IREF - Institute for Research in Economic and Fiscal issues
Fiscal competition and economic freedom
Sweden has a center right government since 2006. This government has reduced the total taxes as percentage of GDP from 48,8 in 2006 to 44,0 in 2012. Only Denmark has higher total taxes. In 2013 the corporate income tax was reduced to 22 percent. Including taxes on income paid by employers, Sweden still has the highest marginal tax rate in the world, 70 percent. The Swedish National Tax Agency is perhaps more important on tax policy than the ministry of finance.
Sweden has a center right-government since 2006. During its first term, 2006- 2010, this government made substantial cuts in the personal income taxation. Taxes on personal income were reduced with earned income tax credits, especially for people with lower income.
Total tax, as percentage of GDP, has been reduced from 48.8 percent in 2006 to 44.0 in 2012. During this period total yearly tax revenues have increased from SEK 1423 billions (€161 billions) to SEK 1583 billions (€179 billions), an increase with 11 percent.
In the general 2010 elections the center right-government continued to rule but lost its majority. Due to this tax policy has been more cautious and dependent on support from the opposition parties. The biggest party in the government, the moderate party, has proposed further reductions of personal income taxes through earned income tax credits. The support for this has been little and recent surveys show that as few as ten percent of the Swedes know by how much their own taxes has been reduced since 2006.
Sweden still has the highest marginal tax rate on personal income. Including taxes on income paid by employers, the top marginal tax rate in Sweden is 70 percent. This is of course a severe problem for business. Many studies show that a reduction of the top marginal tax rate would also increase total tax revenues. The leading party in the government, the moderate party, has made it a political issue, not to reduce the top marginal tax rate. Minister of Finance Anders Borg from the moderate party made a clear announcement in case he will be reelected in 2014: A reduction of the top marginal tax rate is not a priority, not during this term. Not in the next term.
In January 2013 Sweden reduced the corporate income tax from 26.3 to 22 percent. This reduction will be followed by significant reductions in the allowance for deduction of corporate debt.
A state commission has proposed an important simplification reform for Swedish industry. VAT on import from outside the EU has been handled by the Swedish Customs. The proposal is that the tax authorities will take over this and this will make it much easier for industry.
The Swedish National Tax Agency has got a perhaps too important role in policy shaping. The director of the Tax Agency, Mr Ingemar Hansson, is a former Secretary of State for the minister of Finance. Ingemar Hansson has a high profile in Swedish debate on tax policy and sometimes it seems like he is more important than the politicians when it comes to decide on tax policy. On television Mr Hansson has said that businesses should show their commitment to the Swedish society by paying more taxes than actually stipulated by law.
Including taxes on income paid by employers, the top marginal tax rate on personal income in Sweden is 70 percent. The highest tax level starts already at a yearly income of €62,000. The government has since 2007 lowered income taxes quite substantially with an earned income tax credit but they have not reduced the marginal tax. The earned income tax credit depends on the total income. It is constructed to give the highest tax credit for lower income levels. The opposition parties in the parliament have proposed changes in the earned income tax credit system, lowering the credit for higher incomes. This proposal would increase the top marginal tax rate even further.
The taxation of personal income starts with local taxes, which are decided on a local level, the local tax rates ranging from 28.89-34.32 percent. Personal income below SEK 12,500 (€1500) is tax-free.
For annual personal income of SEK 426,300 (€50,900) and above, working Swedes have to pay state tax set at 20 percent. The top marginal tax level is a supplementary state tax of 5 percent. This tax starts at an annual income of SEK 604,700 (€ 62,160) for working citizens. In total this makes the top marginal tax rate 20 plus 5 plus the local tax, which varies from 28.90 to 34.30 percent. Adding social tax contributions you reach the 70%.
In 2009 the corporate income tax was lowered from 28 to 26.6 percent. In the state budget for 2013 the government introduced another change and from January 1st 2013 the Swedish corporate income tax is 22 percent. This reduction can be seen as an advanced result of the state committee on business taxation. The moderate party, which is the biggest party in centre-right government, was pushing towards lower corporate tax. The socialist party is also in favor of lowering corporate tax levels. Both the moderate party and the socialist party consider lower corporate taxes a competitive advantage, which will attract businesses to Sweden. The social democrats support the reduction in corporate tax but think the reduction was too big and have proposed a reduction to only 24.3 percent.
In 2010 the government appointed a state committee to look into the taxation of businesses. This committee’s task was to evaluate the corporate tax system. Its mission was also to find solutions to make it more tax favorable to use equity than debt to finance business investments. As the politicians already have reduced the corporate income tax the state committee now has to look into ways to finance this tax reduction. The committee is most likely to propose limitation on deduction of interest of corporate debt. How these limitations will be constructed will not be presented until 2014. Prior Swedish regulations on limitation of deduction of interests have been complicated and contained a considerable amount of legal uncertainty.
A similar committee was appointed in 2012 to look into the taxation on individual entrepreneurs. The outcome of this committee is yet difficult to assess.
