Behavioral Responses to Local Tax Rates: Quasi-Experimental Evidence from a Foreigners' Tax Scheme in Switzerland

Abstract

We study behavioral responses to local income taxes exploiting a special tax regime which applies to foreign employees residing in Switzerland. The used institutional setting generates two thresholds through which locally heterogeneous taxation is assigned: An income threshold at 120,000 Swiss francs and a duration threshold at 5 years of stay in Switzerland. We exploit these thresholds by applying a discontinuity in density design and a fuzzy RDD to administrative income data. We find causal evidence for strategic income bunching for wage earners and tax induced intra-national mobility. Several pieces of evidence suggest that individuals have to "learn the tax code" and that knowledge and information transmission through local networks plays a major role in the behavioral response to tax incentives.

How taxes impact the choice between an annuity and the lump sum at retirement

“…A recent paper by Schmidheiny and Slotwinski (2015) investigates behavioral responses of foreigners around the threshold where the special tax regime which only applies to foreigners, the so-called source tax, changes to the ordinary tax regime which applies to all individuals in Switzerland. They find that foreigners from high-tax municipalities push their income just below the threshold of CHF 120,000 where the tax regime changes, while foreigners from lowtax municipalities shift their income above the threshold.…”