Swiss Banks, Taxes and Tea Parties

By Renard Sexton

As the US celebrates its annual filing festival today, it is an appropriate time to reflect on taxation in the US, its impact on foreign relations, and the history that unpins it. In an era of the WTO, OECD guidelines, innumerable bilateral treaties, and the so-called Washington Consensus on development reform standards, it is easier than ever to see that tax and tariff policies are big players on the international stage – with all the controversy that comes with it.

Case in point: Just yesterday, a second wealthy UBS client in the US was charged with filing a false tax return and hiding assets from the US government. The ongoing saga between the IRS, UBS, and the Swiss banking system in general has been all over the news, and is representative of the sorts of battles that the Swiss system has had with governments throughout the world, notably Germany and the US, among others. The German government only recently dropped its threat to pursue “tax haven” blacklisting with the G20 against Switzerland and Luxembourg.

The American crusade against tax evasion through Swiss banks has only escalated in the recent past, causing somewhat of diplomatic cooling between the nations. Even as President Obama lobbied Switzerland, among other major economic players, to cooperate to combat the global economic predicament, the IRS and the Tax Division of the Justice Department in the US have doggedly pursued UBS and other banks. Over the protests of bank secrecy lawyers, asset information that was once thought to be impregnable has now, in a few cases, been obtained by authorities through court proceedings in the US.

The saga is indicative of an interesting trend. The US has had a longstanding tradition of low taxes and some protectionist tendencies (particularly with agriculture), which date to the founding of the country. Even today, US tax receipts as a proportion of GDP are generally lower that other large, industrialized countries, except perhaps Japan.

Table 1: Total tax revenue as a percentage of GDP¹

In addition to the lower overall figures, the US is an outlier in its very low consumption taxes, with no national Value Added Tax (state sales taxes are roughly equivalent but are very low and not entrusted to the national government), and relatively low or no taxes on commonly taxed commodities, like gasoline, tobacco, alcohol, and food. In general, it could be said that the US public is more hostile to taxes than most.

On the other hand, public opinion in the US is extraordinarily harsh on those who evade taxes, or even make mistakes on their taxes and have to pay fines as a result. As recently witnessed with several high-profile former Obama nominees, tax mistakes that are perceived to be “cheating” are punished harshly. Public opinion numbers strongly support this anecdotal claim. An annual survey by the IRS Oversight Board measures public sentiment about tax evasion, with staggering results.

Table 2: “How much, if any, do you think is an acceptable amount to cheat on your income taxes?”²

Collecting these three lessons, we can find a few key trends. In general, the US is a country that tolerates only low taxes, and is very sensitive to anyone, foreign or domestic breaking the rules. In fact, there is a long history of explosive events on this subject!

Therefore, in the spirit of the day, let us take a short journey through a hundred years of taxes, tariffs, tax evasion and foreign relations, and explore the some of the events that established American ideas in this realm between 1767 to 1867.

1767 and 1773, the Townshend and Tea Acts: The so-called French and Indian war was over and the invoice was on the way. As put by Chancellor of the Exchequer Charles Townshend, “taxing the Colonies so as to provide for their own safety and preservation,” was in order. Needless to say, the Yanks were not terribly pleased, and as a result boycotting, smuggling and other shenanigans ensued. Smuggled tea from the Netherlands became the norm – even after the Tea Act of 1773 made official higher-quality tea imports from the British East India Company less expensive. Though taxes had been lowered, and a higher quality product was available, the American colonists detested the concept of parliamentary taxation and monopoly sale of tea, and retaliated through such things as the famed Boston Tea Party.

Embargo act of 1807, Non-intercourse act of 1809: As the Napoleonic wars raged in Europe, the US, led by Thomas Jefferson, decided that a complete trade embargo was in order to prevent the country from becoming embroiled in the conflict. The Embargo Act of 1807 did just this, rendering illegal all trade with other countries. It was, of course, impossible to enforce, and simply deprived the national government of import and export duties, which was at the time their main source of income. The Non-intercourse act of 1809 under Madison repealed the act for all except Britain France, which continued to sow the seeds for the War of 1812.

The Hartford Convention of 1814-1815: New England, the mercantile and trade center of the country at the time, suffered greatly from the poor status of relations between the US and the main European powers, particularly Britain. Many in the region were strongly opposed to the 1812-1815 war, instead supporting normalized relations with the Britain through diplomacy and increased trade. Struggles between Massachusetts and Connecticut with the federal government and war department intensified over taxation to pay the American military forces, with the New England states even considering secession at the meetings held at the Hartford Convention, from October 1814 to December 1815.

Income taxes of 1861-1862: The need to fund the Civil War prompted the first federal income taxes in the US. Using a configuration that would make Grover Norquist leap for joy, the Revenue Act of 1861 inaugurated a 3% tax rate on all income over $800, and 5% rate on all Americans living outside of the country. To this day, the US is the only OECD country to tax non-residents; if you live outside the country for more than 330 days in a year, however, $87,600 is excludable from your taxable income.

So if living abroad, perhaps in a country with a very high cost of living and high non-offset consumption taxes like, how can you afford to live with US taxes added on top? Perhaps there is a Swiss bank nearby who would be willing to open you an account.

Renard Sexton works for the United Nations Environment Programme (UNEP) in Geneva, Switzerland and is a correspondent on international politics for FiveThirtyEight.com.