(Bloomberg News) Geneva's bankers are concerned that Socialist Party proposals to scrap a 150-year-old tax break for wealthy foreigners will scare off their best clients.

Their anxiety increased last month with the submission of a national petition to abolish the so-called forfait, an expenditure-based levy foreigners negotiate with Swiss cantons to avoid paying income tax. Appenzell Ausserrhoden will become the third canton to reject the system on Jan. 1 and Basel will follow 12 months later.

"It's an outrage that ordinary people should pay more tax than rich movie stars, singers and sporting celebrities," said Romain de Sainte Marie, president of the Geneva Socialist Party. "It's a form of tax evasion."

The Swiss backlash against the forfait comes as a slowing economy highlights the lower tax rates paid by super-rich foreigners such as Ikea billionaire founder Ingvar Kamprad. While the Socialist Party says the tax loophole has turned Geneva into a city of luxury boutiques and unaffordable housing, bankers counter that rich expatriates are key clients who create jobs and stimulate growth.

"We need to defend it for our own sakes as this is a very interesting customer base," said Gregoire Bordier, president of the Geneva Private Bankers Association. "This system already brings significant revenue to the authorities."

The tax regime in Geneva raised 116.4 million francs ($123 million) for the canton in 2010, according to a study by Zurich- based Economiesuisse. The figure for Switzerland was 464.2 million francs, or 0.9 percent of total tax revenue. The economy will grow 0.9 percent this year after expanding by 1.9 percent in 2011, according to a survey of 21 analysts by Bloomberg News.

System Expands

The number of foreigners tapping the forfait climbed 31 percent to 5,445 between 2006 and 2010, according to figures from a body representing the finance directors of the country's 26 cantons. The tax plan was introduced in 1862 by the canton of Vaud to get wealthy British residents to pay for local services.

Affluent forfaits, who paid an average 122,681 francs of tax in 2010, also support construction and other industries, said Bordier, who is also a managing partner at private bank, Bordier & Cie.

House prices in Geneva almost tripled over the past decade with an average transaction price of 2.13 million francs in the third quarter, according to Wuest & Partner, a real estate consulting firm with offices in Geneva and Zurich.

"In the beginning, you could say they increased property prices," said Bordier. "Now, as prices decline, you could say they're supporting the market."

Tax Parasite

Those arguments don't persuade Geneva's Socialist Party, which submitted the 10,000 signatures in January to prompt a vote on the system. That referendum may come in 2014, according to Arnaud Moreillon, secretary-general of the party in Geneva.

"While the system is a nice little earner for private bankers and luxury property agents, Geneva is regarded as a parasite by tax authorities around the rest of the world," de Sainte Marie said. "Proportionately, ordinary people are paying more tax than rich forfait holders."

Under the forfait, expenditure is calculated at not less than five times the annual rental value of the individual's home in Switzerland. The Swiss Parliament voted in September to increase that to seven times annual rent by 2017 with a minimum taxable income of 400,000 francs.

Ordinary federal and cantonal tax rates are applied to that rental value and there is no obligation on forfait holders to declare worldwide income or assets. Unlike other Swiss residents, they don't pay tax on income from securities holdings.

Ikea Billionaire

That can lower the tax rate for billionaires such as Ikea's Kamprad to less than 1 percent, according to the Socialist Party. Top income tax rates in Geneva and Vaud, where Kamprad lives, are more than 45 percent.

Kamprad is part of the forfait system, said Per Heggenes, a spokesman for the Ikea foundation, without providing further details. Kamprad's fortune stands at $40.6 billion, making him the world's fifth-richest person, according to the Bloomberg Billionaires Index.

Scrapping the forfait system in Geneva and Vaud may result in an exodus of foreign millionaires because the cantons have among the highest income tax rates in Switzerland, according to Peter Krummenacher, a lawyer at Henley & Partners in Zurich, who gives immigration and tax advice.

"Geneva and Vaud have a lot more to lose than Schwyz or Bern," he said.

Formula One

Abolishing the current tax system would prompt some to "spend their money elsewhere," Der Sonntag quoted Formula One Champion Michael Schumacher as saying on Oct. 21. Schumacher, who lives beside Lake Geneva in Vaud, said there are "a lot of other places I could picture myself living," the newspaper reported.

Sabine Kehm, a Gland, Switzerland-based spokeswoman for Schumacher, declined to comment on his tax status, saying it's a private matter.

After Zurich became the first canton to abolish the forfait in 2009, with 52.9 percent voting against the system, 97 of the 201 beneficiaries of the tax left the canton. About two-thirds of them relocated to other parts of Switzerland.

The biggest surprise was that more than half the foreign millionaires, typically among the most mobile and tax-sensitive people, decided to stay in Zurich, said Marius Brulhart, professor of economics at Lausanne University.

"It seems they don't all run away when you remove their special treatment," Brulhart said. "The loss in tax receipts from people who moved away was offset by extra tax from those who stayed."

French Connection

While tax revenue initially increased from the majority who remained in the canton, that changed when one unidentified super-rich taxpayer departed, according to Vincent Simon, an economist at Economiesuisse. Getting rid of the forfait will push retired French millionaires in Geneva and Vaud to seek alternatives, he said.

With 1,394 residents using the system, Vaud has the largest number of forfaits, according to cantonal figures for April. Geneva had about 750 and Valais, another French-speaking canton, had 1,162, according to 2010 numbers from the Conference of Cantonal Finance Directors.

The Socialist Party, in a coalition with the Alternative Left and two labor unions, presented a petition on Oct. 19 with more than 103,000 signatures to the Swiss Parliament, calling for the "abolition of scandalous tax privileges for foreigners." The initiative may lead to a parliamentary debate by 2015 and a national referendum within 10 months of that.