Switzerland and Germany have a Debt Brake—something most people in the United States have never heard of.  So just what is this Debt Brake, how does it work, and what does it have to do with the FAIRtax?

The short answer to the first question is that the Debt Brake has made Switzerland one of the most fiscally responsible countries in the Western world, with one of the lowest per capita debts.

            So, how does it work in Switzerland? Article 126 of the Swiss Constitution generally requires that expenditures not exceed receipts. This provision was in the constitution before, but there was no requirement to pay back the debt already there, making effective debt stabilization a dead letter.

With the debt brake now in the Swiss Constitution, the limit on budgeted expenditures now depends on the economy's state. During emergencies, when expenditures exceed receipts, the government may take on new debt. But when the economy recovers and expands, the government must put money back in the till until the new debt is paid off.

What has Switzerland’s experience been since the debt brake appeared in 2003? At the start of the debt brake, Switzerland's federal debt stood at about 50% of the country's gross domestic product. It declined but rose again during COVID-19 to 43%. During COVID-19, the government had money to deal with the problem. Today the Swiss debt stands at about 37% of gross domestic product and will sink to 31% in five years, even though the Swiss constitution does not require debt reduction.[1]

Switzerland’s next-door neighbor chose to enact its version of Switzerland’s debt brake in 2011. Germany’s debt brake led to two interesting developments. First, the country had to make some tough choices. Germany had gone full-bore in promoting electric cars several years ago. But I hardly saw any when I visited the country recently. Due to the debt brake, the government had to pull back on that program.  I’m not here to take sides on whether cutting that program back was a good thing or a bad thing.  I mention it merely to illustrate that a debt brake can force governments to make difficult but fiscally necessary choices.

Second, Germany’s debt, as a percentage of gross domestic product, dropped from over 80% in 2011 to 64% last year. Due to COVID-19, it rose from 60% in 2019 to 69% in 2021 but has since come back down[2].

By comparison, America’s federal debt is 122% of gross domestic product as of the first quarter of 2024. It was as high as 133% in the second quarter of 2020[3] during COVID-19. We could benefit from two changes, the first obviously being a debt brake.

Our debt could also benefit from the FAIRtax - in two distinct ways. First, Section 509 of the FAIRtax bill requires the tax to be separately stated and charged. This section requires the seller to give the purchaser a receipt showing the price exclusive of the tax, the tax, the price inclusive of the tax, and the tax rate, as well as the date of sale, the vendor's name, and the vendor's registration number.

This information makes the federal government's cost (exclusive of debt) glaringly visible to consumers every time they make a retail purchase.  When taxpayers are constantly reminded of just how much the federal government is costing them, there’s a good chance that they will demand an end to our government’s seemingly unrestrained spending policies and insist that wasteful spending be eliminated.

Second, the FAIRtax base, i.e., consumption, is more stable than the tax base for income and payroll taxes. People tend to smooth out consumption through good times and bad.[4] In other words, people between jobs tend to draw from savings to support the lifestyles they knew when they worked. When they get a new job, they tend to put some of their income back into savings. Thus, their consumption varies less than their income between periods of employment and unemployment. On a national level, people still tend to consume goods and services in times of high unemployment and consume only slightly more in times of high employment.

Because the FAIRtax is based on consumption, consumption tax receipts tend to be lower than income and payroll tax receipts during economic expansion and higher during recessions. Reducing receipts in good times helps politicians spend less, even without the billy club of the debt brake.

I would love to hear your thoughts on explaining to the public how the FAIRtax would help us get our national debt under control.
           
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[1] Source: Swiss Confederation Monogram “Die Schuldenbremse – Erfolgsbilanz – Entwicklung der Schuldenquoten 2023-2022,”

[2] https://www.bundesbank.de/de/presse/pressenotizen/deutsche-staatsschulden-928466

[3] Source: St. Louis Federal Reserve

[4] For example, Kotlikoff, Laurence J., "The Fair Tax and Middle Americans – A Case Study," 2008, p. 1., "Such consumption-smoothing is predicted by economic theory and supported empirically by household spending and saving behavior.”