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Lowering Taxes for That Competitive Edge Nima Sanandaji Suffering from a sagging economy, a Swiss canton reduced both corporate taxes and individual taxes. After the reforms were implemented, the economy picked up with a 17 percent increase in new business, and a drop in the unemployment rate occurred. Amazing what free-market reforms can do, and quickly, too. Follow this link to the original source: "Zug is top location, while Jura comes last" COMMENTARY: The latter strategy is employed by some European governments, attempting to put an end to institutional competition by putting pressure on more free-market oriented systems to increase their taxes and regulation. The goal of economic harmonization in the European Union is partially connected to such ambitions. However, as the experience from Switzerland shows, institutional competition is something to be encouraged rather than limited. The Swiss Confederation consists of 26 states, called cantons, which have traditionally been given considerable freedom in choosing different policies. The competition amongst different cantons to attract businesses and individuals has been a positive force in the country, leading to Switzerland being one of the richest nations in the world. The economist Fabian Wallen gives a clear example of this by noting that the canton of Obwalden, with only some 34,000 citizens, was facing severe economic problems only a few years ago. Population growth was stagnating and taxpayers had started migrating to cantons that offered lower taxes. Realizing that change was needed, the president of the Tax office in Oswalden, Branko Balaban, implemented a major tax-reform during 2005 and 2006. The reform, which was supported by 86 percent in a recent popular vote, meant that corporate taxes were reduced from between 16-19 to 6.6 percent. At the same time the tax rate for individuals was reduced to 1-8 percent. Since federal taxes in Switzerland are progressive, individual taxes in Oswalden became regressive; thus creating an overall more flat system of taxation. The reforms were quite successful. The number of businesses in Oswalden increased by 17 percent after one year and people started moving into the canton that could now boast the lowest unemployment rate in Switzerland. Since the tax reductions had strongly boosted economic development, the reduction in tax income was in reality only half of that previously estimated. But the federal court system objected to the regressive tax systems, claiming this was against the Swiss constitution. Therefore a new tax-system had to be created in Obwalden. Rather than going back on the reform agenda, Obwalden implemented further free-market reforms. A flat tax of 1.8 percent was introduced for individuals, whilst the business tax was reduced to 6.0 percent. Testimony to the popularity of the first wave of reforms, the second wave of reforms was supported by 91 percent in a public referendum. As the example of Obwalden shows, there is clearly an option for government bureaucrats and politicians to reduce the burdens imposed on citizens. Such policies can very well be expected to result in an improved economic climate and gain the support of the people. But in the same way that consumers need competition in the market place in order to find desired products, so too, must different political systems compete if constructive politics is to be found. When a lack of competition between political systems exists it is tempting for the people making the decisions and those working for the public sector to expand the power of government as much as they can, acting in their own self-interests. European politicians attempting to limit or stop institutional competition are basically trying to preserve systems that are not functioning as well as they should. But as the development in Obwalden demonstrates, it is better to work for self-improvement rather than trying to sabotage the economic well-being of your neighbors.
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