Tax policy is notoriously a controversial issue in Switzerland. Cantonal autonomy in this area is extensive, deeply rooted, and widely believed to lead to competition among cantons to attract wealthy taxpayers. Some think this is good: citizens can choose among different combinations of taxes and expenditures, and there is a restraining effect on public deficits. But others think that competition is bad, because it leads to a race to the bottom that undermines the capacity of cantons to deliver important public services. One of the latest incarnations of this longstanding debate is the popular initiative “Für faire Steuern: Stopp dem Missbrauch beim Steuerwettbewerb”, on which the Parliament should take position soon.
In a recent paper, Fabio Wasserfallen and I compared cantonal personal income tax rates and found an interesting pattern. To the extent that cantonal tax rates converged towards lower levels, the trend was stronger for lower incomes. We can see it in this figure, which shows the evolution of tax rates for four income categories (CHF 25,000, 50,000, 100,000 and 200,000 per year) (click on the image for a larger version):
The horizontal axis shows the tax rate for an unmarried person without children in 1990, while the vertical axis shows the difference in rates between 2007 and 1990. Negative values mean that tax rates decreased, positive values that they increased, and a negative relationship between the starting point (rates in 1990) and change (2007 minus 1990) is indicative of convergence (what is sometimes called “beta” convergence). Unfortunately the data are not corrected for inflation (it is not straightforward for technical reasons), which implies that changes within income levels were actually less dramatic than it seems. However, we can still safely compare trends across income levels, and we then see that convergence was stronger for lower income levels, and decidedly more limited for higher income groups. This conclusion rests on the fact that the negative relationship between tax rates in 1990 and change between 2007 and 1990 becomes weaker as income increases.
This is not really what one would expect on the basis of tax competition arguments. Part of the story is probably that competition is limited to a specific region (Zurich and some of its neighbors) and does not have a national dimension. But still, the pattern across income levels is quite striking. Any ideas what might be going on here?