECD therefore recommended that Switzerland introduce a carbon dioxide tax on motor fuels. The OECD suggested that this is a means of reducing greenhouse gas emissions relatively cheaply, underscoring that this potential has barely been exploited. By 2020, Switzerland aims to reduce its greenhouse gas emissions by 20 percent compared to 1990 levels.

Finally, the OECD underlined the need to better exploit the economic potential of women, notably by improving the provision of childcare facilities for pre-school and school children in Switzerland, by bettering career opportunities for women, and by abolishing the tax penalization of married couples. Here, the OECD insisted that improving the fiscal conditions for both spouses in lucrative employment is essential.

In Switzerland, married couples and non-married couples are currently treated differently in terms of taxation. Depending on the amount and the particular distribution of income, couples may be penalized.

While concurring in full with the OECD's view that there should be an end to the fiscal discrimination of married couples, the Swiss Federal Council nevertheless had to abandon its plans last year to introduce a new tax model, designed to ensure that the fiscal burden on married couples is not greater than the tax burden on their cohabiting counterparts. This decision followed a hugely unsuccessful and negative consultation on its proposed bill.

Yet despite this setback, the Federal Council remains committed to change. Recently, the Federal Council underlined its support for the popular initiative calling for married couples to be placed on the same tax footing as cohabiting couples, to increase the chances of a consensus being reached to resolve the issue. The OECD's comments are likely to give a welcome boost to the initiative.

TAGS: Energy | tax | energy | Organisation for Economic Co-operation and Development (OECD) | carbon tax | Switzerland | tax breaks | currency | inflation | individual income tax

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