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IPS264 Oliver H. et al.
In summary, redistributive effects are highly dependent on the specific
design of the tax and deduction system as well as the pre-tax income
distribution, emphasizing the need for empirical studies. To our best
knowledge, there are only few studies that quantified the effect of deductions
so far. Verbist & Figari (2013) showed that deductions are pro-poor in Finland,
Germany, Portugal, Spain and Sweden. In Germany, for example, the
deductions are aimed at pensioners who are relatively more strongly located
in the lower part of the distribution. Deductions are rather pro-rich in
Denmark, Ireland, the Netherlands and the UK, where either private pension
contributions are deducted (Ireland, UK) or mortgage interest tax relief
(Netherlands). While these studies provide first valuable insights on aggregate
effects of deductions in different countries, our analysis complements these
studies with detailed information on various types of deductions, as
Switzerland uses a fairly complex system with numerous different deductions.

3. Data
As opposed to many other European countries where the levying of taxes
is centralized, the tax system in Switzerland mirrors the historically evolved
federal structure, giving a lot of power to the sub-state levels, namely the
cantons and municipalities (ESTV, 2013). A total of 26 tax laws exist, with each
canton having its own tax law and the municipalities and the federal state also
levying taxes. This results in a multitude of direct taxes on income and wealth,
which assures that each level of the state can gather the needed revenue to
provide public goods autonomously.
The data we collected include all tax relevant information of the canton of
Aargau and is available from 2001 to 2011. In 2011, Aargau was the fourth-
largest canton of Switzerland with a population of 618’298 individuals that
handed in 327’047 tax forms. With respect to economic inequality and mean
income, Aargau is very close to the Swiss average. Furthermore, Aargau is also
a good approximation to Switzerland with regard to its demographics and
urbanity. As the argument of the present paper is of general nature and
Aargau is not a special case within Switzerland, we assume our point to be
valid for the whole of Switzerland as well.

4. Methodology
Definition of incomes, taxes and deductions
According to the federal structure of Switzerland, taxes are levied at three
levels (federal, canton, and municipality). In addition, there is a church tax.
Cantons, communities (also referred to as municipalities) and churches also
levy taxes on wealth. Taxes are based on gross income, which includes all
earned income, capital income and taxable social transfers. Before taxation,
several different deductions can be made. Gross income minus deductions

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