Regular readers know that Canton Obwalden recently voted to implement a 1.8 percent flat tax. That reform, combined with other supply-side policies, is garnering some favorable publicity for the sparsely-populated canton. The Financial Times reports on the pro-growth changes, and acknowledges the vital role of tax competition:
…in recent months, Obwalden, whose population accounts for just 34,000 of Switzerland’s 7.5m total, has been punching above its weight. Desperate to stem a haemorrhage of business and wealthier residents to more cosmopolitan places, the Christian Democrat-dominated cantonal government has turned to taxation to stop the slide. …the government [adopted] an ultra-low, flat-rate tax – that took effect on January 1 this year. The move has attracted attention beyond Switzerland’s borders. The European Commission has taken issue with its most prominent non-member on the allegation that Switzerland’s differential cantonal taxes put European Union companies at a disadvantage. Some EU countries have also been riled by Switzerland’s ability to attract high-profile millionaires through one-off tax deals. Last year, Johnny Halliday, the ageing French rock star, became the latest in a stream of foreigners to up sticks. …Proponents argue that allowing cantons, and even individual towns and villages, to set their own rates stimulates competition and keeps taxes down by boosting efficiency. …The reduction in corporation tax to 6.6 per cent, and a further cut to 6 per cent from January 1, has led to a fivefold increase in the number of new companies setting up in both 2006 and 2007. While Mr Wallimann concedes many are just letterbox operations, some have created genuine jobs. He says there has been no rancour with other cantons or accusations of beggar-thy-neighbour policies. “Everyone in Switzerland understands tax competition. It keeps everyone on their toes.