Sunday 4 September 2011

Should the Rich Pay a Lower Tax Rate?

"Court strikes down Obwalden tax break for rich" says

The Swiss Federal Court has ruled that canton Obwalden's degressive tax system, aimed at attracting wealthy residents, is unconstitutional.

The country's highest court said on Friday that degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance.
...

Obwalden had adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent.

It was introduced in 2006 following a cantonal vote as a way of boosting the fortunes of Obwalden, one of the poorest cantons located in Switzerland's mountainous centre.



18 comments:

  1. "In 1291 Obwalden joined Nidwalden to form an alliance with Uri and Schwyz which is the basis of modern day Switzerland. "http://en.wikipedia.org/wiki/Obwald

    And Obwalden is in the very center of Switzerland-- quintessentially Swiss.

    ReplyDelete
  2. I agree with the original ruling in this case and do not believe that higher income earners should be taxed at a lower rate. It makes more sense to use a graduated income taxing system, similar to the one in the United States. Higher earners should be taxed at a higher rate as they still end up walking away with a higher proportion of disposable income relative to gross income as compared to lower income earners.

    ReplyDelete
  3. I am not so sure how I feel about the ruling, but I could say definitively that if I was making that much money, and only had to pay 1% that I couldn't pack my bags fast enough and catch the next flight........

    As for my personal feeling, I tend to side with Buffet, while it might discourage many things, taxation is a basis for what we do here. There is no reason why Buffet should be paying an overall lower percentage than compared to his staff, the ultra wealthy, and super wealthy should be paying at least the same percentage.

    ReplyDelete
  4. Progressive and digressive tax codes are both inherently unfair and eventually disenfranchise some portion of the tax base. It is interesting, though, the outrage this would draw if a US locality adopted such a tax code - all while many taxpayers in the US support the other extreme of our progressive tax code.

    Certainly even with our country's top marginal tax bracket of 35%, the highest earners in our country still walk away with a larger disposable income - but they also become very good at sheltering and hiding income.

    Dr. Art Laffer's idea of a flat tax with almost no exemptions is an interesting balance between these two extremes (the US tax code and the Swiss local tax code). Higher incomes pay higher taxes, but marginally no more for each additional dollar earned. The idea is that this promotes economic growth, and reduces the incentive to shelter income, and can increase government revenues - which is, after all, the primary functions of taxes (not to make things fair)!

    ReplyDelete
  5. I agree with Danielle that a graduated income tax is much more practical than a digressive tax. Moral/political reasons aside, a digressive tax that only taxes the top income earners at 1% of income is clearly not revenue maximizing. From the perspective of the local government (and continuing the theme of Dr. Laffer), an income tax of 1% on the wealthiest individuals would certainly lie on the lower half of the Laffer curve, no where near government revenue maximization. There certainly is merit to the idea of drawing successful/high earning individuals to Obwalden to stimulate the economy, but the policy seems unsustainable and thus these individuals would have an incentive to leave once the taxes were increased.

    ReplyDelete
  6. Even though the 1% tax rate is appealing to high income earning individuals, it may not be revenue maximizing for the government. To develop the area in a productive and resourceful manner, the administration must ensure that the benefits are allocated in the correct target areas. A graduated income tax makes more sense for what the government is trying to achieve.

    ReplyDelete
  7. I cannot make a personal judgement of which country's tax rate is the most fair. The digressive system seems completely unjust, but the US tax system has its own flaws. The case of the Obwalden tax break is very similar to the state of Delaware's corporate tax rate. Companies will set up a one man shop in Delaware simply for tax benefit purposes. Some companies choose to move to Delaware and some do not based on their freedom of choice. If you want to maximize the well being of society the tax rates should be in the power of the state allowing people to migrate according to their personal beliefs. For that reason I would not overturn the 1% tax rate because the people who feel it is unjust can move to another country, state, or canton in order to maximize their own personal well being.

    ReplyDelete
  8. I agree with most of you that a gradual tax system should be adopted. In other words, the rich is supposed to pay a higher rate for their upper-division income, which is the distance between the top middle-class and them. By reallocating this part of money, we are running a more effective surplus maximization process. It is because people have diminishing marginal utility of income. That means the rich values the 100,000,001st dollar coming into their pocket much less than how the poor values their 1001st. But the 1001st dollar coming into the rich's pocket is considered as valuable as the poor's 1001st. On basis of increasing tax rate while marginal utility is falling, we can transfer the wealth and enjoy a positive change in total surplus.

