Discussion Paper Details

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Title: Mobility Responses to the Establishment of a Residential Tax Haven: Evidence From Switzerland

Author(s): Isabel Z. Martínez

Publication Date: October 2021

Keyword(s): local taxes, mobility, Personal income tax, regressive income tax and Tax Competition

Programme Area(s): Public Economics

Abstract: I analyze mobility responses to a tax reform that established the Swiss canton of Obwalden as a tax haven in 2006. The reform, which included a regressive income tax schedule, was explicitly aimed at attracting the top 1%. Difference-in-Differences (DiD) estimations comparing Obwalden to all other cantons confirm that the reform successfully attracted rich taxpayers: by 2016, the share of rich in the canton had more than doubled, and average income per taxpayer was 16% higher relative to 2005. Using individual tax return data, I find a large elasticity of the stock of rich taxpayers of 1.5â??2 with respect to the net-of- average-tax rate. The corresponding flow elasticity is 7.2. To address potential endogeneity, I use a DiD approach to instrument the tax rate changes caused by the reform. Despite the large behavioral responses, the reform did not increase revenue per capita in the canton. Finally, I find small positive effects on local employment. However, rich in-movers were not more likely to also work in the canton, and I cannot rule out that employment effects were driven by the simultaneous reduction in corporate income taxes.

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Bibliographic Reference

Martínez, I. 2021. 'Mobility Responses to the Establishment of a Residential Tax Haven: Evidence From Switzerland'. London, Centre for Economic Policy Research.