Swedish tax policy results in a lower standard of living, a loss of international competitiveness and it widens inequality. That is something that most economists agree with, including tax researcher Åsa Hansson who says that it is high time for tax reform. “In the long term, we would all gain from it,” she says.
Over recent decades, taxes on property, consumption and certain capital have successively fallen, while tax on labour remains at a high level. Furthermore, tax on companies has not followed a downward trajectory to the same extent as in other countries. It is this evolution that causes a heavy sigh from a near-unanimous economist profession:
“I have almost given up. Once, I was fired-up and had faith in the idea that it was possible to make an impact with facts and research results,” says Åsa Hansson, tax expert and associate professor of economics at Lund University.
She also sat on the Swedish Fiscal Policy Council and has taken part in several public inquiries about tax. Last year, she wrote a report for the Centre for Business and Policy Studies about how a comprehensive tax reform might look.
“We economists have been talking about the need for tax reform for 15 years now, but politicians seem unwilling to act,” she says.
More or less harmful taxes
If the goal is to be highly competitive with high employment and to have a good climate for innovation and enterprise combined with a well-functioning public sector, then most economists, according to Åsa Hansson, are in relative agreement about what the tax system should look like.
The emphasis should be on the taxing of goods, services and property, while tax on earned income should fall. Similarly, taxes on active enterprise and innovation should not be higher than on investment in property, passive share ownership and other “less productive investments.”
More companies and more jobs increase income from taxes to the public purse, which leads to more money being available for investments in healthcare, education and the legal system as well as environmental and climate protection.
In other words: The cake could both get bigger and be divided more equitably.
It is precisely the opportunity to shift between different taxes, so that the sum total is beneficial for the vast majority, which makes such a tax reform so critical, Åsa Hansson argues.
“With a long-term agreement across the political spectrum it is possible to work towards compensating groups and creating a transparent and comprehensive system with clear rules.”
Most people benefit long term
People on low incomes would be among those who would gain from tax reform.
“People on low incomes pay a relatively high level of tax in Sweden. For example, a family living in a home worth SEK 2 million pay more, in relative terms, than a family living in a house valued at SEK 25 million. The amount is the same, but not the proportion of the house’s value. And those living in rental apartments pay more than those living in tenant-owned apartments or houses.”
Another example is employer’s contribution.
“They are the same regardless of income, 31.42 per cent, and they account for a significant proportion of the labour cost for low incomes. That makes it expensive to employ low-income earners.”
Exclusion and poverty cost more
Additionally, many deductions benefit high-earners, such as the deduction for commuting expenses and deductions for household services and renovations.
Even if a raised charge on property is troubling for those with high-value, mortgaged houses and apartments, the same group could be compensated through lowered income tax, Åsa Hansson argues.
At the same time, the entire economy would grow.
“From a socioeconomic perspective, lots of people falling behind is worse than a few becoming wealthy. Exclusion is costly, and not just for the individuals and society – it risks being passed on to the next generation. We want a system where it can be lucrative to put in effort. In any case, taxing the rich has a fairly small effect on wealth distribution.”
“It is better to generate tax revenues in the best way, so that they can then be redistributed using benefits and to finance good education.”
Current system obsolete
Since the last comprehensive tax reform in 1990-1991, it has mostly been a case of patching things up: the very next year the universal rate of value added tax (25 per cent) was abandoned, and in 1995 an austerity tax intended as a temporary measure was introduced.
Since then, expert tax relief, deductions for household services and renovations, earned income tax credits and reduced employer’s contribution for certain groups have all been added.
Another argument for reform is that the world has changed radically since the early 1990s.
The current system is not adapted to the world we live in, Åsa Hansson points out. Globalisation and digitalisation have meant that capital has become more mobile. It is not entirely obvious where incomes should be taxed. Being able to work from home means the possibility of more people settling where taxes are low.
“This leads to countries with high taxes on labour and enterprise becoming more exposed, since companies and individuals can exploit other countries’ tax systems to reduce their own tax liability. The result is lost tax revenues for Sweden.”
Groups affected can be compensated
It is not just economists who are aware that the tax system can be improved, many politicians share that position.
