13 Switzerland

Teresa Ter-Minassian
Published Date:
September 1997
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Paul Bernd Spahn

Switzerland is a confederation composed of 26 cantons (and half cantons) of unequal size, topography, and economic potential. Its population exhibits a great variety of cultural backgrounds, languages, religions, settlement characteristics, and economic activities. While some regions at the crossroads between Italy, France, and Germany have benefited from international trade for centuries, others remained more secluded because of mountainous conditions and geographical isolation.1 These factors account for large regional disparities and imbalances within the Swiss economy. In recent times, some formerly remote areas have experienced dramatic changes to their economies owing to transalpine traffic and tourism, with a notable impact on the ecology. Swiss attitudes are thus characterized by the protection of minority groups, the preservation of cultural diversity, mutual consideration and assistance, and the care for the environment—which has constitutional rank. Such attitudes have also shaped institutional political arrangements.

Switzerland has one of the oldest federal traditions dating back to the Everlasting Alliance of 1291, when three cantons formed a union to resist Habsburg rule. In 1815, Switzerland’s independent political status was confirmed by the Congress of Vienna, and the Swiss Confederation was constituted in its present boundaries. In 1848 a formal federal Constitution was adopted for Switzerland, which until then had consisted of a loose confederacy of regions. The present arrangements are based on this first Constitution, which, however, has been amended several times, notably through the important overhaul of 1874, which was strongly influenced by the U.S. model of federalism.

Structure of Government

The basic elements of Swiss federalism are the following:

  • The cantons2 are legally sovereign states, unless their sovereignty is explicitly limited by the Constitution (Article 3 of the Constitution). Likewise, municipalities have considerable legal autonomy and political power although they are not fully sovereign.

  • The confederation is based on the idea of equality between its constituents, the cantons, which is reflected in the role of the Council of States, the upper house of parliament. Its voting procedure accords equal weight to each canton, large or small.3

  • The Constitution provides for a vertical distribution of responsibilities among layers of government, yet, as in Germany, the lower tiers of government also perform functions that are delegated from above. Thus, it is difficult to discern a clear vertical distribution of functions among the authorities. There are also elements of cooperative federalism, horizontal cooperation (through ministerial conferences), and expert-based discussions and consulting procedures (Vernehmlassungsverfahren), whereby government agencies of different levels, political parties, and economic and social groups are involved in preparing legislation. Formal collective decision-making bodies are lacking, however.

  • Revenue as well as expenditure functions are distributed independently among the tiers of government. Each authority has its own budget, yet the budgets are interrelated through a network of intergovernmental transfers.

  • Constraints are imposed on both expenditures and revenues by the political system of direct democracy. Voters are not only asked to elect representatives, they are frequently called to the polls to decide on all proposed constitutional changes and on specific pieces of legislation (including projects to amend federal tax financing). Federal referendums must not only be approved by a majority of voters, but also by a majority of the cantons.

  • Regional diversity, in combination with cantonal sovereignty and direct democracy, has led to different levels in the provision of regional public goods and to significant variations in regional tax laws.4 The communes—which have no independent tax sovereignty—may levy surcharges on cantonal taxes with varying annual coefficients.

The Swiss model of federalism is complex not only because of the complicated network of intergovernmental relations but also because it interacts with the system of semidirect democracy and proportional representation of parties, which aims at maintaining close links between authorities and citizen-voters. Such arrangements reflect the importance accorded to the protection of minorities, and they entail specific forms of constitutional and legislative procedures (see below).

Current Arrangements

Expenditure Assignment

The Constitution attributes to each layer of government so-called principal responsibilities. Article 8 of the Constitution empowers the confederation to deal with foreign affairs, but cantons are also allowed to enter into international agreements “on matters of neighborly relations” (Article 9).

