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No Slowdown of Cantonal Tax Competition in Sight

Credit Suisse publishes a study on the tax burden in the Swiss cantons

The tax competition between the cantons shows no sign of abating. Uncertainties over tax receipts as a result of the international financial crisis and the profit distributions by the Swiss National Bank have done nothing to change this situation. The indicators calculated by Credit Suisse economists to compare the different cantonal tax burdens paint the picture of a Switzerland of two halves: In German speaking Switzerland competition is intense and tax burdens tend to be lower, whereas in French speaking Switzerland tax rates are higher although a trend towards more competition is recognizable. For private individuals and companies alike, the cantons of central Switzerland remain the most attractive from a tax perspective.

In their latest study, Credit Suisse economists compare the current tax burdens imposed by the Swiss cantons. A look at the most important fiscal measures taken by the individual cantons confirms that tax cuts continue to be politically driven. Furthermore, analysis of the finances and debt situation of the cantons indicates that there is plenty of room for maneuver when it comes to cutting tax at cantonal level in the future, too.

Central Switzerland the Most Attractive for Natural Persons and Legal Entities
In terms of locational appeal from a tax perspective, it is the central Swiss cantons that continue to top the country rankings. This is evident from a broad-based index of the tax burden imposed on natural persons and legal entities in 2011, as calculated by Credit Suisse economists. For natural persons, the central Swiss cantons of Zug, Schwyz, Nidwalden and Obwalden are the most attractive cantons from a tax perspective. At the other end of the rankings, are Jura and Neuchâtel. Where corporate taxation is concerned too, it is primarily the smaller cantons that are driving tax competition. After cutting the corporate income tax rate and virtually abolishing the tax on equity in 2011, the canton of Nidwalden now heads the rankings for the lowest corporate tax burden, followed by the cantons of Appenzell Ausserrhoden and Obwalden. The two city cantons of Basel-Stadt and Geneva impose the highest tax levy on companies.

TAX-I: An Indicator of the Individual Tax Burden
With their first-ever publication of the Tax Independence Day (TAX-I) statistics, Credit Suisse economists have introduced an indicator for comparing the individual tax burden imposed by the cantons. TAX-I measures the tax burden in days from the New Year on, and shows how long individuals have to work in the different Swiss cantons to pay their tax bills. The calculation is based on three model households – "graduate," "double earner" and "family" – and encompasses not only income taxes (federal, cantonal, and municipal), but also wealth taxes and mandatory social security contributions.

The TAX-I highlights the day on which a taxpayer has earned the money required to pay his or her annual tax bill. For example, whereas the "family" model household in the canton of Zug has earned enough money to pay its tax bill for the year as early as February 11, the "double earner" model in the canton of Neuchâtel has to work until May 3 to reach the same stage. For all model households, it is the cantons of Zug, Schwyz and Nidwalden that lead the rankings – always in that order – while the Cantons of Jura and Neuchâtel continue to bring up the rear. For the most part, the cantons of French-speaking Switzerland reach their TAX-I later than those of German-speaking Switzerland. The canton of Ticino comes in the middle of the pack.

Cantonal Finances Reveal Potential for Tax Reductions
Where fiscal policy is concerned, public bodies pursue two contradictory objectives: On the one hand, taxes are the key source of income, while on the other the level of the tax burden is one of the key factors determining locational quality. The accounts of both the federal government and the majority of the cantons appear to be reasonably balanced in this respect, and reveal that 19 out of Switzerland's 26 cantons were in the black in 2011. The burden of debt in Switzerland generally looks anything but threatening. In other words, the financial fundamentals are sufficiently stable in many parts of the country to allow for further steps to be taken that will increase locational appeal from a tax perspective. Credit Suisse economists believe the cantons will continue to exploit the fiscal freedom of maneuver open to them and reduce their tax burden further as and when political will and opportunity allow.

French-Speaking Switzerland Discovers Tax Competition
A look at the recent measures taken by the cantons confirms that the trend of tax cuts is continuing, with tax increases proving difficult to implement politically. The example given by the canton of Lucerne, which was first among the larger cantons to implement a strategy of low taxes for companies, strongly suggests that the trend towards lower taxes persists. Up until now, tax competition has taken place almost exclusively among the cantons of German-speaking Switzerland. More recently, however, French-speaking cantons too have been pushing through substantial tax cuts: The canton of Neuchâtel is cutting its corporate income tax rate in stages with a view to reaching the level of 5% by 2016. The cantons of Jura and Fribourg have likewise been active, cutting corporate taxation rates. Only in the canton of St Gallen have any tax increases been implemented.

Switzerland Gaining in International Appeal
An end to the trend of fiscal activism will only come about if the condition of public finances and the widely-applied debt brake measures end up making further cuts impossible. The only risk scenario at the moment appears to lie in the area of contingent liabilities – such as bailout measures either for cantonal banks with a state guarantee or for cantonal pension funds. From today's perspective, therefore, the intensity of tax competition in Switzerland appears unlikely to diminish. The cantons still have sufficient leeway to improve their locational appeal through tax relief measures. This puts Switzerland in a unique position internationally: In many other countries, tax increases are going hand-in-hand with cuts to state benefits. In the countries suffering under a massive debt burden, the relationship between benefits and taxes – to which taxpayers are so sensitive – is set to deteriorate, whereas Switzerland will continue to gain in appeal in relative terms.