Friday, November 28, 2008

The Flat Tax Spreads to the Canton of Obwalden in Switzerland

January 2, 2008

By Alvin Rabushka

Switzerland has a three-tiered income tax system in which income taxes are levied at the federal, cantonal, and municipal level. On average, about a third of all personal income taxes is collected at each level, although there is wide variation among the twenty-six cantons and some 2,900 municipalities. The federal income tax consists of nine brackets that range from 0% on the first Sfr 25,000 ($1 = Sfr1.13) to a top rate of 13.2%, after which it falls to 11.5% on income exceeding Sfr 716,500.

In January 2006 the Canton of Obwalden had previously established a degressive system of personal income tax rates that set lower rates with increases in taxable income. The Federal Court ruled this arrangement unconstitutional in June.

In response, Obwalden’s authorities proposed a flat income tax rate of 1.8%, exempting the first Sfr 10,000 of income from taxation. In a referendum, 90.7% of the electorate in Obwalden approved the measure. The new flat tax will take effect on January 1, 2008. The canton also reduced its corporate tax rate from 6.6% to 6%.

Under the pressure of tax competition to lure high-income individuals to reside in specific cantons, the cantons of Uri and Thurgau are also considering a flat-rate income tax. Should these two adopt a flat-rate income tax, it is likely that other cantons will consider the flat tax to retain their competitiveness for high income individuals.

No comments: