- Subhash Thakur, Valerie Cerra, Balázs Horváth, and Michael Keen
- Published Date:
- May 2003
1997, “What Do Countries Really Spend on Social Policies? A Comparative Note,”OECD Economic Studies, Vol. 1, No. 28, pp. 153–67.
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1998, “What Can the Welfare State Accomplish? An Introduction,”Swedish Economic Policy Review, Vol. 5, No. 1, pp. 3–10.
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1994, “Costs of Monitoring and Corporate Taxation,”Journal of Public Economics, Vol. 55, pp. 307–21.
1999, “EMU and Tax Competition,” prepared for the XI Villa Mondragone International Economic Seminar (Rome, July).
2002, “Some International Issues in Commodity Taxation,”Swedish Economic Policy Review, Vol. 9, pp. 11–45.
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1993, “The Economic Impact of Military Expenditures,”World Bank Policy Research Department Working Paper Series, No. 1138 (Washington: World Bank).
1994, “Capital Goods Imports and Long-Run Growth,”NBER Working Paper 4725 (Cambridge, Massachusetts: National Bureau of Economic Research).
1993, The Selected Essays of Assar Lindbeck, Vol. 2, The Welfare State (Aldershot, U.K.: Edward Elgar).
2001, “Centralized Bargaining and Reorganized Work: Are They Compatible?”paper presented at the ECB Annual Labor Market Workshop, Frankfurt, Germany, December10–11, 2001.
2000, “Wage Compression and Welfare in Sweden,”Working Paper 4 (Stockholm: Stockholm University, Department of Economics).
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2000, “A Quoi Servent les Politiques Régionales?”Economie Internationale, No. 81 (First Quarter), pp. 3–20.
2000, “Fiscal Policy and Growth in the Context of European Integration,”IMF Working Paper 00/133 (Washington: International Monetary Fund).
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1995, “Sweden Considers New Corporate Income Tax Integration,”Tax Notes International, October9, p. 1591.
1999, “Tax Spillovers Under Separate Accounting and Formula Apportionment” (unpublished; Copenhagen: Copenhagen Business School).
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Active labor market programs, 60–61
“Activity Guarantee” scheme, 54
AECT. See Average effective corporate tax rate
Aging. See Demographic factors
ALMPs. See Active labor market programs
Annell deduction, 70n
Average effective corporate tax rate, 67, 115–116
Bargaining. See Centralized bargaining
Beer, excise taxes, 89–91
Black economy, 3
impact of internationalization, 83–88
user cost of, 113–114
Capital income, 13
Capital taxation system, 16
Central income tax rates, 47
goals of, 46, 58
Centralized wage formation, 98, 99
contribution to income redistribution, 78–79
impact of government policy, 53
transfers to households, 9, 11
Childcare payments, 11
excise taxes, 89–91
labor market outcomes, 57–58
Commodities, impact of internationalization, 88–91
Compensated wage elasticity, 51–52
Confederation of Swedish Employees, 98–99
Contingent benefits, 11, 48
Convergence phenomena, 22–23, 25–26, 42
Corporate tax system, 63–68, 83–85, 114–117
Corporatist welfare states, In
Corruption Perceptions index, 103
County councils, responsibilities of, 8
Crisis of the 1990’s
causes of, 4, 29
government regulation of public enterprises during reforms, 19–20
impact on government expenditures, 17–20
permanent output losses from, 29
Cross-border shopping, 88–91
Debt-financed investment, 65
Decentralization of government agencies, 20
Decentralized wage formation, 98–99
Defense spending, impact on growth performance, 39
Defined-contribution pension plan, 95
Demographic factors, 4, 24, 26, 94
Distortionary taxation, 43
Diversion frauds, 89
Dividends, double taxation of, 69–72
Dual income tax, 13, 16, 68–72
Earned Income Tax Credit, 10
Economic growth. See also Growth performance
high-technology sector and, 29–34
interpretation of data on, 22–29
from 19th century to 1950, 21–22
per capita GDP comparisons, 25–29
per capita income rankings, 1970–91, 21–22, 23
policy errors, 28–29
quality of, 34–36
growth performance and, 38–39
public expenditure on, 33
university wage premium, 59–60
Employment. See also Labor market boom, 1970–90, 46–47
