Beggar-Thy-Neighbour Tax Cuts: Mobility after a Local Income and Wealth Tax Reform in Switzerland

Tax competition raises the question to which extent taxpayers respond to differences in income tax rates by migrating to low-tax areas. This paper analyzes a large, two-step tax reform in the canton of Obwalden in central Switzerland in 2006 and 2008. The canton first introduced a regressive income tax scheme with the explicit purpose of attracting affluent taxpayers, followed by a flat rate tax, thereby lowering taxes for all taxpayers. DiD estimations comparing Obwalden and two neighboring cantons confirm that the reform was successful in increasing the canton’s tax base by increasing the share of rich and their average income. Using individual tax data I apply a 2SLS approach to estimate how responsive migration was to the tax reduction. I find an elasticity of the stock of rich taxpayers in the canton with respect to the average net-of-tax rate of 1.9–2.4. The elasticity of the inflow of rich taxpayers is even larger, ranging from 5 to 12. These large elasticities can be explained by (i) the large pool of intentionally treated in the present institutional setting, which puts almost no restrictions on taxpayers to take advantage of the low tax, and (ii) the initially low share of rich taxpayers in Obwalden combined with the small size of the canton. A small number of rich taxpayers relocating therefore translates into a large elasticity. DiD estimates of cantonal revenue, however, suggest that the tax cuts despite attracting and retaining a substantial number of rich taxpayers, did not lead to an increase