Where’s the Most Inexpensive Place to Live? Disposable Income in Switzerland

A Credit Suisse Study of Disposable Income in the Various Regions of Switzerland
Zurich.-There is widespread discussion about low-tax municipalities in Switzerland. It would seem felicitous for householders to move to reduce their tax bill. But a comparison based on tax rates alone shows only part of the story. On top of the different levels of taxation, there is a host of mandatory deductions and fixed costs which impacts the financial consequences of a move. The more appropriate criterion when deciding where to live is disposable income, which is calculated taking into account all costs associated with living in a particular place. Since 2006, the economists at Credit Suisse have been calculating disposable income in the approximately 2,700 Swiss municipalities for a range of hypothetical household types.

In recent years, the competition between the different regions in Switzerland has heightened. Given the generally healthy financial situation and other favorable factors, the cantons and municipalities have made extensive use of their freedom to determine their own redistribution, tax and tariff systems. Some cantons have even introduced measures to make themselves more appealing to new residents, measures that they are now having to revise. The most well-known examples are the degressive tax model in Obwalden and the sizeable cut in taxable imputed rental value in Basel-Landschaft. Both measures were annulled by the Swiss Federal Court, but underline how fierce competition on taxes is.

Fixed Costs Are a Decisive Factor When Choosing Where to Live
Householders weigh up a number of factors when deciding where to live. In addition to geographical location, infrastructure, the availability of suitable properties, emotional criteria and personal ties, financial aspects play an important role. Economists at Credit Suisse believe that other mandatory costs, such as health insurance premiums and imputed rental value taxation for homeowners, should also be factored into the equation along with the tax rates. Furthermore, there is a range of location-specific fixed costs to consider. In some areas, prices for real estate, ancillary costs and utilities even constitute a larger part of a household’s expenditure than mandatory costs.

What Is Left at the End of the Month: Disposable Income
Disposable income is the key financial criterion when deciding where to live. It refers to the amount that a household has available for consumption taking into consideration all the income components and subtracting all the mandatory deductions (income and wealth taxes, social security contributions, occupational benefit plan contributions, health insurance premiums) and fixed costs (living and ancillary expenses, utilities costs). Because this figure depends on the specific characteristics of a household, economists at Credit Suisse calculate disposable income for a range of hypothetical household types in approximately 2,700 Swiss municipalities.

Considerable Differences Even among Neighbors
The following example highlights how great the difference in financial attractiveness can be between municipalities: The Jones family lives in a single family dwelling of medium standard (80% mortgage) in Bettingen, canton Basel-Stadt. They have two children, CHF 300,000 in savings, and together they earn CHF 150,000. Adding on the family allowances and their investment income, their household’s gross income is approximately CHF 156,600. After subtracting all the mandatory deductions (taxes, occupational benefit and social security contributions, and mandatory health insurance premiums) as well as living costs, ancillary costs and utilities, they are left with disposable income of CHF 36,800. In neighboring Rheinfelden, canton Aargau, the family would have CHF 61,400 in disposable income, representing a difference of more than CHF 24,000.

Appenzell Innerrhoden Defends Its Place at the Top
Credit Suisse economists use the regional disposable income (RDI) indicator for cantons in order to map out disposable income against a range of scenarios. As in 2006, the canton of Appenzell Innerrhoden topped the table. Thanks to moderate taxation levels and lower real estate prices, Appenzell Innerrhoden remains the most appealing place to live for the broad middle classes. Together with Nidwalden, Innerrhoden also has the lowest health insurance premium rates. Obwalden, Thurgau, Solothurn and Schaffhausen have all markedly improved their rankings over 2006 due to optimization of their tax framework.

Rise in Living Costs Relativizes Tax Advantages
Mainly on account of the above-average rise in rental and real estate prices, the cantons of Schwyz, Nidwalden and Zug have lost some of their appeal to the broad middle classes; indeed, in some cases the tax advantages in these cantons are offset by the increased living costs. Since 2006, more people have been leaving canton Zug than moving there from other cantons. Credit Suisse economists attribute this trend principally to the decreasing financial attractiveness of the canton. However, thanks to its continuing appeal internationally, Zug still enjoys high population growth.

Life in the Big Cities Is Expensive
Geneva and Basel-Stadt again occupy the positions at the bottom of the ranking. High living costs, coupled with above-average taxes and record health cost levels, mean low appeal. Berne, Zurich and Vaud are somewhat closer to the Swiss average than Geneva and Basel-Stadt, on account of their extensive agglomerations and rural areas, but they still lag behind the majority of cantons. In these three cantons, it is the high cost of living and health insurance premium rates in the major conurbations that eat into householders’ budgets. One exception is Winterthur, which, as the country’s sixth largest town, still manages to achieve an above-average RDI value, making it one of the highly attractive towns to live in. Low disposable income in cities creates opportunities for suburban municipalities because they can position themselves as financially attractive places to live. For example, the area around Zurich - and to a lesser extent around Basel, too - has seen a belt of suburban communities sprout up in which disposable incomes are higher than in the city itself. This tendency, however, is less pronounced in the areas around Berne and Lausanne.

How Many Cents from Each Additional Swiss Franc Earned Are Left for Consumption?
Because of income tax and other income-dependent cost factors, only a fraction - called marginal income - of each additional franc of earned income is left over for consumers to spend at their discretion. This indicator also highlights regional differences: While households in Zug, on average, will be left with 73 cents for each additional franc they earn, their counterparts in Neuchâtel will have to get by on 57 cents, which places them clearly below the Swiss average of 65 cents. The biggest improvements in marginal income over 2006 were in the cantons of Obwalden, Lucerne and Basel-Landschaft.