    ReplyDelete
  9. It surprises me that Obwalden would even attempt to try this. It’s hard for me to fathom that they seriously tried getting this past people. Do they think everyone around them is a moron? I’m sure everyone would love to have this tax policy in there region. One percent of a ton of money is still a ton of money. What government wouldn’t enjoy having a giant budget and a town full of rich, successful people making you look great, which would inevitably lead you to having a successful career in government. I don’t know exactly what the optimal tax rate to maximize productivity, but whatever that is, is what I believe everyone should pay. Income should not determine the tax rate. I don’t believe in the trickle-down theory, and it probably leave the lower income people bitter and less motivated to work.

    ReplyDelete
  10. This tax theory does not make sense at all. Why would the poor be taxed more than the rich? The gap between these two social classes would widen even more, creating a huge imbalance in society.

    ReplyDelete
  11. This degressive tax system is against the basic principle of levying taxes i.e. redistributing wealth from the rich to the poor. It also fails to achieve revenue maximization of the government.However, it does work in the region's favor to some extent because it may attract the rich to the area. This is actually similar in part to what China did in the early ages of "reform and open up". The government offered phenomenal tax breaks to some super-jumbo multinational corporations in the hope that they may invest in China. This did work, but in high price. And now what the Chinese government is doing is to reduce and eliminate the tax breaks because they know it can't be long lasting. Such systems will irritate the poor and cause social turbulence. It also hurts local enterprises who are usually less well-to-do than foreigners.

    ReplyDelete
  12. I don't agree with this degressive tax system. I guess this is good news only to rich people and not poor people. It will make rich people richer and poor people poorer. This won't make the country powerful or better than it was before.

    ReplyDelete
  13. I don't agree with this degressive tax system. I guess this is good news only to rich people and not poor people. It will make rich people richer and poor people poorer. This won't make the country powerful or better than it was before.

    ReplyDelete
  14. In my opinion, I do not think that there should be a digressive tax rate to the extent that Obwalden wants. I agree that in order for high income earners to continue to create new jobs and keep money flowing through the economy, there needs to be some tax incentive for them to do so, but a pure digressive system is unfair.

    The progressive tax rate, on the contrary, is not the answer either. More specifically the tax brackets that we have in the United States. If the goal is fair taxation, then a flat tax income tax should be proposed, with additional provisions for maximizing government tax revenue

    ReplyDelete
  15. I don't think that any class should be taxed highly on income. Consumption taxes are superior to income taxes in my opinion. But leveling a degressive tax system simply to attract more rich people (they are presumably going after the bonuses to society and the economy resulting from having an affluent populace) at the expense of the poor doesn't seem like an idea that will be effective in achieving the desired goal and it will result in greater inequality.

    I don't think there is any doubt that expecting the rich to pay more taxes is not an unreasonable expectation in light of the multitude of benefits which can result (more efficient distribution of wealth).

    ReplyDelete
  16. This idea is a little abstract...

    I believe that Obwalden's digressive tax rate idea would be the end to a lot motivation in Switzerland. If it was implemented I think it could lead to an unfair cycle of poverty for many people. Yes, there would be motivation for the rich to become wealthier which (if these wealthy are CEO's and company owners) could lead to job creation in the economy but could also lead to de-motivation from those who are already low-income paying high taxes.

    I feel as if the world could lose out on many new discoveries and inventions from those who could lose the motivation to take risks for they are scared of losing money and then having higher taxes.

    ReplyDelete
  17. I've heard/read that digressive taxes are implemented when taxing things that people in the lower income brackets use or consume in higher proportions when compared to people in the higher tax brackets. For example, excise taxes on alcohol are digressive, and research by the Tax Foundation has shown that lower-income individuals spend more of their income paying alcohol taxes than their higher-income counterparts.

    Other than examples like that, I don't in what other instances a degressive tax system is or should be used. In any case, it seems to be used as an incentive for people to act a certain way. Other than wealthier people moving to Obwalden, could this tax also encourage people with lower incomes to try to find higher paying jobs, work multiple jobs, save or invest more, or just pack up and move out of the canton?

    ReplyDelete
  18. Morally speaking this degressive taxation issue makes a lot of people feel uncomfortable because it essentially widens the already huge gap between the wealthy and the poor in today's society. However, on a much simpler, functional basis in my opinion it is an economically sound idea. It seems obvious that a wealthy person paying almost no taxes would a large amount of money, and as we all know the majority of our expenditures occur in the region in which we live.

    If the goal is to attract wealthy people in a particularly poor area then some incentives must be created. Moreover, this doesn't seem like much of a stretch to me. For many years anybody with an LLC could deduct the total cost of a vehicle with a gross weight of over six thousand pounds, and for many years the government offered tax incentives to hybrid drivers. It's a similar concept, incentivizing people to purchase a vehicle they otherwise wouldn't versus incentivizing people to move somewhere they otherwise wouldn't live.

    ReplyDelete