“Both Elisabeth Svantesson (Finance Minister) and Magdalena Andersson (Opposition Leader) know that property tax is a good tax. Of course they do not agree about all the other taxes. It is said, however, that the Alliance for Sweden won the 2006 election on the promise of abolishing the property tax, despite experts considering it to be a good tax.”
“It is now difficult to reintroduce.” It is easier, in general, to abolish taxes than to reinstate them.
If there is such unanimity about the need for reform, why is nothing being done?
“The trick is getting voters onside. In terms of the property tax, it is difficult to reintroduce a tax whose abolition so many people have benefitted from. A lot of people would lose out if it were reintroduced. That is why it probably needs to be done gradually. There are various ways of doing that. One alternative is that the increase only applies to sales after a certain date, but that may be hard to implement from the perspective of EU law. Either way, there is the opportunity for compensation through reducing other, more harmful taxes.”
A lack of comprehensibility reduces engagement
Matters are not improved by the fact that few people know how much they pay in tax. Today’s system is a jungle of various deductions on capital and labour and lots of taxes are not particularly visible, such as employer’s contribution
“The whole cost of taxation is not shown on salary statements. Altogether, this reduces the likelihood of people reacting,” according to Åsa Hansson.
If economists and other researchers are reasonably in agreement about the big picture, perhaps there are differing views on the detail?
“Of course, and it is not our place to decide in detail what the tax system should look like. That is to happen through democratic process.”
Are there researchers who hold a diametrically opposing view?
“As I said, there are only a few. On the whole, we are thinking very much along the same lines. There are certain differences when it comes to the extent that various different goals ought to be prioritised. Is it the distribution of income or an economy working as well as it possibly can that should be our primary focus?”
“Higher taxes on capital inhibit investment and, as a result, growth, but they can lead to a more equal distribution of income. Low taxes on capital, meanwhile, can increase inequality since it is above all those with high incomes who have incomes from capital, yet at the same time high tax might reduce the desire to invest and impede growth in the economy. Ultimately, however, this is a balance that politicians have to find.”
"From a socio-economic perspective, it is worse that many fall behind than that a few become rich. In addition, taxation of the rich has rather little effect on the distribution", says to Åsa Hansson. Photo: Charlotte Carlberg-Bärg.
Åsa Hansson’s tax advice to politicians
According to Åsa Hansson, the tax system should be changed in the following ways if we are looking for a combination of a good climate for innovation and enterprise as well as good public services:
- Cut taxes on work through a large basic allowance for taxable income, i.e. no tax on income up to SEK 135,000 per year, while scrapping the earned income tax credit and other deductions. This would make the system simpler and put more money in everyone’s pockets, regardless of salary. In particular, such a reduction would benefit those on low incomes who are currently struggling to enter the employment market, since it would increase the incentive to work and would simultaneously lower employers’ costs when employing.
- Raise the threshold for state tax. According to Åsa Hansson, there are many important groups of workers, such as engineers and nurses, who are currently around the threshold for state tax. Today, they lack the incentive to take on more responsibility or relocate, because the salary increase is not as large as it could be.
- Simplify the system and increase transparency. Increase the uniformity of all types of taxes on capital, from investment savings accounts (ISKs) to close companies and property. Abolish the earned income tax credit in favour of an increased basic allowance (see above). Make the entire tax cost visible, by including employer’s contribution on the wage slip, for example.
- Tax all consumption at the same rate. Sweden’s tax on consumption is low, relative to other EU countries, despite it being a relatively “good” tax. Different types of consumption are also taxed differently, which distorts consumer choices and makes the system difficult. Åsa Hansson therefore proposes a uniform rate of VAT of 25 per cent. Today, comestibles and restaurant/hotel visits are taxed at 12 per cent.
- Compensate those on low incomes. The drawback with increased VAT on food is that it hits those on low incomes, who spend a higher proportion of their income on food. However, a lower rate of VAT on food is an expensive and blunt way of redistributing, since everyone, not just those on low incomes, pays the lower VAT. A more accurate and cheaper way of assisting those on low incomes is through direct income support or increased child benefit. The idea is that tax on labour will also be cut, which would increase income after tax.
