Advertisement

Constitutional Political Economy

, Volume 28, Issue 2, pp 97–116 | Cite as

Federalism and horizontal equity across Switzerland and Germany: a new rationale for a decentralized fiscal structure

  • Peter SchwarzEmail author
Original Paper
  • 296 Downloads

Abstract

Higher wages in agglomerations often do not reflect an increase in purchasing power, because a high percentage of the wage increase has to be spend on housing. Thus, after housing is considered taxpayers may have identical disposable incomes, although gross as well as after-tax income may differ. This unequal treatment of taxpayers is due to the taxation of nominal incomes. If tax systems taxed income based on regionally adjusted purchasing power, horizontal equity would be assured. Since this is an unfeasible option, the differences could be corrected by allowing a deduction on housing costs. Given the large revenue losses, it seems unlikely that governments in OECD countries move to a system where rents are deductible in determining taxable income. Another alternative—taxation of potentially achievable income—is unfeasible due to political opposition. A final and less costly alternative is fiscal federalism. Granting autonomy to the lower levels of the government offers local governments the power to design the tax system in a way that reflects differences in living costs. Although this option does not necessarily imply that governments effectively design the tax schedule in that way, a comparison of Germany and Switzerland shows that governments are aware of these differences across regions. The paper concludes that granting tax autonomy to the lower tiers in Germany would make many citizens, especially in the Southern part, better off and would promote horizontal equity among German taxpayers.

Keywords

Fiscal federalism Rent Horizontal equity Ability to pay House prices Tax autonomy 

JEL Classification

H71 H73 

Notes

Acknowledgements

I thank Martin Daepp, Bruno Jeitziner, Alowin Moes, Mario Morger, Simon Schnyder, one anonymous referee and the editor for useful suggestions. The opinions, findings and conclusions expressed in this paper are those of the author and do not necessarily reflect the views of the Swiss Federal Department of Finance. All remaining errors are mine.

References

  1. Baldwin, R. E., & Krugman, P. (2002). Agglomeration, integration and tax harmonisation. European Economic Review, 48, 1–23.CrossRefGoogle Scholar
  2. Besley, T., & Case, A. (1995). Incumbent behavior: Vote-seeking; tax setting and yardstick competition. American Economic Review, 85(1), 25–45.Google Scholar
  3. Blankart, C. B. (2000). The process of centralization: A constitutional view. Constitutional Political Economy, 11(1), 27–39.CrossRefGoogle Scholar
  4. Buchanan, J. (1950). Federalism and fiscal equity. American Economic Review, 40, 583–599.Google Scholar
  5. Bucovetsky, S. (1991). Asymmetric tax competition. Journal of Urban Economics, 30, 167–181.CrossRefGoogle Scholar
  6. Cai, H., & Treisman, D. (2004). State corroding federalism. Journal of Public Economics, 88(3–4), 819–843.CrossRefGoogle Scholar
  7. Daepp, M. (2010). Vereinfachung der Einkommensbesteuerung. https://www.estv.admin.ch/estv/de/home/allgemein/dokumentation/zahlen-und-fakten/berichte.html. Accessed Oct 14 2015.
  8. Döring, T., & Schnellenbach, J. (2011). A tale of two federalisms: Germany, the United States and the ubiquity of centralization. Constitutional Political Economy, 22, 83–102.CrossRefGoogle Scholar
  9. Eichenberger, R. (1994). The benefits of federalism and the risk of overcentralization. Kyklos, 47(3), 403–420.CrossRefGoogle Scholar
  10. Eichenberger, R., & Stadelmann, D. (2010). How federalism protects future generations from today’s public debts. Review of Law & Economics, 6(3), 395–420.CrossRefGoogle Scholar
  11. Feld, L. (2014). James Buchanan’s theory of federalism: From fiscal equity to the ideal political order. Constitutional Political Economy, 25, 231–252.CrossRefGoogle Scholar
  12. Frey, B. S., & Eichenberger, R. (1996). FOCJ: Competitive governments for Europe. International Review of Law and Economics, 16(3), 315–327.CrossRefGoogle Scholar
  13. Mantzavinos, D. (2010). Federalism and individual liberty. Constitutional Political Economy, 21, 101–118.CrossRefGoogle Scholar
  14. Morger, M. (2012). Steuerpolitik und Mobilität. Einfluss der Besteuerung auf Arbeits- und Wohnsitzwahl der Haushalte sowie auf Standortentscheidungen der Unternehmen. https://www.estv.admin.ch/estv/de/home/allgemein/dokumentation/zahlen-und-fakten/berichte.html. Accessed Oct 14 2015.
  15. Oates, W. E. (1999). An essay in fiscal federalism. Journal of Economic Literature, 37, 1120–1149.CrossRefGoogle Scholar
  16. Oates, W. E. (2008). On the evolution of fiscal federalism: Theory and institutions. National Tax Journal, 61, 313–334.CrossRefGoogle Scholar
  17. OECD. (2016). Taxing wages. Paris.Google Scholar
  18. Richter, W. (2006). Efficiency effects of tax deductions for work-related expenses. International Tax and Public Finance, 13, 685–699.CrossRefGoogle Scholar
  19. Schmidheiny, K. (2006). Income segregation and local progressive taxation: Empirical evidence from Switzerland. Journal of Public Economics, 90(3), 429–458.CrossRefGoogle Scholar
  20. Stadelmann, D., & Eichenberger, R. (2014). Public debts capitalize into housing prices: Empirical evidence for a new perspective on debt incidence. International Tax and Public Finance, 21(3), 498–529.CrossRefGoogle Scholar
  21. Stöwhase, S., & Traxler, C. (2005). Tax evasion and auditing in a federal economy. International Tax and Public Finance, 12(4), 515–531.CrossRefGoogle Scholar
  22. Tiebout, C. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64, 416–424.CrossRefGoogle Scholar
  23. Weingast, B., Shepsle, K., & Johnsen, C. (1981). The political economy of benefits and costs: A neoclassical approach to distributive politics. Journal of Political Economy, 89(4), 642–664.CrossRefGoogle Scholar
  24. Wilson, J. D. (1991). Tax competition with interregional differences in factor endowments. Regional Science and Urban Economics, 21(3), 423–451.CrossRefGoogle Scholar
  25. Wrede, M. (2000). Tax deductibility of commuting expenses and leisure: On the tax treatment of time-saving expenditure. Finanzarchiv, 57, 216–224.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  1. 1.Swiss Federal Tax AdministrationBernSwitzerland

Personalised recommendations