Since the 90s Sweden has a dual tax system with different tax levels on personal income and capital gains, dividends etc. To avoid income shifting from personal income to capital gains in closely hold companies Sweden introduced a complicated system of regulations on how high the capital gains in a business could be. Higher gains was considered as personal income and taxed as such. These rules were much criticized by the business community and in 2005 the regulations were changed, when a socialist government was in charge. New regulations included lower capital gains tax for closely hold companies and allowed higher gains if the companies hired more people. These new regulations were further improved by the center right-government in 2007 and the result of this reform has been impressive. Total capital gains from closely hold companies have increased threefold. With lower taxes Swedish business owners have focused more on profit. Unfortunately the center-right government now has proposed changes in this legislation that might be a setback in this development. The new government policy against closely hold companies is characterized by suspicion.
Sweden abolished the taxes on inheritance and gifts in 2004 and the net wealth tax in 2007. It was a socialist government that abolished the inheritance tax and the support for this reform is still strong. The wealth tax was abolished by a center right-government and a reintroduction was on the agenda for the socialists until 2012. This changed in 2012. The new leader for the social democrats in Sweden, Mr Stefan Löfven, has been very clear; no new wealth tax.
Sweden has a tax of 30 percent on interest, dividends and capital gains. This tax is the same for both short trade and long investments. In 2012 an Ernst & Young report compared the Swedish tax with the tax rates on dividends and capital gains for the OECD, EU, and BRIC countries. The average top personal dividend tax rate in the OECD, EU, and BRIC countries in 2012 was 20.2 percent and the average top personal capital gains tax rate was 14.9 percent. A reduction of the Swedish capital gains tax rate is a priority for the Swedish business community.
"The Swedish government opposes supranationalism in tax policy and national taxes shall not constitute own resources for the EU", Minister for Finance Anders Borg said in January 2013.
The Swedish resistance against a financial transaction tax comes from its experience from the 80s when Sweden introduced a national tax on financial transactions. Most of the stock market moved away from Sweden due to this tax. Swedish politicians still remember how harmful this tax was to the economy and this explains why the support from Sweden for the EU commission’s proposal on a FTT is low.
Investing in the future was the name of the state budget for 2012. Minister of finance Anders Borg writes in the budget: " The strong Swedish public finances enable the Government to propose measures totaling SEK 22.7 billion in 2013. This still leaves margins to further stimulate the economy should the crisis in the euro area deepen."
The most important measures in the budget for 2012 are investment in infrastructure and education together with the reduction of the corporate income tax.
Sweden has continued its cautious budgetary policy aiming at a budget surplus. A surplus target was introduced in the 90s when Sweden was hit by a financial crisis. The financial savings of the consolidated public sector shall on average be equal to 1 percent of GDP over a business cycle. Sweden also has an expenditure ceiling and a requirement on local governments to have balanced budgets. In 2012 Sweden had a minor budget deficit (SEK 13 billions) and the consolidated public debt was 37.7 percent of GDP.
The tax revenues as share of the GDP continued to decrease. In 2012 total taxes as share of GDP was 44.0 percent, compared with 44.3 in 2011.The consolidated tax revenues increased with 2.3 percent in 2012.
Although Sweden as a nation has a strong economy, Swedish families are exposed to financial uncertainty. A threat within the country is household indebtedness in relation to a cooling housing market. Swedish household debt is growing rapidly and amounts to 164.3 percent of disposable income (2012), an increase of 55 percentage points since 2000. Installment time for an average family house is now as high as 100 years (most Swedes newer pay their houses, they have loans without or with very small installment. This is probably Sweden’s biggest problem today). Today Sweden has a high capital gains tax of 30 percent and interest on loans for houses is also deductible against personal income at 30 percent. This tax regime is stimulating debt and limits savings, especially in a country with high taxes on personal income. A recent report from the EU Commission proposed that Sweden should reduce the possibility to deduct interest on loans for houses from personal income taxes.
Today the Swedish tax authorities can sentence a taxpayer to pay a penalty tax, usually 20 or 40 percent extra tax. Tax crimes are also a part of the regular judiciary system and the offender can thus also be sentenced with a fine or, in severe cases, to jail. Sweden has twofold punishment for tax crimes. This twofold punishment is not in conformity with judgments by the European court of justice. Recent judgments in Swedish courts have challenged the twofold punishment in the tax system. The European court of justice has given preliminary approval and the Supreme Court of Sweden will now examine the question. The Swedish system will also be tested in four new judgments from the European court of justice. It is most likely that the Kingdom of Sweden will lose its fight for a twofold punishment for tax crimes in the coming years.
Sweden Anders Ydstedt
Public policy advisor, Scantech Strategy Advisors, Malmö
A short presentation of IREF ’Yearbook on Taxation in Europe’ Series
Among the many ways to understand the climate of opinion and the culture of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal systems almost always rhyme with complexity; each system bearing the (...)