According to Swissinfo, Obwalden's authorities announced the decision to put in place a flat tax after 90% of the canton's electorate voted in favour of the proposal.

Obwalden had been forced to review its tax system following a complaint from Socialist Party deputy Josef Zisyadis that reforms put in place in January 2006 had created a regressive tax system, where wealthy taxpayers paid a lower tax rate than those on lower incomes, and which was therefore unconstitutional.

Zisyadis succeeded in getting the tax overturned by the Federal Tribunal in Lausanne in June, stating at the time that the court's decision had "put a brake on the fiscal cannibalism between the cantons".

After a referendum in 2005, Obwalden, a tiny mountainous region in the centre of Switzerland, brought in an income tax law which cut tax for those earning more than CHF300,000 per year to 1% from 2.35%. Individuals earning up to CHF70,000 paid 8% and those with income up to CHF300,000 paid up to 6%. At the same time, Obwalden also cut corporate tax to 6.6%, making it one of the lowest rates in Switzerland.

Obwalden's tax reforms also prompted other cantons to respond with tax cuts of their own: cantons Zurich, Valais, Fribourg, Uri and Schaffhausen all reduced tax rates in 2006. This prompted complaints from those on the left that some cantons were engaged in a 'race to the bottom' on taxation that would eventually endanger the viability of public finances.

The cantonal tax system has also come under attack from the European Commission, which is attempting to make Switzerland change aspects of its corporate tax regime designed to attract holding companies to the jurisdiction. The Commission argues that the Swiss tax regime, which allows cantonal governments freedom to set their own tax rates to attract new companies and wealthy expats, breaches the 1972 trade agreement between Switzerland and the EU by distorting trade and competition.