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Looking at the countries with the lowest tax rate we can see many countries that derive their riches from oil supplies and thus can afford to have a low income tax rate and a low VAT rate. But there is one exception - Switzerland. A very advanced country with no oil reserves and a very rugged terrain. How is it possible for them to have such a low tax rate?

I am aware of their (in)famous banking system that bring in a lot of money but is that the only reason?

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    While Swiss taxation and government are indeed lower than most of its European neighbours, I don't think the linked Wikipedia page is really useful. From the data there, Switzerland's income tax rates don't appear to be much lower (VAT is much lower though, but it doesn't appear to be what you are asking). – xngtng May 21 at 9:42
  • @xngtng updated to include both types of taxes – JonathanReez May 21 at 9:44
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    @JonathanReez if you actually live there it's just not that low. It's that simple. It's incredibly hard to compare tax rates. Sales taxes, council (real estate) taxes, the nature of cap gains taxes, breaks for different things. It's almost impossible to compare on paper. – Fattie May 21 at 16:30
  • @JonathanReez , banking has nothing much to do with anything - that's more of a myth. there are banks everywhere! – Fattie May 21 at 16:38
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    Just BTW if thinking of moving there, it depends drastically on which Canton (state) you live in. (Particularly for some categories of expat.) – Fattie May 21 at 16:39
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Comparing taxation across nations is not trivial, because different nations use different means of taxation; just because the VAT is low doesn't mean that the overall tax burden is.

Since you asked about taxes in general, let's look at the OECD statistics for "Total Tax Revenue as % of GDP". Their summary report about Switzerland writes:

Switzerland ranked 30th out of 37 OECD countries in terms of the tax-to-GDP ratio in 2019. In 2019, Switzerland had a tax-to-GDP ratio of 28.5% compared with the OECD average of 33.8%.

However, Switzerland has a somewhat unusual tax structure. Here are the various tax categories (OECD Stats: tax revenue as % of GDP, 2018):

Category Switzerland OECD Average
Total Tax Revenue 28.05 33.88
1000 Taxes on income, profits and capital gains 13.37 11.52
1100 ... of individuals 8.60 8.14
1200 ... of corporates 3.2 3.14
1300 ... unallocable between 1100 and 1200 1.57 0.24
2000 Social security contributions (SSC) 6.63 9.00
3000 Taxes on payroll and workforce 0 0.42
4000 Taxes on property 2.05 1.86
5000 Taxes on goods and services 5.84 10.94
6000 Taxes other than 1000, 2000, 3000, 4000 and 5000 0.15 0.15

As you can see, taxes on income, profits and capital gains are significantly above the OECD average, but most of that difference is the "unallocable taxes" category (specifically, the Withholding Tax and the Property Gains Tax, which the Wikipedia table does not take into account).

However, social security contributions are a lot lower than average. This is caused by the Swiss hybrid pension scheme, which consists of 3 pillars. The first pillar is mandatory, executed by the state, and therefore considered a tax. The second pillar is also mandatory, but executed by independent fund managers. Since the money is paid to private entities rather than the state, this is not considered a tax by OECD. This second pillar amounts to about 6% GDP. If it were counted, social security contributions would be about 13%, well above the OECD average of 9%. The 3rd pillar is voluntary, and thus not considered a tax either. However, since it replaces the 2nd pillar for the self employed (who can't use the 2nd pillar), one might argue that it should be counted, too.

Something similar happens with health insurance: In Switzerland, health insurance is mandatory, but everyone chooses their insurance company. Since the health insurance premiums are paid to a private company rather than the state, the OECD does not consider them a tax. In contrast, in some European countries health insurance is fully tax funded. (and yes, health insurance premiums matter; in Switzerland they amount to 7.8% of GDP).

That is, mandatory social security payments worth 14% of GDP are not considered taxes by OECD because Switzerland chose to have part of their social security systems executed by private entities regulated and supervised by the state, rather than executed by the state directly.

If these mandatory social security contributions were counted, Switzerland's total tax revenue would be about 42% GDP - well above the OECD average of 34%, and comparable to Scandinavian countries such as Norway (39.9%), or Sweden (42.9%) known for their good (and fully state funded) social security institutions.

This shows why comparing taxes in isolation is meaningless. Taxes measure how much money flows to the state. They do not measure what that money does, or how much money flows back. Does it really make a difference whether health insurance premiums are paid to the state, or to a private company? I have to pay either way.

In summary, the Swiss do pay low VAT. They also pay above average income taxes. And they pay hefty mandatory pension fund and health insurance premiums on top.

The Swiss tax wonder is a myth.

PS: Banking contributes only 5% of the Swiss GDP. So much for the infamous reputation ;-)

