The suggestion that Australian states should compete for business and investment is sometimes viewed as fanciful. The states relinquished their income tax powers during the Second World War and are now heavily reliant on the federal government for revenue. Their residual taxation powers are pretty limited and many of their regulatory functions have been referred to the federal government.
Nonetheless, competitive federalism does exist in some parts of the world. In Switzerland, it is working exactly as it should. Swiss cantons, which have considerable independence from the federal government, are actively competing to attract business and investment.
An article in the Wall Street Journal describes what is happening:
Low taxes have long given Switzerland a strong hand in the battle to lure the operations of big multinational companies. Now, an intramural war is on in which individual Swiss states are competing harder for business.
Switzerland’s cantons are offering low tax rates to tempt multinationals to establish regional headquarters or other operations in their jurisdictions. In doing so, other states are trying to take business away from Zug, the canton that has mastered the game of attracting business to such a degree that it is beginning to run out of space.
Switzerland as a whole is battling with countries such as Ireland, the Netherlands, the U.K. and Germany for business. While Switzerland’s research universities, efficient public sector and strong intellectual-property protection are attractive, its low tax rates are a huge draw.
Switzerland’s federal corporate tax rate is 8.5%. When average cantonal and municipal taxes are included, the average corporate tax rate in Switzerland is 21.2%, compared with about 30% for Germany and 25.5% for the Netherlands, according to KPMG.
But in Switzerland, cantons—which enjoy far more autonomy than U.S. states—are the main drivers in luring multinationals. Two-thirds of total taxes are levied by the cantons, which have wide autonomy on social-security contributions, business permits and construction rules.
There is additional detail in the full article, but you get the picture. Rather than seeing business as a cow to be endlessly milked, which every level of government in Australia seems to regard as absolute truth, the Swiss cantons are vying to bring business into their locations. Particularly big multinational businesses. And taxing them less, not more.
The closest we come to that in Australia is when one of the state governments reduces payroll tax by 0.25%. (And keeps spending as if the revenue never stopped as well.)
I’m not optimistic that we will ever get competitive federalism working properly in Australia. But Australians are rarely keen to try something that nobody else has attempted. With Switzerland setting an example, at least that objection does not apply.