Swiss Court Strikes Down Degressive Tax

Debates about tax policy often include assertions that a tax is progressive (rates rise on higher incomes, therefore high earners pay a larger proportion of their income in taxes) or regressive (usually flat rates, therefore low earners pay a larger proportion of their income in taxes). The federal income tax is often described as progressive, and state sales taxes are often called regressive.

We don’t often hear about a tax with degressive rates (rates are reduced on higher incomes). But the word became known to the residents of the Swiss canton of Obwalden, where 86 percent of voters approved a degressive tax system last year:

Obwalden’s new 6.6-per-cent corporation tax will be the lowest in Switzerland and property tax will drop by at least 30 per cent.

Individuals earning up to SFr70,000 will in future pay eight to ten per cent less personal tax.

Those earning up to SFr300,000 will be taxed up to six per cent, while those in the highest bracket will see their burden sink from 2.35 per cent to one per cent.

Under the system, income over about $233,000 was subject to just a one percent top marginal rate. Addressing arguments that the system was unfair, Obwalden deputy tax chief Robert Vonwyl told swissinfo.org:

There are critics and it is understandable, but everyone will benefit from this system, including those on lower incomes. People with higher incomes will still pay more money despite paying less tax as a percentage of earnings.

It would have been an interesting experiment to see how things turned out. But the experiment was cut short last week by the Swiss Federal Court, which struck down the tax system as violating “constitutional measures designed to ensure taxation according to economic performance.” The suit had been brought by a communist parliament member who labeled the system “fiscal cannibalism,” and had been supported by a critical EU.

While Obwalden officials must now go back to the drawing board, the realities of economic incentives remain unchanged around the world. “Degressivity” may again enter the tax lexicon as governments seek to attract productive companies and individuals, and come up with new ideas to stay competitive in tax policy.