government employment index, 101
MELTs on returning to employment, 55, 57
on-the-job training, 60
self-employment grants, 60
training courses, 60
Endogenous growth model, 37
Enterprise sector, government regulation during reforms, 19–20
Environmental policy, 34–36
Environmental sustainability index, 34–36, 104
Equalization system, 94, 96
Equity finance, 65, 69
Ericsson, 30, 32
EU. See European Union
indirect tax rates, 89–90
statutory tax rates, 84–85
Exchange rate fluctuations, 22
Excise revenue losses, 89, 91
Excise taxes, 17, 89–90
Expenditures. See Government expenditures
Fiscal rules, 18–19
G–7 countries. See Group of Seven countries
GDP. See Gross domestic product
Genuine domestic savings, 103–104
Gini coefficient, 78, 97, 109
Global Corruption Report, 103
Global System for Mobile Communications, 30
Globalization. impact on Swedish model, 5. See also Internationalization
GNP. See Gross national product
Government. See also Government expenditures; Swedish government
Government employment index, 101
Government expenditures in GDP, 4, 5, 8–9, 17–20
impact on growth performance, 39, 41–42
productive expenditures, 43
unproductive expenditures, 43
Gross domestic product
economic growth from mid-19th century to 1950, 21–22
government expenditure and, 4, 5, 8–9, 17–19
interpreting comparison data, 22, 24–29
per capita comparisons, 25–29
transfers to households, 9–10, 19, 74
Gross national product, 26–27
Group of Seven countries, impact of research and development investment, 40
Growth performance. See also Economic growth
determinants of, 37–38
endogenous model, 37
government intervention, 37–39
neoclassical model, 37
welfare state and, 40–44
GSM. See Global System for Mobile Communications
Health care, financing responsibility, 8–9
Health levels, growth performance and, 38–39
High-technology sector, 29–34
Hours worked, 48–54, 100
Housing allowances, 11, 48, 49, 78
ICT. See Information and communication technology
Immigration, 76–77, 93
Imputation system, 71
Income measures, 26–28
Income redistribution, 74–80, 97–98
Income taxes. See also Tax revenues
basic deduction, 53–54
central income tax rates, 47
local income tax rates, 47
marginal effective labor income tax rate, 49–53, 55, 57
marginal excess burden, 51–52
rates, 68, 92
tax revenue contribution, 12–13
impact on labor market incentives, 48
impact of tax transfer system, 77–80
income redistribution and, 75–77, 97–98
Inflation rate, 64–65
Information and communication technology, 30–34
Infrastructure investment, impact on growth performance, 39
Intergenerational mobility, 76–77
impact on welfare state, 81–93
cross-border shopping, 90
Intramarginal investments, 66
Investment. See also Savings average effective corporate tax rate, 67, 115–116
foreign investment, 67
incentives for, 64
intramarginal investments, 66
marginal effective corporate tax rate, 64–67, 114–117
statutory tax rate, 67–68
transfer pricing, 67
Investment funds system, 63
Krona, impact of U.S. dollar on value of, 22
Labor income rates, 13
Labor market. See also Employment
active labor market programs, 60–61
changing institutions, 98–101
collective bargaining and, 57–58
history of outcomes, 46–47
hours worked, 48–54, 100
impact of government intervention, 47–57
impact of internationalization, 91–93
marginal effective labor income tax rate, 49–53
marginal excess burden of taxation, 51–52
part-time employment, 61
participation rates, 54–55
sickness benefits, 55–57
tax transfer system and, 47–48, 57–58
temporary employment, 61
wage compression and, 59–60
Liberal welfare states, In
growth performance and, 38–39
Literacy levels, 33, 38–39
LO. See Swedish Confederation of Trade Unions
responsibilities of, 8
spending, 94, 96
Local income tax rates, 47
Lorenz dominance, 75n
Maintenance support, 11
Marginal effective corporate tax rate, 64–67,114–117
Marginal effective labor income tax rate, 49–53, 55, 57
Marginal effective personal income tax rate, 69n, 117
Marginal effective personal savings tax rate, 69–70, 116–117
Marginal excess burden, 52, 109–110
impact on labor market incentives, 48
reducing MELTs, 53
transfers to households, 9–11
MEB. See Marginal excess burden
MECT. See Marginal effective corporate tax rate