The exclusive responsibilities of the confederation are in defense, external relations, citizenship and the status of foreigners, political asylum, civil and penal law, social protection, policies on property, economic order, money and currency, energy policy, and national transportation and telecommunication (see Table 1 for a list of constitutional provisions). Exclusive competences of the cantons are in the maintenance of public order, public welfare, establishments of health care, schools and education, the relationship between state and church, regional and local land planning, roads, and the use of water and other resources. All other domains—the Constitution mentions in particular health, the protection of the environment, culture, the fostering of research, science and arts, universities and vocational education—are presumed to be the responsibility of cantons unless federal law assigns functions otherwise. Where responsibility in such areas is conferred to the confederation, policies are generally implemented at the cantonal level. But even where the Constitution assigns functions to the central government, it often provides a “fallback” position at the local level, for example, for public welfare for the needy (Article 48).

Table 1.Switzerland: Exclusive Responsibilities of the Confederation According to the Swiss Constitution
CategoryRule in Favor of the ConfederationRestrictions in Favor of the Cantons
General provisionsArticles 2 and 5.Articles 3, 6, and 7.
Defense and civil protectionArticles 8 (general), 20 (military corps), 22 (military camps), and 22bis (civil protection).Exception: Article 9 (“neighborly relations”).
External relationsArticles 8 (general) and 28 (customs).
Macroeconomic policiesArticle 31quinquies (countercyclical policy and employment policies).
Money and currencyArticles 31quater (banking), 38 (coining), and 39 (banknotes).
Citizenship and status of foreignersArticles 44 and 45bis (citizenship), 66 (loss of civil rights), 68 (stateless), 69ter (status of foreigners), and 70 (expulsion of foreigners).Cooperation of cantons is generally required. Articles 60 and 61 (reciprocity, equality of status mandate).
Law and orderArticle 64bis (penal law).Article 50 (public order, religious freedom) and 56 (regulation of associations).
Welfare and social protectionArticles 34bis (health and accident insurance), 34ter (labor relations), 34quater (old-age pensions and insurance), 34quinquies (family policies), 34sexies and septies (housing), and 34novies (unemployment insurance).Article 48 (subsidiary aid to the needy).
Policies on property and territoryArticles 22ter (protection of property rights), 22quater (use of property), and 23 (public interest and expropriation).
Economic orderArticles 24 and 24bis (water and forestry), 24ter (shipping), 25 (fishing, hunting), 31 (freedom of commerce), 31bis (restrictions on the freedom of commerce), 31 (consumer protection), 31septies (price controls), 34 (child labor, labor protection), 40 (measures), and 64 (trade in mobile property).Articles 31 and 31ter (business regulations), 32 (cooperation for price controls), and 33 (certification of scientific personnel). Responsibility for implementation.
Energy policiesArticles 24quater (electricity) and 24quinquies (nuclear energy).
National transportation and telecommunicationsArticles 26 (railways), 26bis (pipelines), 36 (postal and telecommunication policies), 36bis (national roads), 36ter (earmarking of mineral oil tax), 37 (control on cantonal roads and bridges), and 37ter (air traffic).Article 36bis (implementation and maintenance of roads, national roads) and 27bis (restrictions on traffic).
EnvironmentArticles 24septies and octies (pollution control, renewable energy), 24novies (abuse of genetic engineering), and 36sexies (transit traffic and ecology).Article 24sexies (protection of the natural environment). Implementation is responsibility of cantons.
Promotion of culture, radio, and televisionArticles 27ter (film), 27quater (stipends and aid to students), 27quinquies (sports), 27sexies (promotion of science), and 55bis (radio, television).Cooperation with cantons needed.
Intergovernmental relationsArticles 42ter (equalization among cantons) and 42quinquies (tax harmonization).
Special issuesArticles 32bis and ter (liquor: quality control, production, and import), 40bis, and 41 (abuse of weapons and ammunition), 69 and 69bis (health protection, infectious diseases).Articles 32quater (regulation of liquor trading) and 35 (gambling).

This division of responsibilities is, however, not easily discernible from the budget or financial accounts and certainly not fully reflected in the structure of government expenditures. As in the case of Germany, cooperation among authorities and the delegation of executive functions to lower levels of government—in combination with intergovernmental transfers of resources—make it difficult to assess the political significance of public authority from the vertical breakdown of public outlays as shown in Table 2.5.