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    Are 2nd pillar contributions counted as tax by OECD? They are also not paid to the state and it is controlled by independent fund managers. – xngtng May 21 at 18:11
  • @xngtng: Good point, comparision with national statistics (which list the pillars separately) reveals they aren't. Will edit, thanks for pointing that out! – meriton May 22 at 8:21
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    One thing that you might want to point out: It's not a completely meaningless artifact of different accounting methods that Switzerland has low tax according to some measures. Things that are counted as a tax are usually redistributive, rich people contribute more towards it. Things that are not counted as a tax (health, second and third pillar of pension scheme) do not redistribute any wealth. That means that the fraction of mandatory social security spending of the total household income is much much higher for low income people. – Nobody May 23 at 16:31
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    @Nobody: That is a good point, but it is not quite that simple. For instance, the 27% with the lowest income receive subsidies for paying their health insurance premium ("Prämienverbilligung"). Granted, these subsidies are financed by taxes, not the premiums of the wealthy. But it shows that you can not draw conclusions about how social a country is by only looking at taxes, because redistribution can not only happen by taking more money from the rich, but also by giving more money to the poor. – meriton May 23 at 17:35
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    I should also point out that the lower tax rate in Switzerland is chiefly lower VAT, which is only weakly redistributive, while the strongly redistributive taxes (income tax, property tax) are slightly above the OECD average. I don't know whether Switzerland is more or less social than the OECD average, but we would need to look at an entirely different dataset to properly assess this. – meriton May 23 at 17:39
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In the end, Switzerland is a very rich country and Swiss francs are fanatically strong as a currency. Even a lower rate can bring in more "purchasing power" (abusing the term here) for the government. This is a complex question with many factors that I can't address (but you definitely can find a lot of articles and potential explanations elsewhere on "why Switzerland is so rich"), at least not under this question.


But in relation to taxation in particular:

If you are asking why VAT or a particular type of tax is low, this is an internal political decision.

In Switzerland's case, VAT is only levied by the Confederation (federal government). The Federal Constitution authorizes the Confederation to levy certain taxes only (including VAT) and prohibits the cantons or their communes from levy a VAT or taxes similar to a VAT.

The Confederation represents only a part of public administration in the Swiss federal system (in terms of government revenue: 67bn for the Confederation, 75bn combined for cantons and communes). If cantons were to replace a similar proportion of revenue with a VAT, the combined rate would be similar to other European countries, albeit probably still lower.


The Confederation and cantons also levy corporate and individual income taxes. In addition, all cantons impose a wealth tax on an individual's net worth. This does not represent a big part of the revenue for the cantons, but still significant.

The taxation rates vary wildly from canton to canton or even commune (village/town/city) to commune. A single person earning 80k francs per year would pay ~12k in income taxes (of course, a rough estimation taking into account average deductions) in Lausanne, but only ~4k francs in Zoug.

With the subsidiary principle, the decisions are taken locally and I cannot explain every canton's decision on their taxation structure and budget spendings. Some explanations and comparisons can be found here (in French). But in general the same reason applies, rich countries or cantons can afford a lower taxation rate to provide a similar level of service to poorer countries or cantons. This effect is more pronounced at the cantonal level because the cost of labour etc. is similar within a country (than within the world).

Last but not the least, often, mandatory (private) health insurance premiums are not counted as tax for Switzerland, sometimes neither are the mandatory (private) retirement fund for most employed persons.


But in general, Switzerland still spends less. In terms of total taxation and expenditure as a ratio to GDP, Switzerland's tax revenue represents ~28% of GDP and the government expenditure represents 34% of the GDP (46% and 56% resp. for France, 37% and 44% resp. for Germany).

For social welfare in particular, Switzerland spends far less (less than 20% GDP).

As these values measure against the GDP, the first paragraph of the answer also applies.

Switzerland also has an individualist reputation and this also plays into politics and deciding the role of government in the society (for better or worse).

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    I would recommend adding some headers or block quotes to make your post more readable – Ekadh Singh May 21 at 12:08
  • Citation for "if we consider the health insurance and pension fund, the number would still be in the lower end"? Looks like the OECD numbers you mention to do not include health insurance? What are the numbers with health insurance? – meriton May 22 at 10:04
  • @meriton I was looking at the net social spending and comparing against the neighbours. But now I think it is misleading so I will remove the sentence. Thanks. – xngtng May 24 at 11:44
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Because you look in the wrong direction.

Personal income taxes are rarely relevant for the state, there's more populism (and preventing middle class from having savings).

Yes, Switzerland has a low income and VAT tax, and low corporate taxes but...

The average income is high. So even 'low' percent tax produces big number.

There are a lot of companies having their headquarters in Switzerland. And a lot of postbox companies. They pay relatively low tax, but they all pay that tax in Switzerland, even if in most cases they produce most of their income outside of Switzerland (it's effectively a tax drainage).

And last but not least: Switzerland is one of the few countries that have total ownership tax. If you're a Swiss resident, your whole ownership is taxed, not only properties, but cars, ships, bank accounts, shares and funds, arts etc. This tax might look low (0.2%-0.5%), but it's calculated from your total ownership value each year. And there are people who are really rich!

The real answer is, that in the countries like Germany or Sweden, the populist politics let you see only the tip of the iceberg, tax middle class like wild, and let rich pay almost no taxes, while Switzerland allows middle class pay little taxes, and ask the rich for the checkout.

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    According to OECD stats, Swiss income taxes (13.37% GDP) are above the OECD average (11.52% GDP). In addition, property tax amounts to a mere 2.05% GDP, only marginally higher than the OECD average of 1.86% GDP, and can not possibly explain how Switzerland manages to have much lower taxes on goods and services (5.8% GDP) than the OECD average of 10.9% GDP. Put differently, the "missing" VAT is over 20 times bigger than the additional property tax. – meriton May 22 at 9:45
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Tax is not particularly low there. It's that simple.

https://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_to_GDP_ratio

It's completely identical to many other countries such as Australia, USA, Korea, Argentina.

(The link given in the OP is utterly useless. The link given here is better but still useless.)

Extremely long essay on the topic:

https://money.stackexchange.com/a/139934/41786

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