Opponents clash on fairness of tax system

Enjoying life in the low-tax canton of Obwalden Keystone

The Swiss business community has waded into a debate on the tax burden of citizens by denouncing a move to abolish competitive rates that attract the rich.

The centre-left Social Democratic Party in May 2008 submitted an initiative that, if passed, would force all cantons to adopt the same tax system. The Swiss Business Federation (economiesuisse) believes this would damage the economy.

The Federation recruited a noted academic to produce a dossier outlining the benefits of the current system. The findings of Lars Feld, from Heidelberg University in Germany, were presented on Tuesday.

The crux of the ongoing debate rests on whether it is fair for cantons to set increasingly lower tax rates that give most benefit to people with higher incomes and greater wealth. Tempting rich individuals from abroad has become a virtual industry for many cantons that compete with each other to set the most attractive conditions.

The Social Democrats have long campaigned against the practice, arguing that it discriminates against people on average or lower incomes.

Degression banned

The issue came to a head two years ago when the Federal Court banned canton Obwalden from introducing a degressive income tax system that set a lower rate for higher earners. Following the handing in of the initiative, there will be a public vote on setting a nationwide rate of 22 per cent for incomes above SFr250,000 ($231,000).

But economiesuisse warned that such a move would violate the autonomy of cantons and weaken the attractiveness of Switzerland as an international business centre.

“Tax competition in Switzerland is mainly healthy for the Swiss economy. It helps to keep taxes at a relatively moderate level but it is not accompanied by adverse effects such as bad income distribution,” Feld told swissinfo.ch.

“It makes Switzerland attractive to foreign companies and individuals, which maintains high tax revenues overall.”

Feld added that a public expectation of excellent public services acts as a natural barrier against excessive tax reductions, preventing the much cited “race to the bottom” as cantonal competition heats up.

Multi-pronged campaign

But the Social Democrats have vowed to keep up their fight against a tax system they believe tramples over the rights of moderate earners. Their campaign is entitled: “Stop tax competition abuse”. No date has yet been set for the vote.

“The initiative would plug tax loopholes for the super rich and create more equality,” the party said in a statement. It also challenged economiesuisse’s view that a change in the system would harm the economy.

The party is also campaigning against excessive bonuses in the financial sector and plans to launch a separate initiative limiting the wages of high earners in companies to no more than 12 times more than the lowest wage.

In addition the party in Zug is threatening to force a public vote in that canton to abolish the practice of offering special tax deals to wealthy foreigners in an effort to attract their tax revenues. Canton Zurich voted in February to end the so-called “lump sum” taxation practice.

Matthew Allen in Zurich, swissinfo.ch

Tax rates

In 2008, audit specialists KPMG compared the top rate of income tax in 87 countries. It ranked European countries together with Swiss cantons/cities (federal, cantonal, communal rate combined). Here are selected rankings:

1: Macedonia/Bulgaria 10%

2: Russia 13%

3: Serbia 15%, Ukraine 15%, Czech Republic 15%

4: Romania 16%

5: Isle of Man 18%

9: Canton Zug 23.1%

10: Canton Schwyz 23.9%

12: Canton Obwalden 24.1%

35: Zurich city 39.95%

36: Greece, France, Poland, Britain 40%

43: Spain, Italy 43%

45: Geneva 44.97%

46: Germany, Croatia 45%

51: Denmark 59% (top income rate in Europe)

The average top income tax rate among Swiss cantons was 33.5%