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The Swiss, it's said, are naturally frugal. If so, perhaps it explains why they can balance their budgets and why we can't. European fiscal crises notwithstanding, Switzerland balanced its budget once again in 2012 – hiking spending by a mere 1.7 per cent, hiking revenue by a modest 2.4 per cent and hence limiting public expenditures, more or less precisely, to what the country proposes to collect in taxes.

But perhaps the Swiss aren't naturally frugal. Perhaps they're simply smarter. For one thing, they levy the lowest corporate tax rates in the world – for the right reason. It pays to do so. In the canton of Schwyz, economic affairs minister Kurt Zibung describes (in Foreign Affairs magazine) low taxes as the canton's "biggest economic advantage." Georg Hess, a colleague, says low taxes "are in our collective interest." Schwyz (population 145,000) has the unemployment rate to prove it: 2.5 per cent.

Switzerland's corporate tax rates vary significantly from canton to canton, from municipality to municipality. Appenzell, a small alpine canton, posts a corporate rate of 10.8 per cent – the lowest in the country (federal, cantonal and municipal levies combined). Obwalden, a mountain canton famous for its skiing and hiking, levies a combined corporate rate of 11.1 per cent. In the past five years, the number of companies with headquarters in Obwalden has increased to 3,500 from 2,000. (In 2007, Obwalden adopted a flat tax on personal income; at 1.8 per cent, it's the lowest personal rate in the country.) Other cantons levy higher, but still internationally competitive, rates: Bern, 18.5 per cent; Geneva, 21.5 per cent.

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And why not permit local and regional jurisdictions to compete, as they see fit, with low corporate taxes? Why should companies in North Bay necessarily pay the same corporate tax rate – now 26.5 per cent – as companies in Cornwall and Windsor? Schwyz's corporate tax rate (federal, cantonal and municipal rates combined) is 11.8 per cent, almost the rate that the Ontario government levies all by itself (11.5 per cent) and that Premier Dalton McGuinty hesitates to lower by even a fraction of a percentage point.

Within Schwyz, the town of Pfäffikon (population 7,000) has cut its corporate tax rate every year for the past five years – transforming itself in the process into a world financial centre: a veritable Wall Street of global hedge-fund investors, George Soros among them, with $90-billion in assets under management. (Switzerland also grants 10-year tax holidays to companies that move their headquarters to the country; companies can "buy" extensions through further investment.)

Switzerland thus competes with itself – its multiple selves – on corporate tax rates. OSEC, the foreign trade organization, says the country's laissez-fair approach "is one of the main reasons why Switzerland is such an attractive corporate location." In its 2011-2012 ranking of 142 countries, the World Economic Forum's Global Competitiveness Report placed Switzerland first.

Switzerland's economic success goes further, though, than corporate tax rates. Schwyz, for instance, makes it clear in its promotional literature that you will be welcomed – provided you meet your responsibilities as either citizen or guest. You will be expected to respect the "fundamental values" of the canton. You will be expected to buy your own health insurance coverage from a private Swiss insurance company. And you will be expected to find yourself a family doctor. "This doctor will be your first point of call for all health problems," the canton advises, "even in emergencies, at night and on weekends." In other words, don't even think of walking into a hospital for a minor complaint. In Schwyz, private health-care insurance is mandatory for everyone. If you're poor, the canton will adjust the premium to help you out.

Switzerland's cantons define what they expect from their citizens. And then they compete among themselves on corporate tax rates – making an explicit economic swap: low tax rates in exchange for investment and jobs. This competition has a logical end – the abolition of corporate taxes altogether. Swiss author Philipp Löpfe, for one, champions such a reform. With abolition, he says, the cantons will stop competing with one another. Instead, the competition will become Switzerland versus the world.

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About the Author
Neil Reynolds

Neil Reynolds is an Ottawa writer whose columns on national economic issues appear in Wednesday's and Friday's Globe and Mail. He is the former editor-in-chief of The Vancouver Sun and the Ottawa Citizen. More

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