Table 2.Switzerland: Government Budgets, 1995
(In percent of consolidated total outlays)
(In percent of GDP)
Source: International Monetary Fund, Government Finance statistics Yearbook, 1996.

Items may not add up to 100 owing to the elimination of double-accounting for the total. Budgeted figures may not coincide with financial accounts.

Source: International Monetary Fund, Government Finance statistics Yearbook, 1996.

Items may not add up to 100 owing to the elimination of double-accounting for the total. Budgeted figures may not coincide with financial accounts.

The extensive network of payments, subsidies, incentives, joint financing, and delegation of competences that has evolved over the years tends to blur the identification of spending authorities, as well as their accountability. Such complexities may also have contributed to hoisting particular private interests over national or regional policy objectives in some instances (Bieri, 1979, p. 48).

Tax Assignment

The Swiss Constitution is very explicit in separating taxing powers vertically. Originally, the center government collected all the indirect taxes (customs duties and excises), and cantonal and municipal governments were ascribed direct taxes (income and wealth taxes). Over the years, the confederation has, however, acquired powers in the realm of income taxation as well. This was mainly dictated by vertical fiscal imbalances and diverging revenue needs—not by stabilization policies. In the Swiss case, the federal income tax was introduced during World War I—in the disguise of a defense tax. World War II saw the introduction of yet another important federal tax, the turnover tax (a wholesale sales tax). Both “emergency taxes” stayed on, and their introduction was later sanctioned by a constitutional amendment. However, the law fixes maximum rates for these federal taxes, and “sunset” dates were established for their expiry.6

As to present arrangements, the following vertical assignment of taxes prevails in Switzerland:

  • Indirect taxation on private expenditures (value-added tax), excises, and customs duties are exclusively federal.

  • Tax bases of direct taxes on personal income and wealth and on business income and wealth are exploited concurrently by all levels of government, including municipalities—with priority given to the cantons.7

  • As a matter of principle “each tier of government is endowed with a full or partial tax authority for a number of taxes and not only one. Cantons and communes have also the right to levy user charges and fees for those services where this is appropriate” (Dafflon, 1991).

  • The cantons have an exclusive right to tax motor vehicles.

The bestowal of independent taxing powers to each layer of government enables the federal as well as regional governments to discharge their functions effectively without being dependent on each other. Contrary to Australia, for instance, cantonal dependence on grants is low in Switzerland, amounting to an average of roughly 20 percent of their budgets. If revenue sharing is included, it is about 27 percent. It should be noted, however, that the figure for grants comprises 7½ percent of municipal contributions to cantonal services—hence upward-oriented vertical grants. If these grants are deducted, the total dependency of cantons on the confederation is below 20 percent of their budget receipts (Dafflon, 1991).

Competing taxing powers at the two levels of government and diversity in fiscal federal arrangements create enormous problems of tax coordination, tax competition, and harmonization in Switzerland (Dafflon, 1986). Although the Constitution mandates the avoidance of cantonal double-taxation, legislation was slow to respond, and the principles governing horizontal tax coordination were largely developed by the Courts of Justice. The variety and complexity of subnational tax systems is only rivaled by that of the United States where tax competition as well as vertical and horizontal tax coordination has been a major concern for years. In Switzerland, case law has, however, established a uniform practice as regards which canton is allowed to tax which part of the income of individuals and companies.8 Some of the constitutional provisions attempting to cope with intercantonal double taxation or prohibiting special taxation of industries (Articles 46(2) and 31 of the Swiss Constitution) evoke conforming instruments embodied in the U.S. federal arrangements (like the “immunity doctrine” or the “due process of law clause” of the Fifth Amendment).

Equalization, Revenue Sharing, and Grants

Switzerland has a strong tendency to equalize differences in taxable capacity through asymmetrical vertical grants provided by the central government. The objective is to enable the cantons to provide similar levels of services without forcing them to levy taxes that are significantly more onerous than in other cantons. This prescript is firmly entrenched in the federal law on equalization of 1959. The principle of “uniformity of living conditions”—typical for German equalization arrangements—is not adhered to in Switzerland, however (Bieri, 1979, p. 12).

