"Regressive" Income Tax in Switzerland?How to Harness Tax Competitions?

Yuta Kakegai, Ibaraki University

In addition to its direct democracy and the tradition of decentralization, Switzerland is known for its strong autonomy.Furthermore, income taxation in Switzerland is mainly characterized by the fact that it is the source income for the cantons, and the progressiveness is lower than in other European countries.An extreme example of autonomy and direct democracy is the "regressive" income tax of the canton of Obwalden. In December 2005, the Cantonal Initiative in Obwalden approved a plan to introduce regressive income taxation, which would reduce taxes on high income earners. Along with other tax reduction measures, Obwalden, which had been a canton with moderate financial resources at the end of the 1990s, became one of Switzerland's most powerful financial resources. This invoked criticism from other cantons and the EU. However, this regressive income taxation was judged to be unconstitutional in the Federal Court and was abolished. However, in 2007, Obwalden introduced the Flat Rate Tax and continues to be a canton with a low tax rate. In this paper, we describe how tax competition can be suppressed by historically analyzing these policy processes. Among them, we focus on the following two in particular. (1) Aspects of “economic rationality and conflict of constitutional democracy.” (2) Aspects of “confrontation between two democratic theories of direct democracy and constitutional democracy.

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 Presented in Session 154. Public Finance in the Local Context