SWISS BANKS AND FINANCIAL PRIVACY

Pierre Bessard of the Liberales Institut in Switzerland, makes the case in NY Times (link) why financial privacy shouldn't be infringed and why Dept. of Justice and the European Union should not exert pressures on Swiss banks regarding financial privacy and client information disclosure to foreign governments:

"Switzerland, which is home to an impressive number of global corporations, has also come under fire from the European Union for offering too-favorable tax rules, including exemptions for income earned abroad. But what critics forget is that these practices also benefit other countries. Swiss firms alone employ hundreds of thousands of people in the United States and Germany, for example. Subsidiaries of multinational corporations usually pay income taxes where they operate, so having their headquarters in Switzerland can help companies avoid multiple taxation in high-tax countries, thereby safeguarding productive capital for investment."

THE QUALITY OF BUSINESS LOCATION: THE CASE OF SWISS CANTONS

Credit Suisse recently published a research paper (link) where it's been shown that Swiss cantons with lower tax burden and improved regulatory environment are therefore more attractive as locations for doing business (link). Cantons Zug, Zurich and Obwalden got the highest score. Although tax rate structure in Zurich is not among the lowest in entire Switzerland, Zurich's high score can be explained by the fact that there's a high-quality access to demand linkages that certainly boosts the quality of Zurich as business location despite relatively high personal and corporate tax rates. In more distant cantons, tax competition certainly plays a bigger role since creating a business environment friendly oriented towards incentives to work, save and invest is a primary tool that boosts the locational quality of the region regarding economic outlook and the quality of the particular environment for doing business.

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.

OBWALDEN APPROVES 1,8 PERCENT FLAT INCOME TAX RATE

Obwalden is a Swiss canton situated in central Switzerland. SwissInfo reports that Obwalden has recently become the first Swiss canton to adopt 1,8 percent flat income tax rate on all categories. In December 2005, Obwalden decided to slash the corporate tax rate to 6,6 percent. The canton also decided to impose degressive tax system which was later declared as unconstitutional. In the first six months of this year, the canton saw an astonishing 230 percent growth of company registration. In addition, 90,7 percent of voters approved changes in tax regime.