The redistributive aims are mainly achieved through three types of vertical financial adjustments: federal tax reimbursements, tax sharing, and specific purpose grants (usually conditional grants-in-aid).

Similar to Australia at the inception of the federation, the Swiss Confederation reimburses part of the revenues collected from customs duties (yet only on fuel and petrol). This reflects the fact that the confederation has delegated certain responsibilities (especially road building) to the cantons to be administered by them on behalf of the central government. The horizontal incidence of these payments is very complex, since they are mainly related to cantonal expenditures on road construction and improvement. Although financial assistance is calculated in accordance with these functions—and on a fiscal capacity indicator, which is discussed below—these transfers are essentially unconditional.

Tax sharing is often portrayed in Switzerland as a means to compensate the cantons for their tax sovereignties forgone as these were transferred to the confederation (Higy, 1973, p. 8). Such means, which have recently become more important under pressure from cantonal governments, can also be interpreted to form unconditional general revenue grants. They are basically distributed in accordance with regional revenue collection, population, and the canton’s relative fiscal needs, measured in terms of a statistical indicator. Tax-sharing revenues thus form part of an asymmetrical vertical perequation scheme that is closed ended.

The scheme can be imagined to work in two steps: (1) the federal contribution may be thought of as constituting a “closed pool”; and (2) horizontal perequation is then achieved through rules similar to those of the German Finanzausgleich (equalization among states).9

In 1992, tax sharing encompassed three revenue sources. The cantons received 30 percent of the federal direct tax on income and profits, 10 percent of the withholding tax, and 20 percent of a tax on exemption from military service.10 The latter tax share is distributed among the cantons on a derivation basis without equalization provisions. The direct tax share is allocated partly on the same basis and partly according to the fiscal capacity indicator discussed below. Revenue sharing from the withholding tax is allocated to the cantons according to population for one half, and according to fiscal capacity for the other half.

Traditionally, vertical intergovernmental transfers have been dominated by conditional grants-in-aid to be applied in accordance with policy priorities of the federal government. Conditional grants given to cantons by the confederation are usually closed ended with matching requirements. Some grants are provided with “pass through” obligations, that is, they have to be handed down to municipalities, sometimes together with mandatory additional funding of the canton.

In addition to providing funds for specific state functions according to national priorities, federal conditional grants are also intended to have some equalizing effect. As for tax reimbursement grants and for tax sharing, their horizontal allocation is partly based on a cantonal fiscal capacity measure.

In order to stabilize its own budget, the confederation has frequently reduced its grants to the cantons in equal proportions. This has diminished the equalization effects embedded in the arrangements because poorer cantons are harder hit under this approach. It also renders the distribution scheme inflexible and does not allow setting priorities that vary across regions. Moreover, the specific purpose grants have been criticized as rendering cantonal budgets rigid and entailing waste of resources. A major reform project was therefore initiated at the end of 1996 that aims to separate more clearly general revenue grants and equalization, on the one hand, and specific purpose payments and political control, on the other. It also attempts to render the grants system more efficient.

Fiscal Capacity and Equalization

Measurement of the cantons’ fiscal capacity has been modified several times. The actual formula comprises four ingredients (Dafflon, 1991).

  • The canton’s (adjusted) fiscal revenue per capita. This includes cantonal and local tax revenue from all sources (adjusted for differences in tax effort in order to obtain comparable figures).

  • The canton’s GDP per capita. Not only fiscal resources are stressed in the formula, but also private income (which seems to be a natural indicator of fiscal capacity); this is different from Germany or Australia where only public revenue is considered in the formulas for horizontal perequation.

  • Regional (cantonal and local) tax effort. In a federation that accords a large degree of tax discretion to regional governments, no canton can be allowed to benefit from higher grants by reducing its own fiscal effort below an acceptable level.11

  • The canton’s specific expenditure requirements. These enter the formula in a rather modest way—similar to expenditure needs in the German Finanzausgleich. Differences in the costs of providing services in mountainous regions are expressed by an indicator measuring the relative importance of agricultural areas below 800 meters; another proxy for differences in costs is relative population density. These indicators may appear to be quite crude, especially in comparison to the criteria developed by the Commonwealth Grants Commission in Australia.

