The Swiss canton (state) of Obwalden has just adopted a flat tax of 1.8% on all personal income, with a deductible of SFr 10,000. What is quite remarkable is not only that this tax rate is extremely low, but also that this tax law was accepted by popular referendum with a 90% majority.
It is not the first time that this canton has had innovative strategies in tax law, with the blessing of the voting population. In 2005, 86% accepted a regressive tax rate. Yes you read right. This tax law was later struck down by the Swiss Federal Court on the grounds that it was anti-constitutional.
Why would such a large proportion of the population be approving a tax regime that, usually, favors the rich? The strategy here is for this small state (population 33,000 in a country of 7 million) to attract the rich from other cantons, or abroad, thus increasing the tax base and making it possible to reduce the tax rate for all.
This is tax competition as its best. But does it really serve the common good, common being defined beyond the borders of Obwalden? At a larger scale, Switzerland has been repeatedly accused of unfair tax competition by the European Union because of the infinite latitude cantons have in designing income taxes. In particular, many cantons have set piecemeal tax agreements with foreigners who take fiscal residence and pay ridiculously low taxes. Imagine if everyone would do that: tax rates would be set so low that it would become impossible for the government to provide significant services. Or would it?
Clearly the issue here is that the tax jurisdiction is very small, atomistic, in that it does not by itself affect the overall tax base. A larger jurisdiction would be more careful in reducing its tax rate, as it does reduce its revenue. So, to prevent excessive tax competition, tax jurisdictions would need to form a cartel, and make sure no one deviates. This not going to happen in Switzerland, where cantons enjoy large liberties from the federal state. But a central state like France can impose significant tax rates on its citizens, as long as they cannot escape to Switzerland or Monaco (which suffered a blockade on this issue).