Cantons prepare for new round of tax cuts

Obwalden has raised the stakes in the cantonal tax game Keystone

A new round of tax cutting is expected in many Swiss cantons during the New Year, after voters in canton Obwalden decided to slash rates from January 1.

Switzerland’s taxes are among the lowest in the world, thanks largely to its system of direct democracy, which allows voters to decide what they pay.

Obwalden’s decision reflects a growing trend among cantons of slashing tax rates to attract big companies and the wealthy.

St Gallen University economist Christoph Schaltegger told swissinfo that such intense tax competition is made possible by voters having a direct say in such issues in individual cantons.

Schaltegger co-authored a 2003 report looking at the connection between voting systems and tax.

“Our research showed that places with a stronger direct democracy tended to have a smaller tax burden and reduced services,” he said.

“Voters tend to opt for lower taxes on property, wealth and income, but not so much for profits and capital.”

Not selfish

Schaltegger believes that local voters tend to be more conservative than a centralised government. But he rejected the idea that people with a direct say in setting tax levels voted for selfish reasons.

“A vote for lower taxes is usually accompanied by a proportional cut in public services,” he said.

“It is not the case that people want public services to be run on a deficit that will be shifted to future generations. People tend to be more fiscally conservative where there is strong direct democracy.

“In the case of Obwalden it appears that voters were reacting to a specific situation. They recognised that other cantons were doing better than them so they had to do something to change that.”

Schaltegger’s findings are borne out by the fact that Swiss cantons lead the way in setting low tax rates.

Low taxes

Obwalden’s new 6.6 per cent corporate tax rate will better the likes of Zug, Schwyz and Nidwalden on January 1. Only Slovakia, which set a 19 per cent flat tax rate two years ago, and Ireland can compare with Switzerland’s low taxes.

At least 18 of the 26 Swiss cantons are planning to react to the Obwalden vote by lowering their taxes next year, according to a study by the Neue Zürcher Zeitung newspaper. Cantons Zurich, Valais, Fribourg, Uri and Schaffhausen will reduce taxes on January 1, the broadsheet says.

But Obwalden deputy finance chief Robert Vonwyl told swissinfo that he is unconcerned by the move.

“It is clear that other cantons will do something similar in the future,” he said. “But either they are too far away or their proposed cuts are too limited to affect us.

“We have already had lots of requests from companies to come to Obwalden so I am confident that our new tax system will prove a success.”

Vonwyl confirmed that Obwalden plans to flatten its degressive tax system in five years by lowering taxes further for middle-income earners.

swissinfo, Matthew Allen

In brief

Voters in Obwalden approved a new degressive tax regime which came into effect on January 1.

Individuals earning up to SFr70,000 will in future pay 8 to 10% less personal tax.

Those earning up to SFr300,000 will be taxed up to 6%, while those in the highest bracket will see their burden sink from 2.35% to 1%.

The cantonal property tax has dropped by at least 30% and the 6.6% corporate tax is now the lowest in Switzerland.

Key facts

Switzerland’s competitive tax system has come under the scrutiny of the European Commission, which questions whether tax breaks attracting foreign companies contravenes the 1972 Free Trade Agreement.
Swiss and officials from Brussels met on December 15 in an attempt to thrash out a deal to resolve the dispute.
The European Union could take action against Switzerland if an answer is not found within three months.