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Federal-Cantonal Equalization in Switzerland: An Overview of the Reform in Progress

PFM, Vol. 4 No. 4, (2004)

Fiscal equalization in its present form in Switzerland is placed under strong criticism:
for the last three decades, it has piled up ad hoc changes and new programs without a
global vision; it mixes macroeconomics with taxation and approximate public
expenditure estimation; it lacks transparency and visibility. In one sentence: it is time
for change. Is this diagnosis too severe? What should and can be changed? Which
reform is possible in the short or medium term? This paper tries to answer these
questions in two parts. The first one describes the equalization programs currently in
place and evaluates their policy performance. The second exposes the difficult pace of
reform and explores the workings of the new system. Changes have been fiercely
debated in the last three years and the final result will be submitted to national vote in
the Fall of 2004. There are four issues of interest in this case study: (i) the combination
of fiscal equalization with a re-assignment of functions between the federal and
cantonal tiers; (ii) revenue and cost equalization as twins in the project; (iii) a shift in
the measure of fiscal capacity of the constituent States from a predominantly macro to
a Representative Tax System; (iv) the transition from the present to the new system as
a purely political outcome. Of course, the answers to the above questions are specific to
Switzerland, but sharing this particular experience may help in understanding other
equalization systems.

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