Who Needs Progressive Taxation?

Apparently not the Swiss residents of the canton of Schaffhausen, in the northern part of Switzerland. Schaffhausen is in fact moving to a system of “degressive” taxation. That’s right, lower tax rates for the rich:

Beginning in January 2004, Schaffhausen will replace its system of increasing marginal tax rates on income with a system of degressive marginal rates. The cantonal tax rate will be set at just under 8 percent for income of SFr 100,000. It will rise to a peak of 11.5 percent for income between SFr 600,000 and SFr 800,000. Thereafter, the marginal rate declines with each incremental chunk of income: 10 percent at SFr 1,300,000; 8 percent at SFr 3,000,000; and just over 6 percent for income more than SFr 10,000,000. This is a true incentive-based tax system–the larger one’s income, the lower one’s marginal rate.

Declining marginal tax rates will also apply to wealth taxes, further enhancing the degressivity of cantonal taxes.

Schaffhausen has its own legislative parliament, which contains eighty deputies representing all regions within the canton. Eight political parties compete for these seats. Evidently Schaffhausen’s voters support a tax cut that gives the greatest benefits to the richest people. They believe that attracting wealthy individuals to reside in their midst is good for everyone.

Here is the full story. I don’t expect to have any data on this soon, but I am pleased to see the experiment. One question, of course, is whether cross-canton migration effects (as opposed to labor supply effects) are beneficial for Switzerland as a whole, or just for Schaffhausen. It does not create aggregate value to shuffle rich people from one canton to another. In any case I am amused to see an idea that finally weakens Alvin Rabushka’s loyalty to the flat tax.

Addendum: I am embarrassed to admit that co-blogger Alex tells me he posted on this topic some time ago, read his coverage as well.