MELT. See Marginal effective labor income tax rate
MEPT. See Marginal effective personal income tax rate
MEST. See Marginal effective personal savings tax rate
Monopolies, government regulation during reforms, 20
Municipal governments, responsibilities of, 8
National Mediation Office, 99
National Pension Fund, 95
Neoclassical growth model, 37
New equity finance, 69
Nondistortionary taxation, 43
Nordic Mobil Telephony, 30
Occupational injury insurance, 9
OECD. See Organization for Economic Cooperation and Development
On-the-job training, 60
Online banking, 35
Organization for Economic Cooperation and Development
government income transfers for countries, 9, 10, 12
per capita GDP comparisons, 25–29
ratios of working-age persons to total population, 24
Sweden’s per capita income ranking, 1970–91,21–22,23
tax wedge comparisons, 4
Output convergence, 42
Owner-occupied housing deductions, 72
Parental benefits, 11
Pareto efficiency, 38n
Part-time employment, labor market outcomes, 61
Participation rates, 47, 54–55
Pay-as-you-go benefits, 11, 95
PAYG. See Pay-as-you-go benefits
Payroll taxes, tax revenue contribution, 13
balancing mechanism, 95
contribution to income redistribution, 78–79
replacement rates, 11
system reform, 95
Per capita income
effects of tax rates on growth, 41–42
interpretation of data, 22–24
Sweden’s ranking among OECD countries, 1970–91, 21–22, 23
Periodization reserves, 64
Personal taxes, 116–117
Petrol, excise taxes, 89–91
Political stability, impact on growth performance, 39–40
headcount measure, 75, 78
impact of tax transfer system, 77–80
income redistribution and, 75–77, 97–98
PPP. See Purchasing power parity
Premium Pension Authority, 95
Privatization, 6, 20
Productive expenditures, 43
Property taxes, 13, 17, 72
Public consumption levels, 4, 6, 19
Public debt ratio, 19
Public enterprise sector, government regulation during reforms, 19–20
Purchasing power parity, 22, 27
Quality of life
contributions of welfare state, 103–104
rankings, 34, 39
R-based cash flow tax, 64
Real estate tax, 72
Redistribution of income, 74–80, 97–98. See also Transfers of income
Regional governments, 8
Rent control, 73
Rental price of capital, 113–114
Replacement rates, 55, 56
Research and development investment, impact on growth performance, 39
Reverse causality, 42
Risk taking, impact of social insurance, 44–45
Ruding Committee, 85
SAF. See Confederation of Swedish Employees
Savings. See also Investment
double taxation of dividends, 69–72
genuine domestic savings, 103–104
marginal effective personal savings tax rates, 69–70
owner-occupied housing deductions, 72
property tax rates, 72
tax revenues and, 68–73
wealth tax and, 68, 69, 73
Self-employment grants, 60
Sickness absences, 55, 101
Sickness benefits, 11, 55–57, 79
Social assistance, 11, 48, 77
Social care, financing responsibility, 8–9
Social democratic welfare states, In
Social insurance, impact on risk taking, 44–45
compensation scheme for employees’ contribution, 17n
impact on labor market incentives, 47
tax revenue contribution, 13, 17
Spirits, excise taxes, 89–91
Stabilization wage formation, 99
State of the World index, 39
State-owned enterprises, privatizing, 20
Statutory tax rate, 67–68, 84–85
Stock exchange, foreign ownership, 34
Stock options, 34
Student benefits, 79
Student loans, 11
Subnational governments, 8
Swedish Confederation of Trade Unions, 98–99
Swedish government. See also Government expenditures
deficits, 4, 7
impact on growth performance, 37–39
labor market intervention, 47–57
revenues, 4, 5, 17–18
structure, 8, 19–20
Swedish model, 1–7, 17–20, 104–108
Swedish welfare state
achievements of, 2–3
advantages of, 3
changing labor market institutions and, 98–101
economic costs of, 3, 4
features of, 1–2
future of, 108–112
impact of internationalization of economic activity, 81–93
lessons for others, 104–108
political economy and, 96–98
quality of life contributions, 103–104
spending pressures, 93–96
support for, 2
Tax allowances, 65–66
Tax arbitrage, 87
average effective rates, 92
on capital income, 87–88
corporate taxes, 63, 64–68, 84–85
effects on per capita income growth, 41–42
income effect, 48–49
by income group, 58
international comparisons, 14–15
