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What is lump sum tax?

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Quick Answer

Lump sum tax is tax equal to a specific amount, not depending on an individual’s income or any other considerations, explains About.com. This tax is viewed as efficient because it is equal for all individuals and does not discourage higher-income earners.

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Full Answer

Switzerland offers an example of lump sum taxes in practice, reports STEP. As of 2013, some 5,500 foreign-born individuals residing in Switzerland and meeting specific conditions, such as not engaging in gainful employment, pay taxes under a lump sum tax regime in some Swiss cantons. The regime requires these individuals to opt in, and if a traditional tax regime would offer higher tax revenues, the lump sum regime is not used (but the taxpayer may claim certain deductions). If certain circumstances no longer hold — for example, if the individual becomes a Swiss citizen or begins gainful employment — the individual cannot continue paying lump sum taxes.

New legislation pertaining to lump sum taxes is expected to apply in 2016, provided Swiss citizens vote for it, notes STEP. Under this law, additional restrictions are imposed on paying under a lump sum tax regime. These include requiring cohabiting individuals to be treated under the regime only if both spouses satisfy the conditions, using an individual’s global living expenses (not just those in Switzerland), and strengthening the criteria for determining taxable income.

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