In Switzerland, there is tax competition among cantons
As the French-language Swiss newspaper Le Matin Dimanche found out, a married couple with two children and, by Swiss standards, a 'modest' income of 60,000 Swiss francs per year would be completely exempt from income tax, but only if they live in the cantons of Geneva and Zug. However, in the city of Biel in the canton of Bern, on the contrary, such a family would pay income tax of 1,562 Swiss francs.
A married couple without children and with an income of about 125,000 Swiss francs per year in the canton of Zug will pay taxes of 5,451 francs, while in Geneva they would pay three times as much, and in the canton of Neuchâtel even four times as much. Why is that?
The point is, notes Swissinfo.ch, that each canton of Switzerland has its own tax system, and in Geneva the tax scheme is built on the principle of a progressive tax rate, with the degree of this 'progressivity' much higher than in other cantons.
As soon as a childless couple in Geneva reaches an income level corresponding to the 'upper middle class', that is, if they collectively begin to earn more than 175,000 Swiss francs per year, they will pay much more taxes than in neighboring cantons. At the same time, ultra-rich residents of the canton also pay much more taxes in Geneva compared to other cantons.
The lowest tax rate in French-speaking Switzerland is in the city of Sion, while the cantons of Vaud (Lausanne) and Neuchâtel have a reputation as a 'fiscal hell', the newspaper Le Matin Dimanche points out.
But the canton of Zug is well known for its tax attractiveness. As a result, companies such as Glencore and Johnson & Johnson have registered their headquarters here. The canton also positions itself as the Swiss capital of cryptocurrencies and the blockchain industry.
In June 2020, the Zug parliament decided to reduce the income tax rate in order to ease the financial pressure on families resulting from the coronavirus crisis. This decision is critically assessed by left-wing parties as an attempt to 'score points' on the pandemic issue.
In general, the Swiss tax system reflects Swiss federalism in its structure: taxes are levied at the federal, cantonal and municipal (communal, local) levels, with cantons having the right to set their own tax rates.
As a result, there is tax competition among cantons. In addition, there is a significant variation in cantonal tax rates. For example, with a salary of 100,000 Swiss francs per year, personal income tax rates can range from less than 8% (in the canton of Zug) to almost 25% (in the canton of Basel-Stadt).
Tax rates are also calculated differently depending on the canton, and factors such as income level, other assets, and marital status may be taken into account. Many cantons provide ample opportunities to narrow the tax base.
In addition, every resident of Switzerland currently has the right to deduct up to 6,400 francs per year from taxes paid into the 'third pillar' of the Swiss pension insurance system (a private voluntary savings fund, along with the state pension, which constitutes the 'first pillar', and the occupational pension, which constitutes the 'second pillar').
On the other hand, married couples currently pay more taxes than cohabiting but unmarried individuals collectively. In the press, this situation is called 'marriage penalty'. The prospects for a broad tax reform in Switzerland have been discussed for a long time, but so far 'the cart is still there'. Overall, however, taxes in Switzerland are generally lower than in many other European countries.
Cantons also set their own corporate tax rates for companies and other business structures, including domiciled and trust funds. Nevertheless, following a popular vote in May 2019, the corporate tax system was unified.
Preferential tax deals for foreign companies are no longer practiced. Instead, many cantons have lowered their corporate taxes, equalizing 'tax rights' for local and foreign companies, thereby hoping to remain attractive for business.