marginal effective corporate tax rate, 64–67,114–117
marginal effective labor income tax rate, 49–53, 55, 57
marginal effective personal savings tax rates, 69–70
property tax, 72
statutory rate, 67–68, 84–85
substitution effect, 49
wealth tax, 68, 69, 73
of 1991, 13, 16
impact on labor market, 46–47
Tax revenues. See also Income taxes composition of, 12–13
corporate tax system, 63–69, 83–85, 114–117
distortionary taxation, 43
double taxation of dividends, 69–72
during the early 1990s, 4
impact on growth performance, 41–43
impact on labor market incentives, 47–48
international mobility of tax bases, 81–93
investment and, 64–68
from investment and savings, 63
nondistortionary taxation, 43
owner-occupied housing deductions, 72
property tax, 72
ratio to GDP, 10, 12
savings and, 68–73
Tax transfer system
impact on inequality and poverty, 77–80
impact on labor market incentives, 47–48
labor market outcomes, 57–58
Taxation levels, 3, 4
Technology sector, 29–34
Telecommunications, 30, 32, 40
Temporary employment, labor market outcomes, 61
TFP. See Total factor productivity
Total factor productivity, 23, 40
Transfer pricing, 67
Transfers of income, 9–11, 19, 74–80
Undeclared savings, 86
active labor market programs and, 60–61
benefits, 11, 43, 54, 57
rates, 46–47, 55, 56
UNICE. See Union of Industrial and Employer’s Confederations of Europe
Union of Industrial and Employer’s Confederations of Europe, 34
United Kingdom, tax credits, 10
impact of U.S. dollar on value of krona, 22
tax credits, 10
Unproductive expenditures, 43
User cost of capital, 113–114
impact on labor market incentives, 48
rates, 17, 47, 87–88
tax revenue contribution, 17
VAT. See Value-added tax
Wage compression, labor market outcomes, 59–60
Wage dispersion, 97, 98
Wage elasticity, 51–52
Wage rates, 77
Wage scale, 3
Wage subsidies, 60
Wealth tax, 68, 69, 73
government sector responsibilities, 8–9
principal transfers to households, 9–11
share of spending in GDP, 12n
growth performance and, 40–44
Swedish model, 1–7, 17–20
types of, In See also Swedish welfare state
Wine, excise taxes, 89–91
Working-age population, 24, 26
Working Families Tax Credit, 10
Subhash Thakur is an Advisor in the European I Department of the IMF. He holds a PhD in economics from the University of California, San Diego. He has worked extensively on European economic issues and published in the areas of international economics and macroeconomic policy. He has taught at the IMF Institute and the School of Advanced International Studies (SAIS) of the Johns Hopkins University.
Michael Keen is Chief of the Tax Policy Division in the Fiscal Affairs Department of the IMF, having been Professor of Economics at the University of Essex. He has published widely on the theory and practice of public finance, and is currently President-elect of the International Institute of Public Finance and Chair of the International Seminar in Public Economics. Founding co-editor of International Tax and Public Finance, he is also on the editorial boards of the Journal of Public Economics, Fiscal Studies, the Economics of Governance, and the German Economic Review.
Balázs Horváth is a Senior Economist in the IMF’s European I Department. He worked mainly on transition economies and other middle-income countries before taking up the post of desk economist for Sweden in September 2000. He has published in the fields of econometrics, transition economics, and empirical studies on growth. He holds a doctorate from the University of Pennsylvania.
Valerie Cerra is an Economist in the IMF’s European I Department. During her career at the IMF, she has worked on a range of developing and industrial economies, including other Nordic countries. Her research and publications focus on international economics and macroeconomics. She holds a doctorate from the University of Washington.
Sweden has long been viewed as epitomizing a particular approach to economic and social policy. To its advocates, the Swedish welfare state builds on a strong social consensus favoring extensive state intervention to ensure a high quality of life for all Swedes. To its critics, the Swedish system is marked by excessive government intervention and attendant inefficiencies.
