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Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland

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  • Martinez, Isabel Z.

Abstract

Tax competition raises the question to which extent taxpayers respond to differences in income tax rates by migrating to low-tax areas. This paper analyzes a large, two-step tax reform in the canton of Obwalden in central Switzerland in 2006 and 2008. The canton first introduced a regressive income tax scheme with the explicit purpose of attracting affluent taxpayers, followed by a change to a flat rate tax, thereby lowering taxes for all taxpayers. Using individual tax data from the cantonal tax administration, I apply a 2SLS approach to estimate how responsive migration was to the tax reduction. I estimate an elasticity of the stock of rich taxpayers in the canton with respect to the average net-of-tax rate of 2.4 in the first two years after the reform, increasing to 3.5 over the five post-reform years. The corresponding elsticities of the inflow of rich taxpayers are even larger. These estimates are larger than what the few studies on tax induced mobility elasticity have found so far. I can further rule out that these results are due to an exogenous positive income shock to top incomes. DiD estimations comparing the share of rich taxpayers and net income per taxpayer in Obwalden to two neighboring cantons confirm that the reform was successful in increasing the canton's tax base. The large elasticities can be explained by two aspects. First, by the sizable pool of intentionally treated and the prevailing residence-based taxation, as opposed to source-based taxation. Through relocating to Obwalden, any Swiss and European citizen could take advantage of this tax scheme. Second, by the initially low share of rich taxpayers in Obwalden and the small size of the canton.

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  • Martinez, Isabel Z., 2016. "Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland," Annual Conference 2016 (Augsburg): Demographic Change 145643, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145643
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    Cited by:

    1. Isabel Z. Martinez & Emmanuel Saez & Michael Siegenthaler, 2018. "Intertemporal Labor Supply Substitution? Evidence from the Swiss Income Tax Holidays," NBER Working Papers 24634, National Bureau of Economic Research, Inc.
    2. Marius Brülhart & Jonathan Gruber & Matthias Krapf & Kurt Schmidheiny, 2016. "Taxing Wealth: Evidence from Switzerland," NBER Working Papers 22376, National Bureau of Economic Research, Inc.
    3. Katrine Jakobsen & Kristian Jakobsen & Henrik Kleven & Gabriel Zucman, 2018. "Wealth Taxation and Wealth Accumulation: Theory and Evidence from Denmark," NBER Working Papers 24371, National Bureau of Economic Research, Inc.

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    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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