New research model examines tax competition in Switzerland

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Beatrix Eugster at the Center for Disability and Integration at the University of St.Gallen (HSG) along with Raphaël Parchet of the Università della Svizzera italiana look at the relationship between culture and taxation.

New research model examines tax competition in Switzerland

Eugster and Parchet compared empirical data in and around the German-French language border within Switzerland. Their work shows that culture has an influence on the level of taxes, but that the pressure of tax competition reduces these cultural differences across language borders.

Employment, fertility or even political institutions can be influenced by cultural differences. Research shows that cultural differences also influence preferences for tax policy and the public goods provided. The Swiss language border, also known as the Röstigraben, divides the population into two culturally distinct groups.

Looking at the three bilingual cantons of Fribourg, Bern, and Valais, gives insight into how cultural backgrounds effect taxation. In Switzerland, cantons and municipalities are able to determine their own tax rates, which provides an insight into how differing preferences can reflect culture.

The researchers found that the culturally desired tax differences cannot and do not manifest themselves at the language border because tax competition drives tax policy more than culture does. This sees the French speaking communities in these areas to have lower taxes. This quasi-experimental identification of the existence of tax competition is so far unique in the economic literature.

New research model
Researchers employed a theoretical model to complete the analysis. In this model, taxes are set by majority vote of the population. The novelty of the model is that when setting the tax rate, residents take into account what impact the level of the tax rate will have on the settlement of wealthy residents and thus on the tax revenue and the level of taxes next year.

In technical terms, the researchers introduced an “endogenous median voter” into a classic model of tax competition. They thus combined two previously separate lines of research, namely models for strategic taxation of capital (with perfect mobility) and models on income sorting (without strategic inhabitants). The model showed that tax competition can be pronounced, although the data show little mobility of the inhabitants. The hypothetical risk of wealthy inhabitants leaving the municipality is sufficient to compensate for the tax differences between German- and French-speaking municipalities on the language border.

Award of the Swiss Academy of Humanities and Social Sciences
For their essay, Beatrix Eugster was awarded the Young Researcher Award for outstanding academic essays in the humanities and social sciences (silver). The jury assessed the article as a “democratically important contribution to the controversy about the sustainable design of tax systems”.

Further awards went to the anthropologist Emanuel Schaeublin (Gold, University of Zurich and ETH Zurich) and the psychologist Hippolyte Gros (Bronze, University of Geneva). The texts of the prizewinners deal with major questions of scientific research and human coexistence by means of exemplary studies.