These contrasting views are captured in the imagery of Prime Minister Goran Persson: ‘Think of a bumblebee. With its overly heavy body and little wings, supposedly it should not be able to fly—but it does.”
The Swedish welfare state is the bumblebee that has managed to fly. This book draws on recent IMF surveillance and policy advice to understand how it has done so, to assess the challenges that the “Swedish model” faces in the new century, and to propose a strategy for dealing with them. Reflecting the pervasive nature of public intervention in Sweden, the discussion addresses both issues of macroeconomic management and the details of tax and spending policies. Not least, the book also seeks to draw lessons for the many other countries that face the same challenges from globalization and demographics.
“This very useful survey of the Swedish welfare state includes lots of interesting information and reflection, a particularly valuable feature being the emphasis on the reforms and retreats of welfare state arrangements over the past decade. It is a very instructive study, although Swedish readers may not agree with all its nuances.”
Institute for International Economic Studies Stockholm University
Esping-Andersen (1990), for instance, identifies three types of welfare state: the “liberal,” characterized by modest and largely means-tested benefits and strong stratification between welfare recipients and others (as in the United States); the “corporatist” concerned largely with preserving status rights and so providing, for example, benefits only loosely related to contributions (as in Germany); and the “social democratic,” of which Sweden is the archetype, characterized by a considerable degree of universalism in benefits—provided at a level attractive even to the middle class—and committed to high employment levels both as a right and as a means to finance high benefits.
Comprehensive accounts of the structure and history of the Swedish welfare state, from a variety of perspectives, can be found in Freeman and others (1997), Lachman and others (1995), Lindbeck (1997) and Lindbeck and others (1994), and OECD (2000).
These aspects are critical in assessing economic performance. Nordhaus (2002) estimates, for instance, that improvement in health indicators over the past century may have raised welfare by an amount approximately equal to the increase in measured real consumption.
National Tax Board (2000) and the European Commission (2001) estimate the share of the black economy in Sweden at up to and equal to 7 percent, respectively; the higher estimate is by Schneider and Enste (2000).
See, for example, Atkinson (1995, 1999).
Only Denmark had a (slightly) lower share of means testing. In the United States, at the other extreme, the corresponding figure was about 18 percent.
In fact, the spring 2001 budget estimated that the effect of taxing gross social transfers on the tax ratio averaged between 5 and 6 percentage points of GDP during 1990–98.
As noted by Atkinson (1995), the share of welfare spending (WS) in GDP can be written as:
where B denotes the average benefit level, w the average wage, L the number of workers, and R the number of benefit recipients.
Adema (1997) derives internationally comparable figures on the share of public social expenditure in GDP for 1993, controlling in particular for differences in direct taxes and social contributions paid on transfers, indirect taxes on consumption purchased out of net cash transfers, and tax breaks for social purposes on public and private social expenditure. Sweden still comes out at the top of the list of the eight OECD countries covered in the study, but the difference relative to the United States shrinks from 26 percentage points of GDP using unadjusted data to 15 percentage points, and becomes insignificant relative to Denmark, the other highly taxed OECD economy.
For detailed discussion of the rationale for and experience with the dual income tax, see Sorenson (1994) and Cnossen (2000).
The essence of the compensation scheme is as follows. Let Y denote income and e the employee’s social security contribution rate. Given T(.), the income tax schedule, and with no compensation, the income tax plus social security contribution liability is L = T(Y - eY) + eY. The compensation takes the form of an income tax credit for a proportion α of the social security payment, allowing only the uncredited portion 1 - α as a deduction. Thus, total liability is L* = T[Y- (1 - α)eY] + (1 - α)eY, with α being increased in four steps from 0 to 1.
Data underlying the spring 2001 budget are based on the European System of Accounts (ESA-95) standard from 1980. While data for the 1970s are based on an earlier definition, they were appended without a visible break.
For a detailed assessment of Sweden’s fiscal strategy, see Schimmelpfennig (2002).
The large pension system deficits in 1999 and 2001 resulted from nonrecurring transfers to central government as part of the reform of the pension system and boosted central government surpluses, with no effect on the general government balance.
Sweden’s relative ranking in 1998 was 17.
Financial Times, “Telecoms Survey,” January 23, 2002.