- Raise property tax and tax all housing forms at the same rate. Tenant-owned apartments and rentals should be taxed at the same rate as houses. Today, rental apartments are taxed higher and tenant-owned apartments at a lower rate.
The maximum sum for a house is set at a low level, just over SEK 9,000, which means that the owner of a low-valued house has to pay the same as the owner of a house with a higher valuation. Since land and properties are unmovable, they provide, like VAT, a stable income for the state. Taxing property at a lower rate than other assets drives up property prices, leading to more people having large debts – Sweden has high levels of household debt – and more people struggling to get into the housing market.
- Abolish stamp duty and capital gains tax on property since they reduce turnover and mean that we do not use the existing housing stock well.
- Lower corporation tax which should be at a level below the EU and OECD average. Sweden has historically had lower rates of corporation tax than the EU and OECD average, but it is now at the average. Sweden is a small country on the periphery, and it cannot compete with a large market. By way of compensation, the tax rate should be below that of large countries. A reduction would mean a marginal reduction in income for the state, since corporation tax gives modest revenues, but would have a great impact on Sweden’s attractiveness for investments and help prevent operations from leaving the country, according to Åsa Hansson.
- Reinstating inheritance and wealth taxes is not something Åsa Hansson believes in for several reasons: They are easy to avoid and provide relatively little income for the state. It is inequality in the bottom sector that is a big problem and that is only marginally affected by an inheritance and wealth tax. In addition, poor people also receive inheritances and would actually be hit proportionately harder than the wealthy by a reintroduced inheritance tax.
- Environmental taxes are among the few taxes that cannot be classed as harmful, since they address a serious problem, but it is important to tax correctly. The emissions should be taxed, not the activity. That is why energy should not be taxed, but rather emissions from energy consumption. Different energy sources have different levels of emissions. Since a lot happens at EU level that Sweden must take into account, Åsa Hansson’s advice is to wait and see. Environmental and climate problems are global, so international agreements should be sought.
- State control. Large differences between municipalities’ abilities to generate tax revenue and thereby finance healthcare and schools suggest that the system should be reviewed. Putting healthcare and schools under central state control would probably make them more equal.
"The trick is to get the voters on board. As for the property tax, it is difficult to reintroduce a tax that so many have benefited from. Therefore, it probably needs to be done in stages. There are different ways," says Åsa Hansson. Photo: Charlotte Carlberg-Bärg.
Research report “Skatter i en globaliserad värld” (Taxes in a globalised world)
Video: “Skatter i en globaliserad värld” (Taxes in a globalised world)
The Restart Commission’s tax proposal (Chapter 9) 2020
Selected research publications
Hansson, Å, Olofsdotter, K. and Thede, S., (2018), “Do Multinationals Pay Less in Taxes than Domestic Firms? Evidence from the Swedish Manufacturing Sector”, World Economy, 2018, 41(2), 393-413.
Hansson, Å., Porter, S. and Williams, S.P., (2018), “What Determines Tax Incentives and How Effective Are They”? Journal of Business and Economic Policy, 2018, 5(4).
Hansson, Å. And Porter, S., (2015), “The importance of the political process on corporate tax policy”, Constitutional Political Economy, 2015, 23(93).
Brokelind, C. and Hansson, Å., (2014), “Tax incentives, tax expenditures, Theories in R&D: the case of Sweden”, World Tax Journal, 2014, 168-200.
Hansson, Å. and Olofsdotter, K., (2014), “Labor Taxation and FDI decisions in the European Union”, Open Economics Review, 2014, 25(2), 263-287.
Hansson, Å. and Olofsdotter, K., (2012), “FDI, Taxes and Agglomeration Economies in the EU15”, Applied Economics, 2012, 45(18), 2653-2664.
Hansson, Å., (2012), “Tax policy and entrepreneurship: empirical evidence from Sweden”, Small Business Economics, 2012, 38(4), 495-513.
Hansson, Å., (2010), “Is the Wealth Tax Harmful to Economic Growth”, World Tax Journal, 2010, 2(1).
The impact of technological developments on taxes
Along with a number of other researchers, Åsa Hansson leads an interdisciplinary research team on the impact of technological development on taxes and society, SOETECH