Despite these provisions for horizontal perequation through asymmetrical vertical revenue sharing and grants, equalization is generally less important in Switzerland than in other Western federations—except the United States. The main outcome has been to increase the amount of subsidies given to poorer cantons, a virtually self-perpetuating category (Frey, 1977, pp. 98–100). As one prominent writer on Swiss federalism has concluded: “equalization in grant programs is of subsidiary interest only” in Switzerland (Dafflon, 1989, p. 213).


In principle, each public constituency is autonomous and independent in its budgetary procedures in Switzerland, including borrowing. Yet this does not mean that there is no effective budget constraint on deficit spending. The idea of “sound financing” of public budgets is firmly entrenched in people’s minds, and this consensus view governs fiscal federal arrangements in general. Moreover, direct democracy has secured that soft financing through money creation is prohibited by law, and obligatory finance referendums—or the mere threat of calling to the polls in the case of facultative referendums—act as an effective constraint on loan finance, as they do on taxation. The “golden rule” is formally established, which permits borrowing only for investment purposes on a pay-as-you-use basis. Article 42bis of the Constitution obliges the federal government to consolidate budget deficits with due “consideration for the state of the economy.” At the local level, borrowing is limited by law in most cantons, which apply the golden rule to their municipalities as well.

According to the Constitution, cantonal laws, or municipal decrees, the following can be subject to referendums: “engagement credits or project appropriations, the estimates (of the budget) as a whole, individual payment credits or annual appropriations, or loans” (Bieri, 1979, p. 70). Although the importance of finance referendums has declined, the eventuality of such referendums and a broad consensus on the issue seems to have worked, in the past, as an effective constraint on public borrowing. During the 1980s, Swiss governments produced even small financial surpluses. At the beginning of the 1990s, however, public budgets started to drift into deficits that reached 4.6 percent of GDP in 1993. This was mainly owing to cyclical aspects that predominantly affected the budget of the confederation, while municipalities were able to improve their fiscal position during this time.

Although budget deficits have recently been reduced significantly for the total public sector (2½ percent of GDP in 1996), despite continued economic stagnation, the experience of rising public borrowing requirements has spurred a discussion on constitutional limitations of deficit spending. An initiative was started in 1995 with a Vernehmlassungsverfahren (procedure to consult all interest groups involved) that recommended to reduce and stabilize the ratio of public expenditures to GDP rather than the deficit ratio itself. This may eventually find its way into the Constitution although it is yet unclear which form it may take.

Administrative Structure

Tax Administration

As in Germany, the administration of taxes is highly decentralized in Switzerland. Each layer of government administers its own taxes, with some compensation for administrative costs incurred for shared taxes. This reflects independent taxing autonomy of subcentral governments and the multiplicity of cantonal tax laws that have sprung from it. Unlike in Germany, however, tax administration is not necessarily guided by uniform rules and procedures, as tax legislation for one and the same tax might differ significantly among regions. The assessment of multi-cantonal companies is a burdensome task both for the private sector and for tax administrators, since the rules to avoid double taxation among regions have become rather complex over the years. Significant cooperation and exchange of information among fiscal administrations is required, rendering the process of tax assessment and verification very cumbersome. The notion of a “tax jungle” is often used in connection with Swiss taxation and its administrative intricacies.

Attempts made in Switzerland in the mid-1970s to introduce a uniform federal income tax with cantonal participation or to impose uniform cantonal direct taxes throughout the nation were both defeated. Following a constitutional amendment in 1977, the confederation has chosen the avenue of some formal tax harmonization of income taxes, and, more recently, harmonization of direct cantonal and communal taxation was successful to some extent, following conforming legislation.12 Furthermore, a referendum on the introduction of a VAT held in November 1993 was positive. This illustrates both the Swiss electorate’s willingness to accept basic reforms and a mounting disposition toward centralization and harmonization. Such change might also have been spurred by developments in neighboring countries, notably in the European Union, as well as by recent tendencies in world capital markets and international tax competition.