Nor indeed is growth even synonymous with “efficiency,” a term used in this book in the sense of Pareto efficiency, referring to a situation in which it is impossible to make any one person better off without making any other worse off.
UNDP (2000), available at http://www.undp.org/hdr2000/.
Landau (1993) finds evidence that the impact may be nonlinear, with low (high) defense spending enhancing (inhibiting) growth.
The relationship between the level of public expenditure and growth may well be nonmonotonic. Tanzi and Schuknecht (1995), for instance, argue that increased public expenditure may enhance growth up to some point, after which it becomes increasingly wasteful. Crafts (2000) suggests that the advanced European countries have moved to the point at which the favorable effects of government spending on growth are offset by the disincentive effects of taxation.
See, for instance, the survey in Boadway and Keen (2000).
According to the March 30, 2001 issue of Global Data Watch (published by the Morgan Guaranty Trust), two-thirds of Swedes—double the European average—hold shares.
Blanchard and Wolfers (1999) argue that this has been true of European labor markets more generally. In addition to labor market rigidities, relevant institutional aspects of the Swedish model include product market rigidities, disincentives stemming from high taxes and transfers, and extensive regulatory intervention.
There is no deduction or credit of either tax against the other.
Assuming all income to arise from wages, and that there is no savings, the consumer’s budget constraint implies that (1 + v)C = (1 - τw)W, where C denotes consumption, W wage income, v the uniform rate of consumption tax (taken to be 17.6 percent), and τw the rate of income taxation (55 percent). The gross cost to the employer of hiring this worker, G, is (1 + τs)W, where τs is the rate of the employer’s social security contribution (32.92 percent). Combining the two, the MELT, defined as unity minus the derivative of consumption with respect to the employer’s wage cost, is 1 - (1 -0.55)/[(l + 0.3292)(1 + 0.176)]. When, as in practice, taxes are nonlinear, the same algebra applies at the margin.
There is in theory no reason to require the MELT to rise everywhere with income. Indeed, optimal tax schedules in some key cases imply that it should fall over high income ranges (Seade, 1977). More generally, although theory warns that optimal marginal effective rate schedules can have all kinds of shapes—see for instance the various cases in Boadway, Cuff, and Marchand (2000) for which closed-form solutions are obtained—there is no generally compelling rationale for having the MELT fall over a range of low incomes and then rise again.
It then declines back to its initial level, implying a MELT initially below and then above the statutory tax rate. The purpose of this measure was to reduce marginal tax rates for those with very low incomes, especially students and part-time working mothers. However, this came at the cost of imposing particularly high marginal tax rates on those with somewhat higher incomes.
Since the excess burden of a tax is a convex function of the tax rate, the associated inefficiency when MELTs vary around an average will be greater than it would be if all households faced that average MELT.
This is the elasticity when the consumer’s income from nonlabor sources is adjusted so as to leave their level of well-being unaffected by the change in the wage rate.
This is shown in Edwards, Keen, and Tuomala (1994).
MELTs may also need to rise to finance any increase in the costs of the benefit.
At least 70 hours per month for six months.
Such activities may be offered during the benefit spell, with sanctions in the form of reduced benefit payment if not accepted.
Payments received both in and out of work, such as child benefit, increase the replacement ratio (since they appear in both the numerator and denominator).
Absent for the entire week owing to sickness.
See, for instance, Forslund and Kolm (2000).
Much of the work in this area is by the Office for Labor Market Policy Evaluation (IFAU). See also Calmfors, Forslung, and Henström (2001).
Empirically, savings and investment have been somewhat more closely correlated than might have been expected, a puzzle first noted by Feldstein and Horioka (1980). This underscores the importance of analyzing the impact of taxation on both.
Under which firms could allocate up to half of their before-tax profits to an investment fund (escaping corporation tax on this amount), at the price of making a non-interest-bearing deposit at the Riksbank of some fraction of the amount reserved. The funds could then be used to finance investment in times of recession: in effect, such investment received immediate expensing. The scheme was abolished as part of the 1991 reform. See Södersten (1993) for an analysis of the impact of the system on incentives to invest.
See Figure 4.1 of Agell, Englund, and Södersten (1998).
