The Swiss are known for their money management skills. In fact, over a third of the private wealth in the world is managed in Switzerland. To maintain that advantage the Swiss portray themselves as competitive, safe, and smart when it comes to money.
Being a small country; Switzerland is an easy place to get around by car or train. Thus, when one canton (state) decides to enact tax rates that are more attractive than the neighboring canton; taxpayers contemplate relocating.
An interesting policy is being tried by the little canton of Obwalden on Lake Luzern near Zurich. This canton recently decided to drop the progressivity of their tax rate structure. The change is expected to attract more residents from neighboring higher progressive tax rate locations and keep current residents from moving out.
The canton elected leaders calculate that the revenue loss by abandoning progressive tax rates will be more than offset by the gain in keeping residents from moving out and by getting a percentage of taxes (at a lower rate) from the newcomers who currently pay taxes in another canton.
With a large socialist population in some Swiss cantons one would expect an initiative challenge to this drop of progressive rates (a challenge is legal under the Swiss federal system where changing street signs can be put to the vote). It seems, however, that even the socialists are convinced that the canton will be better off by abandoning their progressive rates because under the new non progressive rate everyone will benefit and pay potentially less taxes.
What is the next step in this relocate incentive battle; zero or negative taxes?
Will the change in Obwalden start a race to the bottom among taxing jurisdictions in Switzerland or maybe even Europe or the U.S.?
Well, the concept of making a state tax attractive is not completely new to the United States. In some locations in the U.S., tax jurisdictions already have negative taxes to get businesses and individuals to remain in or relocate to within their borders (rebates, tax credits, tax holidays, Act 221 in Hawaii, etc.). It would be interesting to discover, for example, how many firms or individuals decided to relocate or stay in Hawaii just because of tax credits that reduced their personal or corporate tax liability to zero or near zero.
The Swiss may have an especially competitive tax environment because their geographical locations make taxpayer mobility easy. Isolated Hawaii, on the other hand, must also feel the pressure because Hawaii has approved Act 221 and many other tax credits for selected activities/purchases.
Someday Hawaii voter-taxpayers will catch on to the fact that high Hawaii tax rates are set to cover the costs of these preferential credits plus a governmental system (state and county) that has zero voter control over spending.
Wonder what Hawaii would be like if we copied Switzerland and approved a Charter or Constitutional amendment permitting voters to call for a referendum on any tax or bond revenue proposal? After all, should not those who pay have a say?
”’Paul E. Smith, a board member of the Tax Foundation of Hawaii and the Grassroot Institute of Hawaii, can be reached via email at”’ mailto:firstname.lastname@example.org
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