Budget Formulation and Implementation

Budgetary procedures in Switzerland differ significantly from those in other countries. Items to be included in the budget must have been legislated upon beforehand, and budget appropriations cannot be introduced in their own right. In other words, “public budgets are not material financial laws enacted by Parliament, but only documents or formal laws that are established by the government and discussed by Parliament. The power of the Legislature to decide priorities and the amounts of public outlays is limited” (Dafflon, 1977, p. 72).

The budget as well as medium-term financial planning—a planning tool of the Federal Council—serve mainly to establish a coherent view on public finances and on its macroeconomic impact. Its classification is by government function and types of expenditure as well as economic categories and modes of financing. The budget is established both on a cash flow and an accrual basis, and it also allows monitoring of government commitments.

The peculiarity of Swiss public budgeting shifts political responsibilities on to legislative and constitutional procedures rather than parliament and the budget itself. It is through these procedures that direct democracy comes into play. Although legislation is normally initiated by the parliament, the Constitution allows the electorate to challenge any proposition by constitutional initiatives, and the demand must eventually be put to the nation in a referendum. Similarly, any cantonal government can compel the government to examine draft legislation by the Councils.

Examination typically leads to the appointment of a Select Committee that opens consultation with public authorities, political parties, special interest groups, and organizations (Vernehmlassungsverfahren).13 While this process allows some particular interests to creep in, it also ensures that legislation is based on a broad social consensus.


Macroeconomic Management

Traditional theory of federalism suggests that macroeconomic management rests on a degree of centralization of government spending functions, as well as on the power (and willingness) to use the budget as a fiscal policy instrument. In Switzerland, the Constitution obliges the federal government to make provisions for balanced economic growth and all tiers of government to consider conjunctural aspects when establishing their budgets (Article 31quinquies); however, a highly decentralized public sector, as well as complex budgeting procedures, do not seem to be auspicious for macroeconomic stability. The lack of fiscal cooperation among the cantons and between the cantons and the federation appears to impede fiscal policy coordination even further. Moreover, built-in stabilizers are relatively weak given a considerable time lag between accrual of income and the collection of direct taxes. The only self-acting stabilization effect derives from federal unemployment insurance, which was introduced in 1977, and from social security contributions. The gross turnover tax, which also taxed investment and intermediate inputs, was even procyclical, and Swiss taxation has sometimes been characterized as an “automatic destabilizer” (Organization for Economic Cooperation and Development, 1993, p. 55). However, the introduction of VAT has significantly enhanced the stabilizing function of fiscal revenue.

Nevertheless, Switzerland has experienced remarkable fiscal stability over the postwar period, with relative price stability, full employment, and a strong currency. Apart from monetary and wage policies, migration, transborder commuters and seasonal workers, as well as fluctuating labor participation rates, especially before the introduction of federal unemployment insurance, seem to have cushioned cyclical shocks until more recently. However, unemployment—which stood at only ½ of 1 percent in 1990—has significantly risen since then (to about 4½ percent in mid-1996). This is mainly attributed to the institutional change of unemployment insurance and the behavior of labor supply (Organization for Economic Cooperation and Development, 1993, p. 98), apart from a recession and structural difficulties of the Swiss economy.

Recession and structural problems have also affected public budgets, which had deteriorated over the years. In the early 1990s, expenditure growth strongly exceeded revenues, forcing governments of all tiers into debt, although the debt was less for the local sector. The federal government has responded by submitting to parliament an extensive fiscal consolidation package, yet the very nature of the budgeting procedure has rendered its implementation difficult. This is the reason for suggesting a constitutional amendment in order to limit parliamentary spending powers as they exceed the proposal of the executive (frein aux dépenses).

