FISCAL FEDERALISM AND TAX COMPETITION: THE CASE OF SWITZERLAND

Financial Times recently published an article (link) describing how fiscal federalism works in Switzerland. Contrary to conventional belief, Swiss constitution gives a significant degree of decision-making and fiscal responsibilities to cantons and municipalities. In economic perspective, one of the key advantages of fiscal federalism is tax competition among jurisdictions within Switzerland. Cities such as Zurich and Lucerne charge notably higher taxes while a growing number of cantons and municipalities use low-tax policies to attract entrepreneurship, savings and investment and stimulate economic growth. Empirically, the sources of productive behavior are favorable to seeking low-tax shelters, generating greater efficiency and welfare.

Although fiscal federalism is perceived as an expensive experiment that does not yield required incentive to maximise efficiency, personal income tax rates are modest compared to continental Europe and Nordic countries. Switzerland might offer a lessons to high-tax jurisdictions in the rest of Europe. Politicians and (surprisingly) even some economists often state that low tax rates on personal income lead to the loss of tax revenue. Contrary to static assumptions, low tax rates on personal income, given favorable conditions such as low and upward limited public spending, generate higher tax revenue. In fact, expatriates in Switzerland contribute SFr 390 million to federal, cantonal and local tax budgets.