Taxes in Sweden

October 29, 1962

STOCKHOLM—Some of our more knowledgeable businessmen and accountants, concerned by our government’s niggardly rate of depreciation allowances in the past, have from time to time pointed out how much more liberal these allowances are in Sweden. They are. From 1939 until about four years ago a Swedish company could deduct the entire cost of a new machine in one year. Under present law it is still permitted to write off new machinery and equipment within five years.

In addition to this, a company may set up a deductible “investment reserve” of up to 40 percent of an entire year’s profits. It must, however, deposit 46 percent of this reserve in cash in the Riksbank (the national bank) and, broadly speaking, can invest it only at times approved by the government.

Another substantial tax advantage enjoyed by the Swedish taxpayer is his relative exemption from long- term-capital-gain taxation. He pays straight income tax on 100 percent of capital gains on securities and other assets held for less than two years, but on only 75 percent of the gain on assets held between two and three years, on only 50 percent of the gain if the assets are held one year longer, on only 25 percent if held one year longer still, and no capital-gains tax at all if the asset is held more than five years. And he pays no capital-gains tax on real estate if he has held it more than ten years.

HEAVY IMPACT

But this pretty much exhausts the relative tax advantages of the Swedish taxpayer. The corporate tax rate is roughly equivalent to our own. Corporate income taxes average about 49 percent, and shareholders must pay full income taxes, without deductions, on dividends received. Personal income taxes are extremely heavy. After exemption of only about $400 for single persons and $800 for a family, individuals first pay 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 effective top rate not only can exceed 70 percent, but a family with a national taxable income of only $1,200 could pay 23½ percent, while an individual with a taxable income of only $4,000 would pay about 40 percent. The top rates above 70 percent apply to incomes above $30,000.

And the tax impact is greater than these figures indicate. There is a general retail sales tax of 6 percent in addition to special excise and luxury taxes; a formidable annual capital levy on an individual’s capital assets (regardless of whether he gets any income from them), and a severe inheritance tax.

CAPITAL RESTRAINT

As in the U.S. and Britain, the higher rates give negligible yields. Ignoring the proportional local income tax rate averaging about 15 percent, and concerning ourselves exclusively with the national income tax, we find that the highest national rates—i.e., from 45 to 65 percent—yield about $7 million, or only 1 percent of the total yield of national income tax. In fact, the Swedish Taxpayers’ Association has figured, in a study shortly to be published, that 90 percent of the national income-tax revenues would be realized if the progressive rates stopped at the 25 percent bracket, and that just as much would be collected, without any progressivity of tax rates at all, by a flat national rate of 14 percent.

But though the yield from the high bracket rates is negligible (as is also the yield of the capital tax and inheritance tax) it is impossible to measure the restraining effect of such rates on the creation of income, on savings, and on the supply of venture capital.

Many Swedes tell you they are getting their extensive social-welfare services “free”—education, unemployment insurance, old-age pensions, medical care. But the Taxpayers’ Association study makes it doubtful that there is even much redistribution of income or welfare from the “rich” to the “poor.” Half of the population now pay 30 to 40 percent of their income in taxes. Two-thirds of the tax money levied for redistribution purposes in effect returns as “social services” to the identical income groups that paid it, after an enormous merry-go-round.