The introduction of a modern broad-based consumption tax on goods and services in 1995 has strengthened the revenue side of the budget and removed the procyclical conduct of the turnover tax. It has also eliminated some of the structural handicaps of the old tax system, which discriminated against investment and exports—besides impeding effective decentralization and contracting out. Yet the VAT rate is limited by the Constitution, and the medium-term financial plan anticipated a continuing and widening structural budget deficit for 1996–97 (Gygi, 1994, p. 15). Excessive deficits were, however, successfully avoided mainly through a reduction of expenditures, which fell from 32.2 percent of GDP in 1993 to 30.5 percent in 1995. All layers of government took part in this consolidation exercise.

Structural Reform

Structural reform in Switzerland has centered around one principal theme: how to adapt to a changing economic environment, in particular the creation of the single market in Europe, and how to preserve Swiss competitiveness in world markets for industrial products and (mainly financial) services. Despite the rejection by Swiss voters in December 1992 of a proposal on entry into the European economic area, the Swiss government continues its policy aiming at adapting Swiss law to European Union law, in accordance with the treaty negotiated between the member countries of the European Community and the European Free Trade Association. A revised legislative package, “Swisslex,” which was based on elements of the former “Eurolex” package rejected by the referendum, was formally presented to parliament in early 1993. Most of this legislation was adopted rapidly, and some of it became effective as early as 1994.

Furthermore, the central government has embarked on a revitalization program that covers “competition policy, immigration, education, and research as well as the removal of obstacles to international trade and to the intercantonal exchange of services and goods” (Organization for Economic Cooperation and Development, 1993, p. 61). It is also adapting tax policies to the principles applying in the European Union, mainly in the realm of taxing income and of corporate law, besides the introduction of a VAT and the dismantling of customs duties and their revenue-neutral incorporation into excises.

Initiatives in structural reform are typically taken by the central government. This is not to say that cantons and municipalities lack ingenuity in structural reform—on the contrary, they are often the first to notice the need for change and to react to regional economic challenge, yet their policies are often uncoordinated as they attempt “to solve their own economic problems by offering taxation incentives for industry (in the form of temporary tax reductions for new investment, deferment of taxes and depreciation concessions).... All these factors lead to undesirable competition and structural distortions.” (Bieri, 1979, p. 92). It has also been argued that the cantons’ wide-ranging powers to regulate at the local level is a major obstacle to needed structural reform. Furthermore, lower levels of government are often constrained by particular private interests that may impinge on collective decision making. Swiss constitutional and legislative procedures thus have costs which ensue from widespread horizontal and vertical cartellization, restrictions on competition through regulations and public procurement practices, collusive behavior among firms, and protective attitudes of government agencies (Organization for Economic Cooperation and Development, 1992, p. 71ff).

The Swiss Constitution confers the right to counteract “harmful economic and social effects” stemming from such behavior to the confederation, which has engaged in more active competition policy more recently, and the general public seems to be well aware of the challenge and the need for reform. Many, however, view the European Union as a threat to the very nature of Switzerland’s political system. This is less true for the vertical distribution of power, which is also found in other Western European countries, notably in Germany. However, it is felt that European integration would jeopardize the very machinery of direct democracy and reconciliatory maneuvers between private and public interests as established in the traditional constitutional and legislative procedures.


If a lesson can be learned from the Swiss experience it is that “systems based on a strong reliance on cantonal sovereignty can work, even though it will likely result in wildly different—though widely accepted—personal (and other) tax systems” (Bird, 1986, p. 67). The picture of a “tax jungle” and lack of coordination is thus inappropriate. It may have been created by centralist interest groups to evoke resentments against a decentralized public decision-making process, yet it fails the test of an objective scrutiny into the workings of such a diversified system.

One feature of Swiss federalism is to be stressed in particular: an inherent tendency toward consensus and compromise and a strong commitment to safeguarding minority interests. Political decisions are seldom reached without prior consensus among all parties, and it would not be acceptable to decide on policy issues that are likely to meet resistance from substantial minority groups. Helvetian cooperative federalism means effective coordination at the horizontal level and institutionalized vertical consulting among political parties, economic and social groups, and government bodies at all levels. Established coordinating bodies (as in Germany) are missing, however. The Helvetian brand of “cooperative” federalism resembles more the Japanese system of consensus building and collective choice. In the past, this philosophy brought about effective policy coordination within a highly diversified policy structure, as it fostered political and economic stability, as well as growth and general welfare, without much formal demand management.

