‘Progressive’ Taxation

May 13, 1963

In my column from Stockholm of Oct. 29 last year, I referred to the findings of the Swedish Taxpayers’ Association in a study shortly to be published. This study is now available, and it throws considerable light not only on Sweden’s system but on “progressive” income taxation wherever it exists.

The Swedish system is somewhat more complicated than our own. After exemptions of only about $400 for single persons and $800 for a family (converting Swedish kronor at a rate of five to the dollar), individuals pay first a local proportional income tax averaging about 15 percent. Then they pay, on the rest of their income, national taxes ranging from 10 to 65 percent. Thus the marginal top rate not only can exceed 70 percent, but a person with a taxable income of only $4,000 may pay about 40 percent. The top rates above 70 percent apply to incomes above $30,000.

SWEDISH EXPERIENCE

Here are some of the findings of the Swedish study: the basic national income-tax rate of 10 percent brings in about 70 percent of total national income-tax revenue. If the maximum national rate stopped at 25 percent, the tax would bring in 90 percent of its present revenue. If the maximum rate stopped at 45 percent, the government would receive 99 percent of its present revenue. In short, the rates between 45 and 65 percent bring in only 1 percent of total national income-tax revenue. Swedes earning less than $6,000 a year pay 81 percent of all taxes; those with incomes above $6,000 pay 19 percent.

(It is instructive to notice how closely some of these figures parallel our own experience. The basic 20 percent rate yields 85 percent of the entire revenue from our personal income tax. Our whole progression up to 91 percent yields only 15 percent. And all the progressive rates above 50 percent yield less than 1 percent of total revenues.)

When most people hear such figures their first assumption is that “the rich” must be evading taxes. The Swedish study admits there may be some tax evasion, but estimates that the ratio is about the same at all income levels. The popular overestimate of the share of the tax burden that can be laid on the rich by progressive taxation, it points out, is “due to very exaggerated ideas as to the number of persons involved and their relative share of the income of the community.”

DESTROYING INCENTIVE

The total number of income-tax payers in Sweden in 1960, for example, was 3,478,254. The number of taxpayers with incomes over $20,000 was 4,350, or only one in 800, and their total income was only 1.6 percent of the total income reported. Even total confiscation of income in excess of $10,000, the study points out, would not add even 2 percent to total revenues.

This brings the taxpayer association’s study to the effect of these high taxes and harsh progressive rates on production and the creation of income. The study does not attempt any quantitative estimate, but contents itself with pointing out that “the inducement to work longer hours or to invest money in more or less venturesome enterprises declines at the same rate as the earnings of the taxpayers are reduced by taxes.”

The study does make, however, one interesting quantitative observation. Most Swedish taxes are levied for the purpose of redistributing income in the form of subsidies or social services, such as old-age pensions, free education, free school meals, free hospital care, etc. The study estimates that “if all redistributive measures were abolished, taxation would be reduced by about 65 percent.” But as two-thirds of this “redistributive” tax money returns in effect to the identical groups that paid it, one may ask whether this enormous monetary merry- go-round pays off.

Perhaps the most serious harm done by progressive taxation is not merely that it reduces incentives, production, investment, and growth, but that, by fostering the illusion that “the rich” are paying the bill, it contributes to the enormous growth in government expenditure.