Switzerland Addresses Fiscal Drift

by Ulrika Lomas, Tax-News.com, Brussels

12 October 2010

Determined to address the issue of fiscal drift, the Swiss Federal Department of Finance (FDF) has brought the Confederation’s direct federal tax rates and deductions in line with inflation. Corresponding changes to the relevant ordinances will therefore lead to a reduction in direct federal taxation in Switzerland in 2011, principally for married couples and for families with children.

On September 25, 2009, the Swiss National and State Councils decided to compensate for the effects of fiscal drift on an annual basis, starting from the 2011 tax year. The point of reference will be the national consumer price index on June 30 preceding the fiscal year. Henceforth, it will be the responsibility of the FDF rather than the Federal Council to compensate for the effects of fiscal drift.

Since the end of 2004, when the last correction took place, inflation has risen by 5.16%. Consequently, in 2011, the deduction for married couples will rise from CHF2,500 (EUR1,862) to CHF2,600 (EUR1,936); the minimum deduction for double income will rise from CHF7,600 to CHF8,100 and the maximum deduction for double income will increase from CHF12,500 to CHF13,200. Deductions for children and for dependents are both set to increase in 2011 from CHF6,100 to CHF6,400. Maximum deductions for insurance premiums and for savings income benefiting married couples will rise from CHF3,300 to CHF3,500 (if contributions are made either to an occupational pension or to an individual related pension) and from CHF4,950 to CHF5,250 (if contributions to neither pensions are made). For other taxpayers this deduction will not be modified.

Fiscal drift (also known as 'bracket creep') occurs when the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers are dragged into the higher income tax bands and thus suffer a tax increase.

The Swiss federal constitution currently provides for the periodic compensation of fiscal drift within the framework of direct federal taxation. Up until now, the Federal Council only adapted the fixed personal income tax rates and deductions once the national consumer price index had risen by 7% since the last compensation, which is why compensation generally takes place after several years. The last time that changes were made to the rates and deductions was at the end of 2004, for the fiscal year 2006. The Federal Council compensated for the effects of inflation of 7.6% that had occurred since 1995.

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