Why Swiss income taxes are among the lowest in Europe
Switzerland may be an expensive country to live in, but when it comes to taxation, its rate is among the lowest in Europe. Why?
First things first: around 30 percent of the taxes on your earned income go to the federal government, 40 percent to the canton, and the remaining 30 percent to the commune where you live.
At all of these levels, people living in Switzerland “enjoy some of the lowest tax rates in Europe," according to the Swiss government.
For instance, in a comparison of tax rates compiled by the Organisaton for Economic Cooperation and Development (OECD), a single adult in Switzerland pays 11.5 percent of gross wages in taxes. In Europe, only residents of Poland pay less taxes.
A Swiss family, with two children where both parents earn an income, pays 8.9 percent in taxes — again, among the lowest rates in the world.
As a comparison for the second case, this rate is 34.5 percent in Denmark, 16.1 percent in Sweden, 14.8 percent in Italy, 13.2 in the UK, 12 percent in France, and 9.1 percent in Germany.
You may think it’s a paradox that a high-cost and wealthy country like Switzerland has such low tax rates, but there are actually several factors explaining that.
Wealth
Every country, rich or poor, needs tax revenue to be able to develop various public projects and programmes.
Common wisdom would dictate that the wealthier the country, the more taxes it should levy on its citizens’ wages. But that is not so.
In fact, if you tax a lower percentage of the high (in comparison with other nations) income, that still yields lot of tax money.
The Swiss pay less taxes than many of their European counterparts. Photo: Claudio Schwarz on Unsplash
Employment
Switzerland has traditionally had a low unemployment rate. This has an impact on tax revenue.
How?
The more people are employed and paying taxes, the more money comes steadliy into government coffers — even at a low taxation rate.
Government debt
The more indebted a country is, the more tax money it needs to pay it off.
Contrary to the eurozone, and many other nations as well, Switzerland’s debt is low.
That is because the Swiss are not only fiscally conservative, but also good at managing money. This is thanks to the debt brake that they put in place — a mechanism for managing federal expenditures, designed to prevent chronic deficits.
"With a debt ratio of less than 30 percent, Switzerland remains in excellent shape by international standards. The debt brake has also allowed for a considerable overall reduction in federal debt,” the government said.
Just to put that 30-percent debt in a wider context, the EU’s debt is more than double of Switzerland’s — 84 percent.
Less spending on social programmes
Whether this fiscal conservatism is good or bad, the fact is that in Switzerland, services such as government healthcare, free or subsidised childcare, or long parental leaves — services that are paid out of tax money in other countries — are either non-existent or limited.
READ ALSO: What to know about Geneva's plan to extend parental leave
There are two reasons for that.
One is the (still) prevalent mentality that people should be self-sufficient, rather than depend on the government — which, in essence, means that other taxpayers should not support them.
The other is the pragmatic belief that social assistance, whether in the form of various subsidies or handouts, should be given only to people who truly need it, while everyone else has to be responsible for themselves and not over-rely on the state. And this raises yet another paradox.
If Switzerland collects less taxes than most other nations in Europe, how does it manage to have world-class infrastructure, such as excellent roads?
You may be surprised to learn that income taxes are not used, or at least not widely, for building and maintenance of motorways.
Instead, these funds come mainly from car road taxes, and taxes from the sale of fuel.
The compulsory motorway sticker is also a source of revenue.
READ ALSO: What you need to know about Switzerland’s motorway charge sticker
What does Switzerland spend tax money on?
It spends the biggest chunk of public money — nearly 40 percent — "on social protection," which includes primarily old-age pensions (AHV/AVS), along with unemployment, disability, and survivors insurance.
Next is education (15.6 percent), economy (13.4 percent), general public services (11.9 percent), healthcare (7.7 percent), public order and safety (4.6 percent), with the remainder going towards culture, environment, and the military.
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First things first: around 30 percent of the taxes on your earned income go to the federal government, 40 percent to the canton, and the remaining 30 percent to the commune where you live.
At all of these levels, people living in Switzerland “enjoy some of the lowest tax rates in Europe," according to the Swiss government.
For instance, in a comparison of tax rates compiled by the Organisaton for Economic Cooperation and Development (OECD), a single adult in Switzerland pays 11.5 percent of gross wages in taxes. In Europe, only residents of Poland pay less taxes.
A Swiss family, with two children where both parents earn an income, pays 8.9 percent in taxes — again, among the lowest rates in the world.
As a comparison for the second case, this rate is 34.5 percent in Denmark, 16.1 percent in Sweden, 14.8 percent in Italy, 13.2 in the UK, 12 percent in France, and 9.1 percent in Germany.
You may think it’s a paradox that a high-cost and wealthy country like Switzerland has such low tax rates, but there are actually several factors explaining that.
Wealth
Every country, rich or poor, needs tax revenue to be able to develop various public projects and programmes.
Common wisdom would dictate that the wealthier the country, the more taxes it should levy on its citizens’ wages. But that is not so.
In fact, if you tax a lower percentage of the high (in comparison with other nations) income, that still yields lot of tax money.
Employment
Switzerland has traditionally had a low unemployment rate. This has an impact on tax revenue.
How?
The more people are employed and paying taxes, the more money comes steadliy into government coffers — even at a low taxation rate.
Government debt
The more indebted a country is, the more tax money it needs to pay it off.
Contrary to the eurozone, and many other nations as well, Switzerland’s debt is low.
That is because the Swiss are not only fiscally conservative, but also good at managing money. This is thanks to the debt brake that they put in place — a mechanism for managing federal expenditures, designed to prevent chronic deficits.
"With a debt ratio of less than 30 percent, Switzerland remains in excellent shape by international standards. The debt brake has also allowed for a considerable overall reduction in federal debt,” the government said.
Just to put that 30-percent debt in a wider context, the EU’s debt is more than double of Switzerland’s — 84 percent.
Less spending on social programmes
Whether this fiscal conservatism is good or bad, the fact is that in Switzerland, services such as government healthcare, free or subsidised childcare, or long parental leaves — services that are paid out of tax money in other countries — are either non-existent or limited.
READ ALSO: What to know about Geneva's plan to extend parental leave
There are two reasons for that.
One is the (still) prevalent mentality that people should be self-sufficient, rather than depend on the government — which, in essence, means that other taxpayers should not support them.
The other is the pragmatic belief that social assistance, whether in the form of various subsidies or handouts, should be given only to people who truly need it, while everyone else has to be responsible for themselves and not over-rely on the state. And this raises yet another paradox.
If Switzerland collects less taxes than most other nations in Europe, how does it manage to have world-class infrastructure, such as excellent roads?
You may be surprised to learn that income taxes are not used, or at least not widely, for building and maintenance of motorways.
Instead, these funds come mainly from car road taxes, and taxes from the sale of fuel.
The compulsory motorway sticker is also a source of revenue.
READ ALSO: What you need to know about Switzerland’s motorway charge sticker
What does Switzerland spend tax money on?
It spends the biggest chunk of public money — nearly 40 percent — "on social protection," which includes primarily old-age pensions (AHV/AVS), along with unemployment, disability, and survivors insurance.
Next is education (15.6 percent), economy (13.4 percent), general public services (11.9 percent), healthcare (7.7 percent), public order and safety (4.6 percent), with the remainder going towards culture, environment, and the military.
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