If all after-tax profits are distributed then, from the identity between the firm’s sources and uses of funds, investment must be financed from debt issues and the tax value of depreciation allowances. Thus, in the absence of a new equity issue, the equity part of the investment is identical to tax depreciation, that is, the cost of equity finance is effectively deductible against tax, implying neutrality. To see this more formally, write the identity between the firm’s sources and uses of funds as:
where D denotes dividends, Π profits, I investment, B debt, R the interest rate, τ the rate of corporation tax, and DT depreciation for tax purposes. (For brevity, we ignore the possibility of new equity finance.) Suppose now that the firm is constrained not to pay dividends in excess of aftertax profits, so that:
If this constraint bites then, combining (6.1) and (6.2), I = δB + DT. Substituting from this for DT in (6.1) then gives:
D = (1 - τ)(π + ΔB - I - RB).
The corporate tax thus becomes equivalent to a proportional tax on the firm’s cash flow, and hence is nondistorting.
One might naturally suppose that (and it would certainly be convenient if) the MEST could be decomposed into distinct effects from corporate and personal taxation, along the lines 1 - MEST = (1 - MECT)(1 - MEPT), where MECT is as defined in the previous section, and so depends only on corporate tax parameters, while MEPT is a marginal effective personal income tax rate that depends only on personal tax parameters. As discussed in the Appendix, however, it turns out that—because the user cost of capital generally depends on both corporate and personal tax parameters—this is not in general possible.
As noted in Chapter 2, the logic of the dual income tax suggests that dividends not be taxed if corporate income is taxed at the rate applied to other forms of capital income. The 1991 reform went a long way in this direction: although dividends were fully taxable, the impact of this on the cost of new equity finance was mitigated by allowing firms to claim a partial deduction in respect of new equity issues (the “Annell deduction”). In January 1994 both the tax on dividends and the Annell deduction were removed. But when the dividend tax was later reintroduced by a new government in 1995, the Annell deduction was not.
Distributions to individual shareholders by unlisted or nonresident companies (having or having had no substantial ownership of listed companies) are exempt to the extent of an imputed return on invested equity.
They arise, for example, from the natural inclination to deny imputation credit on dividends paid from foreign-source income that has not borne tax in the home country; and legal requirements in the EU may require that the credit be extended to residents of all member states, potentially eroding the revenue collected at corporate level.
See Muten (1995).
Fuest and Huber (2000) argue for the double taxation of dividends in a small economy open to capital movements on the grounds that doing otherwise amounts to an inappropriate subsidy to domestic asset holding. Against this would need to be set, however, the costs of distorting the financing decisions of firms without access to international capital markets.
This statement is loose: a higher value for this ratio does not imply the Lorenz dominance usually regarded as necessary and sufficient for unambiguous inequality statements.
This thus corresponds to a relative notion of poverty. The high average living standards in Sweden and low headcount ratio relative to the median imply, of course, low absolute poverty.
To the extent that individuals’ consumption decisions reflect their own assessment of their lifetime income prospects, the distribution of consumption would provide a better indicator of lifetime inequality than that of relatively short-term income measures. But no comparative data of this sort appear to be available.
The impact of the tax transfer system on before-tax inequality is less clear-cut. If the main impact of progressivity is to induce the higher-paid to earn less, the effect of policy will be to reduce before-tax inequality; on the other hand, the inducement to risk taking implied by social insurance may generate increased before-tax inequality.
The direct provision of private goods may weaken the self-selection constraints—preserving incentives for the more able—that limit the ability to redistribute through the tax system. See, for instance, Blackorby and Donaldson (1988).
Concern at the potential significance of this trend toward globalization led the government to appoint a committee to review its potential implications.
There are exceptions, although these are unlikely to apply to Sweden. For instance, opening up the possibility to export a good in which a country has significant market power creates an incentive to set a high production or export tax to exploit that power.
This is not to say, of course, that increased internationalization is undesirable, since other gains may well offset the fiscal difficulties posed. Openness allows countries to take advantage of technological innovations embedded in new capital goods from abroad; import competition can force domestic firms to operate more efficiently and raise the rate of innovation; and the opportunity to produce for export markets can allow the exploitation of economies of scale and scope in production. As for empirical evidence, several studies find a positive correlation between growth and exports (Balassa, 1978; Krueger, 1978; Bhagwati and Srinivasan, 1979; Otani and Vil-lanueva, 1990).
