Revenue and expenditure needs equalization: the Swiss answer

Introduced in 2008 after ten years of contentious discussions between the federal government and cantons, the actual equalization policy in Switzerland presents several specificities detailed in this chapter. Its ambition is reducing disparities both in the cantons’ tax raising capacities and their expenditure needs simultaneously. Revenue equalization is based on a representative tax system (RTS) applied to the federal direct tax base in the cantons. Expenditure needs are estimated differently for two different groups of cantons: one for urban cantons using socio-demographic variables and the other for mountainous areas using geo-topographic variables. The complexity of the equalization formula raises the following questions: which explanatory variables should be used for which functions? How to measure needs? How much equalization is acceptable? Who pays for what? This chapter shows that in modelling an equalization policy, it is possible to reach sustainable political compromise and practical solutions even if statistical information is not available and it is difficult to quantify certain factors.