IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
An old American joke has it that hell is where the Swedes are in charge of entertainment. But the last laugh in fiscal policy matters in Europe will probably go to Swedish legislators as they vote for implementing a reduction of corporate income taxes (CIT).
The Swedish centre-right Alliance government (elected in 2006 and re-elected in 2010) has proposed to cut corporate taxation from 26.3 to 22 per cent in the 2013 budget, thus bringing this tax below both the EU (23.4) and the OECD (25.5) averages. In addition, a deduction for investments has also been proposed.
This may be compared to the announced cuts in the UK to 24 per cent with further reductions to 22 per cent in 2014. On an international level, we may quote the United States and Japan which are both close to 40 per cent, or France (33.3 per cent).
Notwithstanding the huge Swedish Welfare State (which remains unreformed in swathes, in particular health and education which are both essentially under government control) and the resulting tax pressure (amounting to 56 per cent of GDP), this still represents an encouraging initiative well worth emulating to foster growth and employment.
According to the OECD, the corporate tax is the most harmful type of taxation in terms of economic growth. A favourable environment for investments is an essential condition for competitiveness and expansion. As corporate tax rates come down, more business projects become profitable and companies adapt by increasing their investments.
In terms of the annual World Economic Freedom Index 2012 published on 19 September, Sweden gained 9 positions compared to last year and is now number 30 in the ranking. This reflects a sound monetary policy, a slight reduction in public expenditure as well as improved regulation of the labour market.
Sweden holds a definitive advantage compared to other EU countries: it had to take on fundamental government and fiscal reform in the wake of the banking crisis following the attack on the Swedish krona in the early 1990s.
Former Under-Secretary and chief of staff in the government of Carl Bildt during this period, Olof Ehrenkrona (today ambassador) says in an interview with IREF:
"The current government is persistent in its policy to cut taxes. Finance Minister Anders Borg will enter history as none of his predecessors has managed to reduce the tax burden to the same extent.
"Reducing the corporate income tax is decisive for the competitiveness of Swedish industry, and is difficult for the opposition to criticize as profits fall in the downturn. The timing is brilliant."