Real Federalism in Switzerland

An article in the Financial Times notes that the income tax imposed by the national government in Switzerland takes no more than 11.5 percent of a taxpayer’s income, and that most taxation (and spending) takes place at the canton and municipal level. This is genuine federalism, unlike the United States, where the national government is the dominant force in fiscal policy.

A big advantage of real federalism is greater tax competition, which — as the article notes — leads to lower tax rates and less government waste:

The federal constitution gives significant powers both to Switzerland’s 26 regional cantons, and to the individual towns and villages in them. …A handful of cantons have used ultra-low taxation to attract wealthy individuals to stimulate economic growth. Among the best known are Zug and Schwyz, both not far from Zurich. Most recently, Obwalden, a small, mountainous canton near Lucerne, slashed tax rates to match its low-tax rivals.

The cantonal levy is complemented by a local tax, calculated as a percentage of the cantonal level. Again, rates vary dramatically, even between communities in the same canton. For example, in the canton of Zurich, Switzerland’s most populous, local tax ranges from roughly 70 per cent of the cantonal rate in the wealthy and relatively low-tax towns and villages along Lake Zurich’s so-called Gold Coast, to more than 120 per cent in poorer and much more financially stretched communities in the hinterland. The local and communal taxes are capped by a federal tax, payable separately and at a different time of the year, that rises gently to peak at 11.5 per cent for the highest incomes.

Although three levels of taxation might sound expensive, personal taxes in Switzerland are relatively modest compared with much of Europe. Rates in the ultra-low-tax cantons can be as low as 16 per cent. Even “average” cantons tend to charge less than elsewhere in Europe, thanks to the cantonal tax competition that the Swiss say encourages cantons and local administrations to maximise efficiency.