The EU’s path towards the power to tax: lessons from Switzerland

This paper investigates the process through which decentralized unions of states manage to grant a power to tax to the central level of government. This is a very important question for the European Union (EU) after the end of NextGenerationEU (NGEU) because the European fiscal capacity still consists of limited resources, while granting a power to tax to Brussels remains a political taboo for the member states. Empirically, the paper considers a union of states by aggregation like the EU – Switzerland – where still today the units (Cantons) hold most policy competences, whereas the centre (Confederation) can only exercise the tasks explicitly assigned to it. Yet, since 1941, the Cantons have agreed to temporarily provide the Confederation with the power to collect revenues from a so-called direct federal tax (DFT), comprising an income tax and a tax on the net profits of legal entities, and from the value-added tax (VAT). Although these taxes have never become permanent, they have been constantly renewed over time—lastly from 2020 to 2035—through referenda preceded by a debate in the country. Together, in 2022, DFT (32.7%) and VAT (34.9%) represented 67.6% of confederal revenues. Against this background, this paper asks: how can we explain the process that led Swiss Cantons to grant the power to tax to the Confederation? Which arguments have been used to convince the Cantons to give up some of their fiscal powers? And what prevents this power to tax from becoming permanent? The paper adopts causal process tracing, complemented by systematic content analysis and semi-structured interviews, to reconstruct the conditions that made the confederal power to tax possible. The aim is to identify lessons for the post-NGEU fiscal capacity.