Nor are they unfamiliar to economists, the point being put eloquently by Adam Smith in his Wealth of Nations (1776): “The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular county. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at ease. A tax which tended to drive away stock from any particular country, would so far tend to dry up every ounce of revenue, both to the sovereign and to the society.”
Even if the income is taxed when later taken out of the corporation, the delay in payment will have reduced its present value; in effect, the taxpayer would have received an interest-free loan from the government.
Including local business taxes, however, the average is about 38 percent.
Under such a system a multinational’s total of earnings across a series of countries is allocated to each by reference to some formula proxying the extent of its activity in each. The “perhaps” in the text reflects the possibility that tax competition might actually be more intense under such a system (as argued by Keen, 1999; and Nielsen, Raimondos-Møller, and Schjelderup, 1999).
The ministry of finance has indicated that a subsequent revision of the national accounts is likely to reduce these figures.
This is broadly consistent with the estimate of SKr 11 billion for 1999 reported in Table S40 of National Tax Board (2000).
These practices are circumscribed but not made impossible by Swedish corporate law, which explicitly forbids the issuance of stocks without proper compensation, and formal rules that force the declaration of excessive dividend income as wages.
Austria, Belgium, and Luxembourg would be allowed instead to apply a nonresident withholding tax over a transitional period.
For a review of issues and experience in international aspects of commodity taxation, see Keen (2002).
These are frauds under which goods claimed to be for export, and so relieved of domestic tax, are in fact sold on the domestic market.
Data underlying the analysis in this paragraph come mostly from National Tax Board (2000).
Since 2001, the equalization scheme also ensures that, for all localities, growth in net income after equalization would be at least equal to the growth of the average per capita tax base.
More formally, suppose that the per capita tax base of local government k is a function Bk(τk, gk) of its own tax rate τk and the quality of its public services gk. Then, ignoring for simplicity the correction of the average tax rate in the Swedish formula, its net revenue per capita is:
where a bar indicates an average over all localities. Differentiating, under the assumption that k is small and takes the decisions of all other localities as given, one finds:
For the hypothetical “average” locality—one whose tax rate is at the average level—there is thus no revenue gain from an increase in the quality of spending, and there is an unambiguous gain in revenue from increasing the tax rate. Essentially the same problems arise under the Canadian equalization system, a detailed analysis being provided by Bird and Smart (1996).
The net payment to any household under such a scheme depends on the difference between its own income and the mean (the redistribution under such a scheme comes from the uniform subsidy component, the extent of which depends on the average income), and hence the net gain to the median voter is greater, the greater is this difference. See, for instance, Myles (1995).
For a fairly recent survey of this rapidly growing area, see Boadway and Keen (2000).
Defined as gross domestic savings minus depreciation of physical capital, minus net depletion of minerals and energy, minus net depletion of forests, minus pollution damage, plus investment in human capital. See, for instance, Hamilton (1999).
See, for example, Musgrave (1983).
See Lindbeck and Snower (2001).
Kornai (1997) characterized Hungary in the early years of transition as a “prematurely born welfare state” owing to the magnitude of transfers that could not be sustained at the country’s level of per capita income.
While the discussion throughout is cast in terms of a single-period choice of the capital stock, essentially the same arguments hold in multiperiod contexts since the firm’s optimization problem reduces to a series of single-period choice so long as there are no costs of adjusting the capital stock.
This follows on noting that the present value of tax deductions is:
Boadway and Bruce (1984) characterize a wide class of neutral schemes.
To see this, suppose that the firm incurs costs AK, and can deduct an amount BK against tax, so that its maximand is Π(K) - AK - τ[Π(K) - BK]. Optimizing over K, the user cost is then C = (A -τB)/(1 - τ); and the maximand can be seen to be simply (1 - τ)[Π(K) - CK]. Essentially the same argument will hold in more general settings so long as the same kind of linearity in K holds.
An alternative benchmark, focused more on neutrality, would be to replace S in (Tp) in equation (A.10) by the before-tax rate to the final investor, R. The MEST thus defined is simply that of the text less m.
This point is also addressed in King and Robson (1993).