Yet the constitutional and legislative procedures have recently come under strain mainly through the process of European integration and increased competition in international markets. The need for structural reform of the Swiss economy is obvious. A comprehensive reform of fiscal federalism is currently being discussed. General economic trends are likely to strengthen central government involvement. Yet government authority at all levels remains subject to scrutiny by the Swiss electorate, and conservative trends have often impeded government action on issues sensitive to Switzerland’s neighbors (such as transalpine traffic). Thus, the Swiss model of political decision making remains antagonistic to the approach taken by the Maastricht Treaty for the European Union—despite its principle of subsidiarity. It remains to be seen whether Helvetian federalism can survive in an environment that calls for greater coordination at the supranational level and whether the principle of subsidiarity is sufficient to protect devolution of power and direct democracy in Switzerland.

Recently, the discrepancies between the German, French, and Italian cantons have widened sharply. This is true both in terms of economic performance (for example, unemployment is much higher in the French- and Italian-speaking cantons than in German-speaking cantons), as well as in terms of international orientation on the key question of membership in the European Union. Whereas the French- and Italian-speaking cantons favor membership, the German-speaking cantons oppose it strongly. These increasing economic and political diversities have put pressure on intergovernmental relations.

Three of the 23 cantons are divided into half cantons. In addition, there is a municipal substructure of about 3,000 communes that are under cantonal control. As in Germany—and contrary to Australia—this latter layer of government is very important in Switzerland. Since the cantons may delegate government functions to their communities at extremely varying degrees, it is best to treat the state level in Switzerland inclusive of communal services (and revenues).

Each of the 20 full cantons has two representatives in the Council of States; the six half cantons have one representative each.

For income tax, for instance, where sovereignty is shared by the confederation and the cantons, there are 26 + 1 different tax codes with varying definitions for tax bases, exemptions, and deductible items, as well as for tax rates.

The sum of outlays of each level of government exceeded the consolidated total by more than 20 percent in 1993.

The constitutional basis for the confederation’s direct tax and turnover tax ended in 1994. A proposal for a tax reform securing revenue for the confederation was rejected in 1991, forcing the government to embark on an emergency program and, later, on a fourth referendum on introducing a value-added tax (VAT) in Switzerland. This referendum was accepted in November 1993 granting the adoption of VAT at the beginning of 1995. Again, a sunset date was established (the year 2006), and the vote, once again, limits the rate by the Constitution, at 6.5 percent, which is significantly lower than that in neighboring countries and well below the minimum rate established for members of the European Union (15 percent) (see Article 41ter of the Constitution).

There is opposition against the federal government exploiting direct taxes, however, and a conforming constitutional initiative was lodged in November 1993.

For a further discussion see, for instance, Dafflon (1977), pp. 88ff.

The federal government’s contribution to such a “pool” was zero in Germany before unification, hence the pool must be filled through contributions made by the richer states. As to its impact on horizontal fiscal incidence the Swiss model is, however, rather similar to that of the German Finanzausgleich. In particular, if a canton’s fiscal capacity falls, the compensating fiscal effect of the revenue-sharing grant is made up by other cantons, not by the confederation.

This tax is paid by male Swiss citizens exempted from military service. It is essentially a poll tax that is proportional to income and inversely related to the number of days of military service completed.

A similar correction is made for horizontal perequation through special grants in Australia. In Germany—with its uniformity in taxation—such a criterion is not applied (and would not make much sense).

Loi fédérale du 14 décembre 1990 sur l’harmonisation des impôts directs des cantons et des communes. The cantons and communes were given eight years to adapt their respective legislation. After this term, federal rules will apply automatically. At the same time, the federal law on direct taxation has been coordinated.

For a further discussion of constitutional and legislative procedures in Switzerland, see Laufenburger (1961) or a summary in Dafflon (1977), p. 72ff.


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