Switzerland

Abstract

Switzerland's federal system features an internationally unmatched pattern of widespread revenue autonomy and administrative fragmentation on subnational levels of government. In combination with strong participatory institutions, the resulting tax competition among cantons and municipalities widely restricts excessive tax burdens and induces fiscal restraint. A comprehensive institutional framework at the federal level sets boundaries to ensure that tax competition is not at the expense of fiscally weaker cantons. Yet Swiss fiscal federalism is more fragile than it seems. Despite many institutional barriers to centralization, there is a persistent trend to allocate an increasing number of responsibilities with the federal government. In addition, the fiscal equalization scheme sets disincentives for fiscally weaker cantons possibly increasing disparities in the future. Reform proposals should seek to strengthen fiscal equivalence and prevent a system in which cantons are merely executing federal regulation.