Switzerland maintains low and stable income inequality, influenced by the diversity of its 26 cantons. Wealth distribution varies significantly; for example, Zug’s top earners capture nearly 50% of total income, while Uri’s top 10% accounts for about 27%. Tax policies and economic activities in cantons like Zug and Zurich exacerbate this disparity. Finance directors face the challenge of relying on a small number of high earners for tax revenue, highlighting the need for diversification and quality of life improvements to retain taxpayers.
Understanding Income Inequality in Switzerland
Switzerland boasts a notably low level of income inequality, which remains stable and resilient even in times of crisis. Recent data from 2021, the second year of the pandemic, reinforces this observation.
The Role of Cantonal Diversity in Income Distribution
One crucial yet often ignored factor is the diversity among Switzerland’s 26 cantons, which significantly influences income inequality. For instance, in the canton of Zug, the wealthiest 10 percent of earners account for nearly 50 percent of the total income, whereas in the neighboring canton of Uri, this figure drops to about 27 percent.
The income threshold to enter the upper echelons of earners also varies widely across cantons. In Uri, a household needs to earn just 112,900 francs to be considered in the top 10 percent, while Zug requires an income exceeding 209,500 francs.
A closer look at the Swiss map reveals that cantons such as Zug, Schwyz, Basel-Stadt, Geneva, Ticino, and Zurich exhibit higher-than-average income inequality. Conversely, cantons like Uri, Glarus, Fribourg, and Aargau demonstrate relatively low levels of income disparity.
This indicates that the economic landscape plays a pivotal role; for example, Basel-Stadt attracts many high earners due to its thriving life sciences sector, while Zurich benefits from a robust financial industry. Tax policies also play a crucial part, as tax-friendly cantons like Schwyz and Zug tend to exhibit significant income inequality. Notably, even the median income is considerably higher in Zug compared to Uri.
The varying income concentrations across cantons are shaped by a combination of factors, particularly economic positioning and tax structures. Historical data reveals that the highest income concentrations have shifted among cantons over the years.
Take, for instance, the income inequality patterns in Uri, Schwyz, and Zug. Up until the early 1990s, these cantons displayed similar income distributions. However, post-1990s, income inequality in Uri decreased, while it escalated in Zug and Schwyz, primarily due to differences in tax policies that favored high earners in the latter two cantons.
This high level of income concentration poses questions regarding the impact on the cantonal budget. In Uri, the wealthiest 10 percent contribute approximately 40 percent of total income taxes, whereas in Zug, this group is responsible for a staggering three-quarters of all income tax revenue.
This scenario presents a double-edged sword for cantonal finance directors. While attracting high earners boosts tax revenues, it also creates a concentration risk, heavily relying on a small number of significant taxpayers. This reliance can be precarious, as evidenced by corporate missteps, such as Nokia’s failure to adapt to market changes.
To mitigate concentration risk, finance departments can leverage two main strategies. First, they should focus on retaining high-income taxpayers by enhancing the quality of life in the canton, fostering a competitive tax environment that discourages migration to neighboring regions.
Secondly, diversifying the tax base can help spread risk. This raises important questions: Can the tax base be expanded? Is it feasible to combine various tax types? Such considerations are particularly crucial for cantons with elevated income concentration, as an overreliance on a narrow tax base can jeopardize financial stability. Finance directors should remember the wisdom of Harry Markowitz’s portfolio theory: “The only free lunch in the financial world is diversification.”
Melanie Häner-Müller leads the social policy department at the Institute for Swiss Economic Policy (IWP) at the University of Lucerne.