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federalism How wealthy Swiss regions subsidise their poorer cousins

fountain in canton Jura

Sucking up handouts from its neighbours? A fountain in Délémont, capital of canton Jura.

(Keystone / Georgios Kefalas)

Each year, Switzerland’s unique redistributive system shifts money – lots of it – from richer to poorer parts of the country. Despite debates, complaints, and reforms, it remains a cornerstone of the federal model.

At the end of June, government economists in Bern released a set of numbersexternal link whose impact-to-attention ratio is one of the widest imaginable – the annual “fiscal equalisation” figures.

Essentially, the fiscal equalisation system dictates the amount of cash that rich cantons must hand over to their poorer cousins each year in order to maintain a semblance of national economic cohesion and to temper the growth of regional inequalities.

Similar to previous years, regions paying most into the system in absolute terms are Zurich, Zug, and Geneva; the biggest recipients are Bern, Valais, and Aargau. Per capita, the cantons with the biggest “index change” – losses or gains due to the system – are Zug, from the rich end, and Jura (Switzerland’s youngest region) from the poorer.

It’s all nicely illustrated here by the finance ministryexternal link in a spiral of diminishing fortunes, while the table below shows how much individual citizens in each canton are on average “losing” or “gaining” thanks to the system.


equalization

fiscal equalization figures

Billions annually

If the hierarchy has not changed much, the figures themselves remain big.

Canton Bern, for example, receives over CHF1 billion ($1.01 billion) from the system, while Zurich gives around half that. Overall, fiscal equalisation involves CHF3.5 billion being funnelled to the below-average cantons – that’s more than half the annual GDP of Liechtenstein.

Why is such a system necessary in a country where – as many often assume – most people are rich? Claude Jeanrenaud from the University of Neuchâtel explains that the rationale for the system lies in its two main components.

The first involves the transfer of wealth to reduce inequalities resulting from some cantons taking in more tax receipts than others, he says. Zug, with a high concentration of successful start-ups and wealthy residents, is clearly going to reap more benefits than more isolated, sparsely-populated, agriculturally-focused regions.

The second part of the system, the “structural funds”, are to compensate the fact that public services (roads, water, etc.) are much harder to provide in some regions due to geographic or demographic challenges. In Switzerland, a country that has always striven to minimise its big topographical diversity, this is even more necessary than elsewhere.

So, just as the European cohesion funds have contributed to the development of newer and poorer EU members – notably those in the eastern part of the bloc – the Swiss equalisation system helps to ensure a level playing field and the “overall functioning of the state,” Jeanrenaud says.

Bailing out shirkers?

A model in which some regions are bound to pay for others doesn’t come without debate: above all, there is the issue of balancing the tension between “redistribution and incentive”, as Andreas Stöckli of the University of Fribourg puts it.

If life is too easy, he says pressure to innovate can drop: “the greater the support given to resource-poor cantons, the lower their incentive to seek to increase their tax base, and the more the resource-rich cantons have to hand over, the less the incentive to enlarge theirs.”

This argument naturally comes most often from the richer regions: just as some Germans grumbled about bailing out Greeks at the height of the euro crisis, tax collectors in Zug are not always going to be happy about shifting their hard-earned receipts into a communal pot that will later be distributed to cantons like Jura.

“The transfer from tax-attractive to less tax-attractive cantons needs to be well-balanced,” reckons Heinz Tännler, canton Zug’s Finance Minister. Though he concedes that the system can indeed help maintain solidarity and cohesion, he also says that too much pressure on low-tax areas like Zug can lead to negative consequences for Switzerland as a whole.

“Top performers” – i.e. tax-rich cantons – are already subject to strong competition internationally, he says, something that is likely to increase with new global tax coordination initiatives. In this context, Switzerland needs to “take care” of its more “efficient” (he prefers this word to “rich”) regions.

Reform

Such debates are not just theoretical. In May, a reform under discussion for years finally made its way through parliament – one that will put in place a modified system to reduce the burden on richer cantons.

In the past, cantons battled politically to decide how much money should be transferred to drag the poorer regions up to an ideal target of 85% of the national average “resource potential” (the amount of taxable resources per inhabitant). From now on, however, the figures will be calculated by federal economists, and pegged to a fixed target of 86.5%.

But don’t be misled by the raised benchmark.

Before, politicians in Bern were overly-friendly towards the resource-poor cantons, Stöckli says – perhaps unsurprising given that, in the Senate at least, a large majority of politicians come from regions that benefit from the system. Since 2012, they overshot the ideal target every single year. 

Now that the numbers are fixed, although their legal position is strengthened, poorer cantons will in reality lose out, while richer cantons will save. Federal authorities, meanwhile, who also contribute to the system, are set save some CHF280 million annually from 2022.

Counter-productive?

Whether the changes are enough to impact the integrity of the system and the sustainability of the poorer cantons’ coffers is another question.

Back in 2018, when discussions were ongoing, the head of the finance department of canton Jura, Charles Juillard, wrote in the Le Temps newspaperexternal link that the savings made by the state and the rich cantons could turn out to be “counter-productive”.

“A downturn in the financial situation of certain cantons could not only endanger their development, but also the fragile balance that allows Switzerland to be a coherent and efficient whole,” he wrote.

Stöckli, meanwhile, describes the recent changes as a “fundamental adjustment” to a system that is still hitting its stride (it was introduced in its current form in 2008). But he also reiterates the fact that federal funds will be used to “cushion the financial impact on the resource-poor cantons” – at least in the short term.

Similarly, the impact on inter-cantonal tax competition – which many see as spurred by, and a benefit for, the federal system – is difficult to judge.

For Stöckli, the so-called “pleasure inhibitor” effect of the fiscal equalisation system – that it discourages all-out tax war between regions – is likely to continue, albeit without completely stifling competition.

Taxation in Switzerland

Switzerland levies taxes at the federal, cantonal and local levels, with cantons setting their own rates. Wide variations exist: on a salary of CHF100,000, for example, rates can vary from below 8% (canton Zug) to almost 25% (canton Basel City).

Rates are graduated according to levels of income and assets, as well as family status; for example, married couples currently pay more than non-married couples, something the Federal Council nevertheless wants to change.

In general, taxes tend to be lower than in much of Europe.

Cantons also retain control over coporation tax rates, which also vary throughout the country, and are often low. However, international pressure has led to efforts to overhaul and harmonise the system, including a May 2019 vote that led the scrapping of preferential tax deals for multinational firms based in the country.

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